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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
MARK ONE
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
FOR THE FISCAL YEAR ENDED JULY 31, 1994 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
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
Common Stock ($.10 par value) New York Stock Exchange
13.5% Subordinated Debentures New York Stock Exchange
Due July 31, 2009
7% Collateralized Senior Subordinated Debentures New York Stock Exchange
Due July 31, 2000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED
ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS
PURSUANT TO ITEM 4x5 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN, DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. /X/
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK, $.10 PAR VALUE
PER SHARE, HELD BY NON-AFFILIATES OF THE REGISTRANT, BASED ON THE CLOSING PRICE
OF $2.50 PER SHARE ON SEPTEMBER 30, 1994 ON THE NEW YORK STOCK EXCHANGE, WAS
$8,690,000.
6,383,267 SHARES OF COMMON STOCK, $.10 PAR VALUE PER SHARE,
WERE OUTSTANDING AT SEPTEMBER 30, 1994, INCLUDING 896,000 SHARES OWNED BY THE
COMPANY'S HALLWOOD ENERGY CORPORATION SUBSIDIARY.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by
reference to the definitive Proxy Statement for the Annual Meeting of
Stockholders of the Company to be filed with the Securities and Exchange
Commission not later than 120 days after July 31, 1994.
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FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 8
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 20
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PART I
ITEM 1. BUSINESS
Upon its formation in 1981, The Hallwood Group Incorporated
("Hallwood" or the "Company") (NYSE:HWG) became engaged in the ownership,
operation and management of the real estate portfolios of its corporate
predecessors and in the merchant banking business, specializing in assisting
troubled companies to implement plans of financial restructuring. After 1981,
the Company disposed of a substantial portion of its initial real estate
portfolio and significantly expanded the range of its merchant banking
activities. The Company has acquired substantial investment positions in a
number of previously unaffiliated enterprises and has thereby become a
diversified holding company engaged in three principal activities: asset
management, operating subsidiaries and investments in associated companies.
The Company, its operating subsidiaries and associated company are currently
engaged in the commercial and industrial real estate, energy, textile products,
hotel and restaurant businesses. For financial reporting purposes, Hallwood
considers itself to operate in five business segments: real estate, energy,
textile products, hotels and restaurants. The Company is no longer engaged in
the merchant banking business, other than in connection with the businesses in
which its operating subsidiaries or associated company are engaged. Financial
information for each industry segment in which the Company operates is set
forth in Note 19 to the Company's consolidated financial statements.
Asset Management. The Company's asset management division consists of
real estate and energy business segments.
Real Estate. Real estate activities are conducted primarily through
the Company's wholly-owned subsidiaries, Hallwood Realty Corporation ("HRC")
and Hallwood Management Company ("HMC"). In addition, the Company's
wholly-owned Hallwood Investment Company subsidiary owns and operates an
office-retail property in the United Kingdom. HRC is the sole general partner
of Hallwood Realty Partners, L.P. ("HRP"), a publicly-traded real estate master
limited partnership (AMEX:HRY). HRC owns a 1% general partnership interest and
Hallwood owns a 5% limited partnership interest in HRP. HRC is responsible for
asset management, financing, acquiring and disposing of HRP properties as it
deems appropriate. In addition, HRC provides general operating and
administrative services to HRP. HRP owns 11 commercial properties, of which 7
are office building properties and 4 are industrial park properties. HMC was
formed in June 1991 and acquired the rights under the property management
agreements related to the HRP properties. HMC is responsible for on-site
property management and receives various fees for the managing and leasing of
such properties. See Note 13 to the Company's consolidated financial
statements.
The Company also has an investment in a mortgage loan portfolio
secured by residential lots and condominiums. The carrying value of this
portfolio continues to decline due to normal loan amortization and early loan
payoffs. The portfolio is substantially pledged to collateralize a term loan
on the Lido Beach Holiday Inn hotel.
In fiscal 1994, real estate accounted for 4% of the Company's total
revenues, compared to 6% in fiscal 1993 and 5% in fiscal 1992.
Energy. Energy operations were established in May 1990, when the
Company increased its common stock ownership of Hallwood Energy Corporation
("HEC") (AMEX:HWEC) from 11% to 53%, through the conversion of its preferred
stock into common stock and the purchase of additional common stock. Since May
1990, HEC has been accounted for as a consolidated subsidiary of the Company.
As a result of HEC's subsequent purchases of its own stock for treasury, the
Company's percentage ownership of HEC's common stock has increased to 70%. See
Note 14 to the Company's consolidated financial statements.
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HEC is engaged in the development, production and sale of oil and gas,
and in the acquisition, exploration, development and operation of additional
oil and gas properties. HEC is the sole general partner of Hallwood Energy
Partners, L.P. ("HEP"), a publicly-traded oil and gas master limited
partnership (AMEX:HEP), and conducts substantially all of its operations
through HEP. At July 31, 1994, HEC owned an approximate 12% partnership
interest in HEP (including general and limited partnership interests). In
addition, HEP is the general partner of several other affiliated partnerships
and a 40% stockholder in Hallwood Consolidated Resources Corporation (NASDAQ:
HCRC), a publicly-traded oil and gas company.
HEC accounts for its ownership of HEP using the proportionate
consolidation method, whereby HEC records its proportional share of HEP's
revenues and expenses, current assets, current liabilities, noncurrent assets,
long-term obligations and fixed assets.
In fiscal 1994, energy accounted for 6% of the Company's total
revenues, compared to 7% in fiscal 1993 and 6% in fiscal 1992.
Operating Subsidiaries. The Company's operating subsidiaries division
consists of textile products and hotels business segments.
Textile Products. Textile products operations are conducted through
the Company's wholly-owned Brookwood Companies Incorporated ("Brookwood")
subsidiary. Brookwood is a complete textile service firm that develops and
produces innovative fabrics and related products through specialized finishing,
treating and coating processes. See Note 15 to the Company's consolidated
financial statements.
In fiscal 1994, textile products accounted for 67% of the Company's
total revenues, compared to 60% in fiscal 1993 and 62% in fiscal 1992.
Hotels. Hotel operations are conducted through the Company's
wholly-owned, The Lido Beach Hotel, Inc., Hallwood Hotels, Inc. ("Hallwood
Hotels") and Hallwood-Integra Holding Company, Inc. ("Integra Hotels")
subsidiaries, and consist of: (i) a fee interest in the Lido Beach Holiday Inn,
Sarasota, Florida, which the Company purchased from Integra-A Hotel and
Restaurant Company ("Integra") in December 1989 (the "Lido Beach Property");
(ii) leasehold interests in two other hotel properties, the Longboat Key
Holiday Inn, Sarasota, Florida (the "Longboat Key Property"), and the Embassy
Suites, Oklahoma City, Oklahoma, both of which were purchased from Integra in
June 1991 and; (iii) a fee interest in a Residence Inns by Marriott, Inc. in
Tulsa, Oklahoma, leasehold interests in two Residence Inns by Marriott, Inc. in
Greenville, South Carolina and Huntsville, Alabama, two management contracts
and other hotel-related assets acquired by the newly-formed Integra Hotels
subsidiary upon consummation of Integra's Amended Plan of Reorganization in
March 1994.
The hotels are operated under license agreements with Holiday Inns
Franchising, Inc., Embassy Suites, Inc. and Residence Inn by Marriott, Inc.
The license agreements permit the licensor to prescribe, at such times as it
determines, standards for the operation and maintenance of the various
properties and their furnishings, equipment and facilities. Substantial
capital expenditures may be required from time to time to comply with license
standards. During the last three fiscal years approximately $4,000,000
in capital expenditures was invested in hotel properties.
In fiscal 1994, hotel revenues accounted for 20% of the Company's
total revenues, compared to 15% in fiscal 1993 and 17% in fiscal 1992. For
those hotels owned by the Company for a full year in fiscal 1993, combined
hotel revenues increased by 0.9% and the average daily room rate increased by
6.4% during fiscal 1994.
3
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Associated Companies. Hallwood's investment in associated companies
consists of its 15% common stock investment in ShowBiz Pizza Time, Inc.
("ShowBiz")(NASDAQ:SHBZ). The Company formerly had investments in Oakhurst
Capital, Inc. ("Oakhurst") (NASDAQ:OAKC) and Integra.
ShowBiz operates a system of 330 Chuck E. Cheese's and ShowBiz Pizza
children's specialty restaurants, of which 224 are company-operated. The
Company sold 425,000 ShowBiz shares during fiscal 1993 for $13,500,000
resulting in a $9,705,000 gain. The latest financial statements of ShowBiz are
also included elsewhere in this document. The Company accounts for ShowBiz on
the equity basis.
The Company formerly owned a 15% interest in Oakhurst (20% assuming
exercise of warrants) which, through its Steel City Products, Inc. ("Steel
City") subsidiary (NASDAQ:SCPI), supplies automotive products and accessories
to independent retailers. In February 1994, the Company completed a cash sale
of its entire investment for $1,250,000, resulting in a gain of $30,000.
The Company formerly owned a 24% interest (39% assuming exercise of
warrants) in Integra. The Company resolved to dispose of its Integra
investment in July 1990 and reclassified it as an asset held for sale for
financial reporting purposes. In connection with the planned disposition and
in anticipation of a successful restructuring of Integra, the Company provided
additional financing to Integra; however, the continuation of the recession
resulted in a deterioration of Integra's financial position, and eventually its
July 14, 1992 chapter 11 bankruptcy protection filing.
On October 5, 1993, Integra filed a first amended plan of
reorganization (the "Plan") and disclosure statement. The Plan, which was
confirmed by the bankruptcy court on February 11, 1994, incorporated a
settlement agreement by and between Integra, the Company, the Unsecured
Creditors' Committee and others (the "Settlement") and a supplemental
settlement agreement by and between Integra, the Unsecured Creditors'
Committee, and the plaintiffs in the Reese lawsuit (the "Supplemental
Settlement"). The Plan and Settlement provided for the reorganized Integra to
continue in business as a wholly-owned subsidiary of the Company under its new
name, Integra Hotels, Inc.
On March 8, 1994, all of Integra's common and preferred stock was
cancelled and new common stock of Integra Hotels, Inc. was issued to
Hallwood-Integra Holding Company Incorporated, a newly-incorporated, wholly
owned subsidiary of the Company, for $1,000,000. Integra Hotels, Inc. paid the
administrative and priority tax claims of the bankruptcy case and funded a
trust for the unsecured creditors, by transferring the $1,000,000 and all
potential litigation claims which Integra may have had against the Company and
certain others to the trust. The cash and claims were transferred in full
satisfaction of the claims of all of Integra's unsecured creditors.
Pursuant to the Settlement and Supplemental Settlement, the trust
released all of the transferred claims which relate to the Company and certain
related parties, for an immediate payment from the Company to the trust of
$9,000,000, consisting of $5,000,000 in cash and a $4,000,000 note secured by
344,828 shares of ShowBiz stock. The Supplemental Settlement resolved a
dispute and allowed the bankruptcy court to enter an order that determined that
Integra is the owner and holder of certain claims described in the Settlement
as "Core Claims", (which Core Claims have been asserted in certain state court
proceedings identified as the Reese, European American and Hermitage Hotel
lawsuits). As a consequence, all Core Claims pending against the Company in
existing or future litigation, or asserted against the Company in the future,
are released and permanently enjoined by the Plan and the order confirming the
Plan.
In fiscal 1994, associated companies accounted for 1% of the Company's
revenues, compared to 11% in fiscal 1993 and 8% in fiscal 1992.
4
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Competition. The Company's real estate operations are subject to
competition from other entities, many of which have more experience and
substantially greater financial resources.
The energy industry is highly competitive. Major oil and gas
companies, independent drilling and production programs and individual
producers and operators are active bidders for oil and gas properties, as well
as for the equipment and labor required to operate such properties. The market
for oil and gas depends on a number of factors, including the level of domestic
production, pace of the general economy, supply of imported oil and gas,
actions of foreign oil-producing nations and the extent of governmental
regulation and taxation.
Textile products operations encounter competition in all regions in
which they are conducted. In the volume areas of the textile business,
competition is sometimes based on price, particularly during a soft economy.
Hotel operations are subject to competition from similar types of
properties in the vicinities in which they are located. In the current
economic climate, the sale of hotels may be impacted by the inability of
prospective purchasers to obtain equity capital or suitable financing.
The business of the Company's ShowBiz associated company is subject to
competition from other restaurant chains operating in the same marketplace with
substantially greater financial resources.
Environmental Compliance. A number of jurisdictions in which the
Company operates have adopted laws and regulations relating to environmental
matters. Such laws and regulations may require the Company to secure
governmental permits and approvals and undertake measures to comply therewith.
Compliance with the requirements imposed may be time-consuming and costly.
While environmental considerations, by themselves, have not materially affected
the Company's business to date or that of its associated companies, it is
possible that such considerations may have a material and adverse impact in the
future. The Company actively monitors its environmental compliance, and is
currently not aware of any material compliance issues.
Number of Employees. The Company had 1,152 and 926 employees as of
September 30, 1994 and 1993, respectively, comprised as follows:
September 30,
-------------------
1994 1993
------ ------
Hallwood . . . . . . . . . . . . 5 5
Brookwood . . . . . . . . . . . . 377 389
Hotel Subsidiaries . . . . . . . 513 279
HEC . . . . . . . . . . . . . . . 153 147
HMC . . . . . . . . . . . . . . . 82 83
HRC . . . . . . . . . . . . . . . 20 20
Other. . . . . . . . . . . . . . 2 3
----- ----
Total . . . . . . . . . . . 1,152 926
===== ====
A substantial portion of the salaries and related costs of HEC, HMC
and HRC employees are reimbursed by the respective energy and real estate
Partnership Affiliates.
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ITEM 2. PROPERTIES
REAL PROPERTIES
The general character, location and nature of the significant real
properties owned by the Company and its subsidiaries and the encumbrances
against such properties are described below and/or in Schedule XI hereto.
Cost of real estate owned by property type and geographic distribution (in
thousands of dollars):
July 31, 1994
-----------------------------------------------------
Operating Non-Operating
Description Properties Properties Total Percentage
----------- ---------- -------------- ------ -----------
Real Estate
Office-retail - United Kingdom (2) . . . . . . $10,314 $ -- $10,314 24%
Developed land - Flint, MI . . . . . . . . . . -- 290 290 1
------- ------ -------
Subtotal . . . . . . . . . . . . . . . . . . 10,314 290 10,604 25
Textile Products
Dyeing and finishing plant - Kenyon, RI (2) . . 4,625 -- 4,625 10
Hotels
Lido Beach Holiday Inn - Sarasota, FL (2) . . . 12,331 -- 12,331 28
Longboat Key Holiday Inn - Sarasota, FL (1), (2) 6,773 -- 6,773 16
Marriott Residence Inn - Tulsa, OK (2) . . . . 5,214 -- 5,214 12
Marriott Residence Inn - Huntsville, AL (1) . . 944 -- 944 2
Marriott Residence Inn - Greenville, SC (1) . . 463 -- 463 1
Embassy Suites - Oklahoma City, OK (1), (2) . . 2,615 -- 2,615 6
Parking lot - Irving, TX . . . . . . . . . . . -- 50 50 *
------- ------ -------
Subtotal . . . . . . . . . . . . . . . . . . 28,340 50 28,390 65
------- ------ ------- ---
Total . . . . . . . . . . . . . . . . . . . $43,279 $ 340 $43,619 100%
======= ====== ======= ===
_______________
* Less than 1%.
(1) Cost represents purchased leasehold interest in hotel property and
capital improvements.
(2) Property is pledged as collateral under loan or bond indenture agreements.
July 31, 1994
------------------------------------------
Number of
Investments Amount Percentage
----------- ------ ----------
United States
Florida . . . . . . . . . . . . . . . . . . . . . . . 2 $19,104 44%
Oklahoma . . . . . . . . . . . . . . . . . . . . . . . 2 7,829 18
Rhode Island . . . . . . . . . . . . . . . . . . . . . 1 4,625 10
Alabama . . . . . . . . . . . . . . . . . . . . . . . 1 944 2
South Carolina . . . . . . . . . . . . . . . . . . . . 1 463 1
Michigan . . . . . . . . . . . . . . . . . . . . . . . 1 290 1
Texas . . . . . . . . . . . . . . . . . . . . . . . . 1 50 *
-- -------
Subtotal . . . . . . . . . . . . . . . . . . . . . 9 33,305 76
United Kingdom . . . . . . . . . . . . . . . . . . . . . 1 10,314 24
-- ------- ---
Total . . . . . . . . . . . . . . . . . . . . . . 10 $43,619 100%
== ======= ===
_______________
* Less than 1%.
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As of July 31, 1994, no single real estate property constituted 10% or
more of the Company's consolidated assets.
Construction of the office-retail property was completed in 1989 in an
upscale commercial section of Brighton. The building is unique in the area and
well-suited to the needs of its principal office tenant, which provides
additional traffic for retail tenants. As the building is relatively new, only
minimal maintenance has been required to date.
Hotel properties are operated under license and, as such, must meet and
maintain standards established by Licensor. At any time during the term of the
license, the Licensor may require modernization, renovation and other upgrading
of the hotel. As a result of capital expenditures of approximately $4,000,000
within the last three years, the Company is in compliance with all current
requirements.
The textile products' dyeing and finishing plant was custom-built and is
well-suited for that particular business. The development of new products
requires the plant to be constantly upgraded, along with various levels of
utilization. The plant is a multi-shift facility, which can be fully-utilized
for a particular operation at any given time.
OIL AND GAS PROPERTIES
The Company's oil and gas properties consist primarily of HEC's
indirect interest in properties owned through its investment in HEP.
Quantities and values presented in the financial statements attached hereto
related to HEP's properties are shown net to HEC's interest in HEP. The
supplemental oil and gas reserve information appended to the consolidated
financial statements represents estimated quantities of proved oil and gas
reserves. These reserves are located in principally six areas located in the
United States. The determination of oil and gas reserves is based on estimates
which are highly complex and interpretive. The estimates are subject to
continuing change as additional information becomes available. See Note 5 to
the Company's consolidated financial statements and Supplemental Oil and Gas
Reserve Information.
The following tables summarize certain oil and gas information related
to HEC's direct interests and its share of HEP's oil and gas activities (in
thousands of dollars):
June 30,
-----------------------
1994 1993
------ ------
Net mineral interests, includes
$361 and $826 of unproved
mineral interests at June 30,
1994 and 1993, respectively . . . . . . . . $10,608 $11,952
Net other property and equipment . . . . . . . 397 433
------- -------
Oil and gas properties, net . . . . . . . . . $11,005 $12,385
======= =======
Years Ended June 30,
---------------------------------------
1994 1993 1992
------ ------ ------
Development cost . . . . . . . . . . . . . . . $835 $513 $537
Property acquisition cost . . . . . . . . . . 831 351 900
Exploration cost . . . . . . . . . . . . . . . 287 281 636
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ITEM 3. LEGAL PROCEEDINGS
The Company, certain of its affiliates and others have been named as
defendants in several lawsuits relating to the HEP oil and gas merger and
exchange offer referred to in Note 14 to the Company's consolidated financial
statements, the HRP real estate consolidation referred to in Note 13 and the
restructuring of Brock Hotel Corporation and subsequent "spin-off" of ShowBiz.
In addition, in connection with a formal investigation by the Securities and
Exchange Commission, the Company and certain of its officers and directors have
provided testimony and produced documents regarding the Company's sale of
shares of ShowBiz in June 1993. The Company is also a defendant in a separate
lawsuit relating to these sales. Some of these actions have been settled and
negotiations with respect to the settlement of certain of the others are in
process. Nevertheless, the cost to the Company and its affiliates of defending
these suits has been significant. In addition, the remaining lawsuits seek or
may seek substantial damages from the Company and the other defendants, and
there can be no assurances as to the ultimate outcome of these actions. The
Company intends to defend, or in some cases negotiate to settle, the remaining
actions and does not currently anticipate that such actions will have a
material adverse affect on its financial condition beyond the reserves the
Company has established for such purposes. However, it is possible that the
costs of litigation and any settlements could be material to the Company's
operations and cash flows. See Note 18 to the Company's consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended July 31, 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's shares of common stock, $.10 par value per share ("Common
Stock"), are traded on the New York Stock Exchange under the symbol HWG. There
were 3,601 stockholders of record as of September 30, 1994.
The following table sets forth, for the fiscal periods indicated, a
two-year record of high and low sales prices on the New York Stock Exchange and
dividends paid per share of Common Stock.
Fiscal
--------------------------------------
1994 1993
------------------ -------------------
Quarters High Low High Low
-------- ------- ------- -------- --------
First . . . . . . . . . . . . . . . . . . . . . $ 5-7/8 $ 4-7/8 $ 5-1/8 $ 3-5/8
Second . . . . . . . . . . . . . . . . . . . . . 5-3/8 4-3/8 8-3/4 3-3/4
Third . . . . . . . . . . . . . . . . . . . . . 4-1/2 2-7/8 8 5-5/8
Fourth . . . . . . . . . . . . . . . . . . . . . 3-3/8 2-1/2 6-5/8 5-1/8
The Company has not paid cash dividends since fiscal 1989 and, at present,
does not intend to pay cash dividends in the foreseeable future.
The closing price per share of the Common Stock on the New York Stock
Exchange on September 30, 1994 was $2.50.
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Years ended July 31,
---------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ---------- ---------- --------- ---------
REVENUES
Asset Management
Real estate (a) . . . . . . . . . . . . . . . . . $ 4,399 $ 6,586 $ 6,160 $ 2,192 $ 2,534
Energy (b) . . . . . . . . . . . . . . . . . . . . 6,234 8,455 7,112 8,049 2,400
Operating Subsidiaries
Textile products . . . . . . . . . . . . . . . . . 71,624 70,185 71,393 69,960 70,535
Hotels (c) . . . . . . . . . . . . . . . . . . . . 20,896 17,818 19,325 6,595 3,498
Associated Companies . . . . . . . . . . . . . . . . 1,356 12,232 9,547 3,437 767
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,193 854 1,618 1,245 5,402
--------- -------- -------- -------- --------
106,702 116,130 115,155 91,478 85,136
EXPENSES
Asset Management
Real estate (a) . . . . . . . . . . . . . . . . . 4,287 3,969 6,107 2,999 2,294
Energy (b) . . . . . . . . . . . . . . . . . . . . 5,412 6,763 7,044 7,597 2,357
Operating Subsidiaries
Textile products . . . . . . . . . . . . . . . . 70,761 68,678 71,062 69,896 69,813
Hotels (c) . . . . . . . . . . . . . . . . . . . . 20,330 17,583 19,846 6,743 3,298
Associated Companies . . . . . . . . . . . . . . . . 486 5,057 25,061 104 1,660
Other. . . . . . . . . . . . . . . . . . . . . . . . 7,737 10,007 14,608 9,544 10,709
--------- -------- -------- -------- --------
109,013 112,057 143,728 96,883 90,131
--------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary gain
and cumulative effect of SFAS No. 109 adoption . . (2,311) 4,073 (28,573) (5,405) (4,995)
Income taxes (benefit) . . . . . . . . . . . . . 2,727 5,498 (1,702) 160 125
--------- -------- -------- -------- --------
Loss before extraordinary gain and cumulative effect
of SFAS No. 109 adoption . . . . . . . . . . . . (5,038) (1,425) (26,871) (5,565) (5,120)
Extraordinary gain from extinguishment of debt . . . 648 -- 452 196 --
--------- -------- -------- -------- --------
Loss before cumulative effect of SFAS
No. 109 adoption . . . . . . . . . . . . . . . . . (4,390) (1,425) (26,419) (5,369) (5,120)
Cumulative effect of SFAS No. 109 adoption . . . . . -- -- 12,133 -- --
--------- -------- -------- -------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (4,390) $ (1,425) $(14,286) $ (5,369) $ (5,120)
========= ======== ======== ======== ========
PER COMMON SHARE (PRIMARY)
Net loss per common share . . . . . . . . . . . . $ (0.80) $ (0.26) $ (2.53) $ (0.88) $ (0.86)
DIVIDENDS PER COMMON SHARE . . . . . . . . . . . . . -- -- -- -- --
FINANCIAL CONDITION
Total assets . . . . . . . . . . . . . . . . . . . . $ 127,325 $138,378 $152,019 $151,455 $160,027
Subordinated debentures and convertible debentures 49,768 52,513 49,518 52,720 52,850
Loans payable . . . . . . . . . . . . . . . . . . . 38,054 29,323 43,426 27,330 25,219
Common stockholders' equity . . . . . . . . . . . . . 7,977 13,760 16,919 33,840 30,088
Preferred stockholder's equity (d) . . . . . . . . . -- -- -- -- 9,448
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(a) The Company's real estate operations increased in November 1990 upon
formation of Hallwood Realty Partners, L.P., and purchase of the
related property management contracts in June 1991.
(b) The Company acquired a 53% majority interest in HEC and commenced energy
operations in May 1990. Its majority interest was subsequently increased to
63% in December 1992 and to 70% in April 1994.
(c) The Company's hotel operations commenced in December 1989, as a result of
the purchase of a fee-owned hotel and the purchase of three leased hotel
properties in June 1991, one of which was sold in January 1992. Hotel
operations were also increased by the acquisition of the fee interest, two
leasehold interests and two management contracts for Residence Inns by
Marriott, Inc. discussed in Item 1.
(d) On November 20, 1989, Hallwood Securities Limited ("Limited") exchanged
830,000 shares of common stock of the Company for 8,300 shares of a new
class of Series A Preferred Stock of the Company. Limited also received an
additional 6,339 shares of such Series A Preferred Stock on November 20,
1989, as a payment in lieu of cash for a management fee. Effective January
15, 1991, Limited converted all 14,639 shares of Series A Preferred Stock
into 1,463,900 shares of common stock of the Company in accordance with
the terms of the Series A Preferred Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations. The Company recorded a net loss of $4,390,000
for fiscal 1994, compared to net losses of $1,425,000 and $14,286,000 for
fiscal 1993 and 1992, respectively.
Total revenue for fiscal 1994 was $106,702,000, compared to
$116,130,000 and $115,155,000 for fiscal 1993 and 1992, respectively.
Following is an analysis of the results of operations by asset
management, operating subsidiaries and associated companies divisions and by
the real estate, energy, textile products, hotels and restaurant business
segments:
Asset Management. The business segments of the Company's asset
management division consist of real estate and energy.
REAL ESTATE
Revenues. Real estate revenues of $4,399,000 for fiscal 1994,
$6,586,000 for fiscal 1993 and $6,160,000 for fiscal 1992, include fee income,
rentals, interest and discounts on the mortgage loan portfolio, equity loss
from the Company's investments in HRP and loss on sale of real estate.
Fee income of $3,924,000 in fiscal 1994 decreased by $2,015,000 or
34%, compared to $5,939,000 for fiscal 1993 and $5,160,000 for fiscal 1992.
The Company's HRC subsidiary became general partner of HRP on November 1, 1990,
upon completion of the consolidation of eight real estate limited partnerships
originally sponsored and managed by Equitec Financial Group, Inc. ("Equitec")
into HRP. HRC earns an asset management fee and certain related fees from HRP
properties, which amounted to $435,000 for fiscal 1994, $472,000 for fiscal
1993 and $590,000 for fiscal 1992. Effective June 1, 1991, the Company's HMC
subsidiary purchased the property management contracts relating to the HRP
properties from Equitec for $2,475,000. Equitec had retained the rights to
manage the HRP properties for a three-year period after the
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consolidation. The property management contracts encompass day-to-day property
management responsibilities, for which HMC receives management fees, leasing
commissions and certain other fees. HMC earned fees and commissions from HRP
and certain third parties of $3,489,000 for fiscal 1994, $5,467,000 for fiscal
1993 and $4,570,000 for fiscal 1992. The volatility of revenues during the
three years ended July 31, 1994 was due to the significant level of leasing and
construction fees earned by HMC in fiscal 1993 in combination with the
disposition of certain HRP properties.
Rental income of $567,000 for fiscal 1994 decreased slightly, from
$572,000 in fiscal 1993. Fiscal 1993 rentals decreased 38% from the 1992
amount of $927,000, primarily due to a $192,000 favorable litigation settlement
in fiscal 1992.
Interest and discounts from mortgage loans decreased by 24% to
$354,000 in fiscal 1994 as a result of continuing amortization and repayments,
compared to $468,000 in fiscal 1993. Fiscal 1993 amounts decreased by 27% for
the same reason, compared to $645,000 in fiscal 1992.
The Company recorded an equity accounting loss from its investments in
HRP in the amount of $446,000 for fiscal 1994, $393,000 for fiscal 1993 and
$536,000 for fiscal 1992. See Note 3 to the Company's consolidated financial
statements.
The Company recorded a loss of $36,000 on the sale of real estate in
fiscal 1992, which resulted from settlement of a claim arising from the fiscal
1988 sale of the Company's former Atlantic Metropolitan PLC United Kingdom
subsidiary.
Expenses. Real estate expenses were $4,287,000 for fiscal 1994,
including $1,500,000 for litigation settlement, compared to $3,969,000 for
fiscal 1993 and $6,107,000 for fiscal 1992. This category also includes
administrative expenses, depreciation and amortization, interest, provision for
losses and operating expenses.
In April 1994, the Company entered into a litigation settlement
agreement to resolve the Equitec Roll-up Litigation, and recorded the expense
relating to the issuance of a $1,500,000 promissory note. See Note 18 to the
Company's consolidated financial statements.
Depreciation and amortization of $1,060,000 for fiscal 1994 decreased
$264,000, or 20%, compared to $1,324,000 for fiscal 1993. Depreciation expense
relates to the office-retail property. Amortization expense relates to the
cost of former property management contracts acquired by HMC and amortization
of HRC's general partnership investment in HRP to the extent allocated to
management rights. The fiscal 1994 decline is attributable to the full
amortization of the acquired property management contracts in October 1993.
The fiscal 1993 amount was the same as fiscal 1992.
Administrative expenses of $1,023,000 for fiscal 1994 represent a
decrease of $496,000 from $1,519,000, or 33%, from fiscal 1993. This decrease
was attributable to the disposition of properties by HRP and the October 31,
1992 expiration of HRC's guarantee to absorb general and administrative
expenses of HRP in excess of $2,500,000 per annum. The decrease of $363,000,
or 19% in fiscal 1993 from $1,882,000, in fiscal 1992, was primarily
attributable to the expiration of the aforementioned HRC guarantee.
Interest expense of $672,000, $713,000 and $912,000 for fiscal years
1994, 1993 and 1992, respectively, relate to borrowings from The First National
Bank of Boston ("FNBB") secured by the office-retail property. The fiscal 1994
and 1993 decreases were attributable to a decline in the foreign currency
exchange rate. See Note 7 to the Company's consolidated financial statements.
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Operating expenses declined to $32,000 for fiscal 1994, compared to
$73,000 for fiscal 1993 and $96,000 for fiscal 1992. The declines were due to
reduced professional fees associated with the office-retail property.
The fiscal 1993 provision for losses of $340,000 is comprised of a
$200,000 final loss on disposition of the last commercial real estate mortgage
loan, a $40,000 provision for uncollectible resort time-share loans and a
$100,000 write-down of a developed land parcel, compared to the provision for
losses of $1,893,000 for fiscal 1992, which was comprised of a $1,011,000
(L.500,000) write-down on the carrying value of the office-retail property
located in the United Kingdom and an $882,000 initial write-down of the
commercial real estate loan.
ENERGY
Revenue. The Company owns approximately 70% of the common stock of
HEC as of July 31, 1994 (63% as of July 31, 1993 and 53% as of July 31, 1992).
HEC's general partner interest in HEP entitles it to interests in HEP's
properties ranging from 2% to 25%, and HEC holds approximately 7.3% of HEP's
limited partner units. HEC accounts for its ownership of HEP using the
proportionate consolidation method of accounting whereby HEC records its
proportional share of each of HEP's revenues and expenses, current assets,
current liabilities, noncurrent assets, long-term obligations and fixed assets.
Oil and gas revenues of $5,983,000 for fiscal 1994 compares to
$6,714,000 for fiscal 1993 and $6,680,000 for fiscal 1992. Production volumes
declined 11% from 1993 to 1994 and decreased 9% in fiscal 1993 from fiscal
1992. The declines in production volumes are a result of normal production
declines. Oil prices averaged $16.28 per barrel in fiscal 1994, compared to an
average price of $19.20 in fiscal 1993 and $21.30 in 1992. Gas prices averaged
$2.13 per mcf in fiscal 1994, compared to $1.97 in fiscal 1993 and $1.53 in
fiscal 1992.
Other income of $251,000 for fiscal 1994, compares to $1,741,000 for
fiscal 1993 and $432,000 for fiscal 1992. The large fluctuation between the
periods is primarily the result of HEC's share of a favorable litigation
settlement received by HEP in fiscal 1993.
Expenses. Energy expenses decreased 20% to $5,412,000 for fiscal 1994
from $6,763,000 for fiscal 1993 and decreased 4% in fiscal 1993 from $7,044,000
for fiscal 1992.
Depreciation, depletion and amortization of properties declined 5% in
fiscal 1994 to $2,018,000 from $2,115,000 in fiscal 1993 and 15% in fiscal 1993
from $2,485,000 in fiscal 1992 primarily due to the decrease in production
previously discussed.
Operating expenses, which are comprised of the costs of operating
wells and production-related taxes, for fiscal 1994 decreased by $235,000 or
13% to $1,556,000 from the fiscal 1993 amount of $1,791,000 due primarily to
decreased production volumes in fiscal 1994. Fiscal 1993 operating expenses
decreased $511,000, or 22%, from $2,302,000 in fiscal 1992 due primarily to the
sale of HEP properties.
Administrative expenses for fiscal 1994 decreased slightly, to
$1,049,000 from the fiscal 1993 amount of $1,058,000. Administrative expenses
in fiscal 1993 decreased by $207,000, or 16%, from the fiscal 1992 amount of
$1,265,000. This decrease was primarily a result of a reduction in personnel
and the renegotiation of HEC's office lease.
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Interest expense decreased $186,000, or 33%, to $378,000 for fiscal
1994 from $564,000 in fiscal 1993 and $112,000, or 17%, from $676,000 for
fiscal 1992, due primarily to HEP's lower average debt balance.
Minority interest, which represents the interest of other common and
preferred shareholders in the net income of HEC, of $411,000, $1,235,000 and
$316,000 for fiscal years 1994, 1993 and 1992, respectively, fluctuates
depending upon HEC's net income and percentage of minority ownership.
Operating Subsidiaries. The business segments of the Company's
operating subsidiaries division consists of textile products and hotels.
TEXTILE PRODUCTS
Revenue. Textile products revenue increased 2% to $71,624,000 for
fiscal 1994, compared to $70,185,000 for fiscal 1993. This increase of
$1,439,000 resulted from continued growth in the Brookwood Consumer and
Brookwood Roll Goods divisions, partially offset by a decrease of the Kenyon
finishing plant's revenues due to weak market conditions.
The 2% decrease in revenues from $71,393,000 in fiscal 1992 to
$70,185,000 in fiscal 1993 resulted principally from the Company's decision not
to pursue direct government contracts in fiscal 1993. As a result, there was
no revenue from direct government contracts in fiscal 1993 compared to
$2,712,000 in fiscal 1992. Reductions in direct government and parachute
revenues from the converting operations were partially offset by expansion into
new markets at higher margins.
Expenses. Textile products expenses increased 3% to $70,761,000 for
fiscal 1994 from $68,678,000 for fiscal 1993. The increase in cost of sales
and the resultant deterioration in textile products gross profits were
principally the result of weak market conditions experienced by the Kenyon
finishing plant during fiscal 1994. Gross margins were 12.5%, 13.8% and 12.1%
in fiscal 1994, 1993 and 1992, respectively. Interest expense decreased
$69,000 in fiscal 1994 from 1993 as a result of lower average borrowings and
lower interest rates.
Expenses decreased $2,384,000 in fiscal 1993 from fiscal 1992. The
decrease in cost of sales and the improvement in gross profits resulted
principally from more efficient operations and cost control at the finishing
plant, and the change in sales mix. Interest expense decreased $300,000 in
fiscal 1993 from 1992 as a result of lower average borrowings and lower
interest rates.
HOTELS
Revenues. Revenue of $20,896,000 increased by $3,078,000 for fiscal
1994, or 17%, compared to $17,818,000 for fiscal 1993. Such increase was
primarily due to the inclusion of operations of the Integra Hotels' properties,
acquired in March 1994. For properties held for a full year during fiscal 1993
revenues increased $153,528, or 0.9%, in fiscal 1994 and the average daily rate
also increased by 6.4%. Revenues for fiscal 1993 decreased 8% from fiscal 1992
revenues of $19,325,000, primarily due to the January 1992 sale of the Holiday
Inn hotel in Little Rock, Arkansas. For properties held for a full year during
fiscal 1992, revenue increased $746,593, or 4.4%, in fiscal 1993.
Expenses. Hotel expenses were $20,330,000, $17,583,000 and
$19,846,000 in fiscal years 1994, 1993 and 1992, respectively.
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Operating expenses of $17,338,000 for fiscal 1994 increased by
$2,055,000, or 13%, from the fiscal 1993 expenses of $15,283,000. The increase
was primarily due to the inclusion of the Integra Hotels properties. On a
comparable location basis, operating expenses decreased $444,711, or 2.9%, over
fiscal 1993. Fiscal 1993 operating expenses decreased by $1,885,000 from
$17,168,000, or 11%, from fiscal 1992. As noted above, such decrease was due
primarily to the sale of the Holiday Inn hotel in Little Rock.
Depreciation and amortization increased to $2,104,000 in fiscal 1994
from $1,610,000 in fiscal 1993, due to significant capital improvements
completed during the last three fiscal years and the acquisition of Integra
Hotels Properties. Depreciation and amortization increased in fiscal 1993 from
the fiscal 1992 amount of $1,497,000, due to capital improvements.
Amortization expense for all three years relates principally to the Longboat
Key Holiday Inn and Oklahoma City Embassy Suites leaseholds in the
approximate amount of $950,000 per year.
Interest expense of $888,000 for fiscal 1994 increased $198,000 from
$690,000 in fiscal 1993. The interest expense relates to borrowings under a
FNBB term loan on the Lido Beach Property (which amounted to $673,000, 690,000
and $1,181,000 in fiscal years 1994, 1993 and 1992, respectively), and a
mortgage on the Residence Inn by Marriott hotel located in Tulsa, Oklahoma in
the amount of $215,000. Fiscal 1993 interest, which only reflects the FNBB
term loan, decreased by $491,000 from fiscal 1992 as a result of loan
amortization and lower interest rates.
The two Holiday Inn hotels located in Sarasota, Florida are presently
under contract to be sold to a real estate investment trust ("REIT") to be
formed. As a result of recent increases in interest rates, and a related
weakening of the REIT market, the purchaser has informed the Company that it is
suspending until further notice activity on the formation of the REIT. The
hotel sales contracts provide that it will terminate if the sales are not
completed by November 30, 1994, unless extended for up to two 30-day periods by
the purchaser.
ASSOCIATED COMPANIES
Revenues. Associated companies' income for fiscal 1994 in the amount
of $1,356,000 compares to income of $12,232,000 for fiscal 1993 and $9,547,000
for fiscal 1992. Substantially all income is derived from ShowBiz in all three
years. Included in the 1993 and 1992 amounts are gains of $9,705,000 and
$6,316,000, respectively, from the sale of 425,000 ShowBiz shares in 1993 and
500,000 ShowBiz shares in 1992. Fiscal 1993 and 1992 amounts are net of
write-downs of the carrying value of the Company's investment in Oakhurst in
the amount of $275,000 and $650,000, respectively. See Note 3 to the Company's
consolidated financial statements.
Expenses. Interest expense of $486,000 for fiscal 1994 decreased by
$453,000, or 48% from $939,000 in fiscal 1993. The interest expense relates to
borrowings under the new line of credit facility from Merrill Lynch Business
Financial Services, Inc. ("MLBFS") and former margin loans from Prudential
Securities Incorporated ("Prudential") and Interallianz Bank Zurich AG ("IBZ").
Fiscal 1994 interest also included an amount of $81,000 relating to the
$4,000,000 note to Integra's Unsecured Creditors' Trust ("IUCT"). Interest
expense for fiscal 1993 increased by $56,000 from the fiscal 1992 amount of
$883,000, due to higher interest rates for the Prudential margin loan. All of
the Company's shares of ShowBiz common stock are presently pledged as
collateral under the MLBFS and IUCT loan agreements.
The Company recorded provisions for loss from asset held for sale in
fiscal 1993 and 1992 of $4,118,000 and $24,178,000 with respect to its
investment in Integra. In July 1992, Integra filed for chapter 11 bankruptcy
protection and, as a result, in fiscal 1992 the Company wrote off the carrying
value of its Integra
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investment, including a $6,000,000 anticipatory loss. During fiscal 1993,
Integra continued to operate in bankruptcy while it developed an amended plan
of reorganization. The amended plan provided for payments by the Company to a
proposed bankruptcy-created trust and, as a result, the Company recorded an
additional provision for loss in fiscal 1993 for such payments and legal fees.
As previously discussed, the Plan was confirmed by the court and was
consummated in March 1994. See Note 8 to the Company's consolidated financial
statements.
OTHER
Revenue. On February 4, 1994 the Company received $1,703,000 in cash
as its share of a final liquidation distribution of Alliance Bancorporation.
Due to previous uncertainties involving the recoverability on this investment,
the Company had previously written off the asset; therefore, the entire amount
was recognized as a recovery in fiscal 1994.
Interest and other income, principally from interest on short-term
investments, decreased by $42,000, or 11% to $340,000 in fiscal 1994, compared
to $382,000 for fiscal 1993, as a result of lower cash available for
investment. Fiscal 1993 interest revenues increased by $91,000 from the fiscal
1992 amount of $291,000 as a result of greater cash available for investment
offset in part by lower interest rates.
Fiscal 1994 fee income of $150,000 was received from a financial
consulting contract with ShowBiz. Fiscal 1993 fee income of $472,000, included
fees of $354,000 that were derived from financial consulting contracts with
ShowBiz and Oakhurst. The Oakhurst contract in the annual amount of $250,000
was terminated in June 1993. The fiscal 1993 decrease of $855,000 from
$1,327,000 in fiscal 1992 is attributable to the September 1992 disposition of
Hallwood Services, Inc. ("Services"), a former wholly-owned subsidiary of the
Company, incorporated as of August 1, 1991, to provide administrative services
to Hallwood Hotels, Oakhurst and Integra. Services was sold to a non-bankrupt
subsidiary of Integra in September 1992 for a nominal amount.
Expenses. The Company's net interest expense in fiscal 1994 was
$4,322,000, a decrease of 33% from the fiscal 1993 amount of $6,413,000,
principally due to the favorable effect of the bond exchange program concluded
in March 1993. The Company's net interest expense for fiscal 1993 represents a
10% decrease in such expense compared to the fiscal 1992 amount of $7,159,000,
which was also due to the bond exchange program during the five months of
fiscal 1993.
Other administrative expenses of $3,268,000 in fiscal 1994 compares to
$3,629,000 for fiscal 1993, and to $4,778,000 for fiscal 1992. The decrease in
fiscal 1994 of $361,000, or 10%, is attributable to lower personnel and office
expenses, offset by increased costs related to pending litigation matters. The
decrease in expense of $1,149,000 or 24% for fiscal 1993 compared to fiscal
1992 is due to the sale of Services and lower consulting fees, professional
fees and shareholder relations costs, offset by a non-recurring fiscal 1993
expense of $486,000 related to the bond exchange program.
In fiscal 1994, the Company recorded a $147,000 provision for loss
from an investment in a marketable security. In fiscal 1993, the Company
recorded a $35,000 recovery from a marketable security investment. In fiscal
1992, the Company recorded a provision for losses of $2,671,000 primarily from
a write-off of $2,418,000 in project costs associated with the Company's
unsuccessful attempt to acquire certain assets of Integrated Resources, Inc., a
distressed real estate syndicator in bankruptcy, and a $184,000 write-off of a
non-quoted marketable security.
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Income Taxes. Effective August 1, 1991, the Company accounts for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 - Accounting for Income Taxes ("SFAS No. 109") issued in February 1992.
Among other things this standard requires the recognition of future tax
benefits, measured by enacted tax rates, attributable to net deductible
temporary differences between financial statement and income tax bases of
assets and liabilities (approximately $11,200,000 at the end of the fiscal
year) and tax net operating loss carryforwards (approximately $53,600,000 at
the end of the fiscal year) ("NOLs"), to the extent that realization of such
benefits is "more likely than not", as defined in SFAS No. 109. In its
consolidated financial statements for the fiscal year ended July 31, 1992, the
Company adopted the provisions of SFAS No. 109 and changed its accounting
method for income taxes by recording its cumulative effect, as of the beginning
of the fiscal year, resulting in a one-time $12,133,000 increase to
stockholders' equity.
The Company's NOLs expire as follows: 1995 - $9,000,000, 1996 to 2000
- - - $2,700,000 and 2006 to 2009- $41,900,000. SFAS No. 109 requires that the tax
benefit of such NOLs be recorded as an asset to the extent that management
assesses the utilization of such NOLs to be "more likely than not". Based upon
the Company's expectations and available tax planning strategies, management
has determined that taxable income will more likely than not be sufficient to
utilize approximately $17,700,000 of the NOLs prior to their ultimate
expiration in the year 2009.
Management believes that the Company has certain tax planning
strategies available, which include the potential sale of its ShowBiz shares,
the hotel properties and certain other assets, that could be implemented, if
necessary, to supplement income from operations to fully realize the recorded
tax benefits before their expiration. Management has considered such
strategies in reaching its conclusion that it is more likely than not taxable
income will be sufficient to utilize a significant portion of the NOLs before
expiration, however, future levels of operating income and taxable gains are
dependent upon general economic conditions and other factors beyond the
Company's control. Accordingly, no assurance can be given that sufficient
taxable income will be generated for significant utilization of the NOLs.
Extraordinary Item. During fiscal 1994 the Company repurchased 7%
Debentures with a principal value of $2,174,000 for a discounted amount of
$1,526,000, which resulted in an extraordinary gain from debt extinguishment in
the amount of $648,000. In fiscal 1992, the Company repurchased $81,000 of
13.5% Debentures at a purchase price of $55,000, which resulted in a gain of
$26,000, and HEC acquired $2,149,000 of 13.5% Debentures at a cost of
$1,330,000 resulting in a gain in the amount of $426,000 equivalent to 52%
(ownership percentage at time of acquisition) of the discount.
Liquidity and Capital Resources. Cash and cash equivalents at July
31, 1994 totaled $5,728,000.
The Company's real estate segment generates funds principally from its
property management activities without significant additional capital costs.
The mortgage loan portfolio is a source of liquidity; however, the principal
has been pledged to secure the unpaid balance of a term loan on the Lido Beach
Property.
The Company's energy segment generates funds from operating and
financing activities. Cash flow is subject to fluctuating oil and gas
production and prices. In accordance with the proportionate consolidation
method of accounting, HEC reports its share of the long-term obligations of its
HEP affiliate totalling $4,858,000 at June 30, 1994. HEP's borrowings are
secured by a first lien on approximately 80% in value of HEP's oil and gas
properties. At September 30, 1994, HEP has $17,143,000 outstanding under a
note purchase agreement, which matures in April 1998, and $9,328,000
outstanding under a revolving credit agreement, which matures in March 1999.
HEP's unused borrowing capacity under the revolving credit agreement was
$19,430,000 at September 30, 1994. HEP declares distributions quarterly to its
unitholders including HEC.
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18
HEP will continue to evaluate its cash flow from operations on a quarterly
basis and will determine each quarter's distribution accordingly.
At July 31, 1994, Brookwood maintained a $13,500,000 revolving line of
credit facility (the "Brookwood Revolver") with The Chase Manhattan Bank, N.A.
("Chase"), which is collateralized by accounts receivable and equipment. The
Brookwood Revolver was amended during September 1994 to extend the expiration
date to August 31, 1997. At September 30, 1994, the Brookwood revolver had
$1,934,000 of unused borrowing capacity.
Although the Company's ShowBiz shares, having a market value of
approximately $14,719,600 at October 18, 1994 (based upon the closing price of
$8.25 per share), are presently unregistered, and may be subject to some
limitations on sale, management believes there is a ready market to sell such
shares without adversely affecting market price. All of the Company's
1,784,193 ShowBiz shares are pledged as collateral for the $5,250,000 (balance
as of October 18, 1994) Merrill Lynch Business Financial Services, Inc. line of
credit and the $4,000,000 note payable to the Integra Unsecured Creditors'
Trust.
Management believes that it will have sufficient funds derived from
operations and the potential sale of ShowBiz shares, hotel properties or other
assets to satisfy its obligations.
As described in Note 18 to the Company's consolidated financial
statements, the Company had outstanding contingencies and commitments of
approximately $13,890,000 (excluding operating lease commitments of
$12,581,000).
Inflationary Factors. Typically, inflation has the effect on real
estate operations of increasing revenue based on percentage rentals and
allowing rent increases on lease renewals as rental rates rise, generally to
reflect higher construction costs on new properties. This positive effect, if
any, on the Company's revenues may be offset by increasing operating expenses.
Higher construction costs and rental rates, if any, may make the Company's
existing rental properties more valuable in terms of both replacement cost and
income expectation, two significant factors in any valuation of real estate on
a current basis. However, due to the general downturn in the real estate
industry, there can be no expectation that any of these factors will
materialize.
The market for and prices of oil and gas depend on a number of
factors, including the level of domestic production, pace of the general
economy, supply of imported oil and gas, actions of foreign oil-producing
nations and extent of governmental regulation and taxation. HEP has entered
into numerous financial contracts to hedge the price of its oil and natural
gas. The purpose of the hedges is to provide protection against price drops
and to provide a measure of stability in the volatile environment of oil and
natural gas spot pricing. In general, it is HEP's goal to hedge 50% of its oil
and gas production for each of the next two years and 30% for each of the three
years thereafter. The revenue associated with these contracts is recognized as
oil or gas revenue at the time the hedged volumes are sold. HEP has entered
into financial contracts for hedging transactions of between 7% and 49% of its
forecasted oil production for the years 1995 through 1998 at prices ranging
from $14.75 per barrel to $17.55 per barrel. HEP has also entered into hedging
contracts of between 29% and 55% of its forecasted gas production for the years
1995 through 1998 at prices ranging from $1.97 per mcf to $2.18 per mcf.
Increased costs of the textile products operations resulting from
inflationary factors are, to the extent possible, passed on to customers of the
Company.
17
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the
independent auditors' report, are included elsewhere herein. Reference is made
to Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 is contained in
the definitive proxy statement of the Company for its Annual Meeting of
Stockholders (the "Proxy Statement") under the heading "Election of Directors,"
and such information is incorporated herein by reference. The Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after July 31, 1994.
In addition to certain directors of the Company who serve as executive
officers, the following individuals also serve as executive officers of the
Company:
William L. Guzzetti, age 51, has served as Executive Vice President of
the Company since October 1989. Mr. Guzzetti has served as President, Chief
Operating Officer and a Director of HEC since February 1985 and as President,
Chief Operating Officer and a Director of HCRC since May 1991. Prior to that,
Mr. Guzzetti served as Senior Vice President, Secretary and General Counsel of
HEC from November 1980 until February 1985. Since November 1990 and May 1991,
Mr. Guzzetti has served as the President, Chief Operating Officer and a
Director of HRC and HMC, respectively.
Melvin J. Melle, age 52, has served as Vice President and Chief
Financial Officer of the Company since December 1984 and as Secretary of the
Company since October 1987. Mr. Melle served as Assistant Secretary of the
Company from December 1984 to October 1987. Mr. Melle had served as Secretary
and Principal Financial and Accounting Officer of Alliance Bancorporation from
April 1989 until its liquidation in February 1994. From June 1980 through June
1986, Mr. Melle served as Chief Financial Officer of The Twenty Seven Trust.
Mr. Melle is a member of the American Institute of Certified Public Accountants
and of the Ohio Society of Certified Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is contained in the
Proxy Statement under the headings "Executive Compensation," "Compensation of
Directors" and "Certain Relationships and Related Transactions," and such
information is incorporated herein by reference.
18
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's
outstanding securities is contained in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management," and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
is contained in the Proxy Statement under the headings "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions," and such information is incorporated herein by reference.
19
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Reference is made to the "Index to Financial Statements and
Schedules" appearing after the signature page hereof.
1. Financial Statements.
Included in Part II, Item 8 of this report are the following:
Independent Auditors' Report
Consolidated Balance Sheets, July 31, 1994 and 1993
Consolidated Statements of Operations, Years ended July 31,
1994, 1993 and 1992
Consolidated Statements of Changes in Stockholders' Equity,
Years ended July 31, 1992, 1993 and 1994
Consolidated Statements of Cash Flows, Years ended July 31,
1994, 1993 and 1992
Notes to Consolidated Financial Statements
Supplemental Oil and Gas Reserve Information (Unaudited)
2. Financial Statement Schedules.
Independent Auditors' Report on Schedules
I Marketable Securities - Other Investments
III Condensed Financial Information of Registrant
VIII Valuation and Qualifying Accounts and Reserves
X Supplemental Income Statement Information
XI Real Estate and Accumulated Depreciation
XII Mortgage Loans on Real Estate
All other schedules are omitted since the required information is not
applicable or is included in the financial statements or related
notes.
Financial Statements of ShowBiz Pizza Time, Inc.
Form 10-K, for the period ended December 31, 1993
Form 10-Q, for the period ended July 1, 1994 (Unaudited)
20
22
3. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Certificate of Incorporation of the Company
is incorporated herein by reference to Exhibit 3.2 of
Atlantic Metropolitan Corporation's Registration
Statement on Form S-14, Registration No. 2-89505.
3.2 Amendment to Restated Certificate of Incorporation of
the Company, with respect to conversion of 7%
Participating Convertible Preferred Stock and reverse
split of Common Stock, is incorporated herein by
reference to Exhibit 3.2 to the Company's Form 10-K
for the fiscal year ended July 31, 1986, File No.
1-8303.
3.3 Amendment to Restated Certificate of Incorporation of
the Company, with respect to limiting the personal
liability of directors of the Company or any
stockholder thereof, is incorporated herein by
reference to Exhibit 3.3 to the Company's Form 10-K
for the fiscal year ended July 31, 1987, File No.
1-8303.
3.4 Restated Bylaws of the Company, as currently in
effect, including all amendments thereto, is
incorporated herein by reference to Exhibit 3.4 to
the Company's Form 10- K for the fiscal year ended
July 31, 1992, File No. 1-8303.
4.1 Indenture Agreement, dated as of April 14, 1983,
among Atlantic Metropolitan Corporation, Atlantic
Metropolitan (U.K.) plc and The Law Debenture Trust
Corporation plc, as Trustee, relating to the 12%
Convertible Notes due July 31, 1997 of Anglo
Metropolitan (U.K.) plc is incorporated herein by
reference to Exhibit 4.4 to Atlantic Metropolitan
Corporation's Form 10-K for the fiscal year ended
July 31, 1983, File No. 1-8303.
4.2 Indenture Agreement, and related Pledge Agreement,
dated as of March 2, 1993, among Norwest Bank
Minnesota, National Association, Trustee, and the
Company, regarding 7% Collateralized Subordinated
Debentures due July 31, 2000, is incorporated herein
by reference to Exhibit 4.2 to the Company's Form
10-Q for the fiscal quarter ended January 31, 1993,
File No. 1-8303.
4.3 Indenture, dated as of May 1, 1989, between the
Company and The Bank of New York, as Trustee, is
incorporated herein by reference to Exhibit T3C to
the Company's Application for Qualification of
Indenture on Form T-3, Registration No. 22-19326.
10.2 Consulting Agreement with Robert L. Lynch is
incorporated herein by reference to Exhibit 10.2 to
Umet Properties Corporation's Registration Statement
on Form S-11, File No. 2-73345.
10.3 Amendment to Consulting Agreement with Robert L.
Lynch, effective October 1, 1982, is incorporated
herein by reference to Exhibit 10.4 to Umet
Properties Corporation's Form 10-K for the fiscal
year ended November 30, 1982, File No. 1-8384.
21
23
10.5 Amended and Restated Agreement, dated March 30, 1990,
between the Company and Stanwick Management Company,
Inc. (subsequently merged into its parent, Stanwick
Holdings, Inc.) concerning the allocation of costs
and expenses incurred in connection with the
operation and management of their common offices is
incorporated herein by reference to Exhibit 10.30 to
the Company's Form 10-Q for the fiscal quarter ended
April 30, 1990, File No. 1-8303.
10.6 Amended 1985 Stock Option Plan is incorporated herein
by reference to Exhibit 10.9 to the Company's Form
10-K for the fiscal year ended July 31, 1987, File
No. 1-8303.
10.9 Employment Agreement, dated January 1, 1994, between
the Company and Melvin John Melle, filed herewith.
10.11 Agreement, dated December 18, 1987, between the
Company, Grainger Trust plc, Atlantic Metropolitan
(U.K.) plc and Alan George Crisp, relating to the
sale by the Company of Atlantic Metropolitan (U.K.)
plc is incorporated herein by reference to Exhibit
2.1 to the Company's Form 8-K dated January 6, 1988,
File No. 1-8303.
10.12 Second Amended and Restated Revolving Credit
Agreement, dated as of November 26, 1991, by and
among the Company, The First National Bank of Boston
("FNBB") and the other banks which are parties
thereto, incorporated herein by reference to Exhibit
10.12 to the Company's Form 10-K dated July 31, 1992,
File No. 1-8303.
10.13 Second Amended and Restated Hallwood Note, dated as
of November 26, 1991, executed by the Company in
favor of FNBB, as agent, incorporated herein by
reference to Exhibit 10.13 to the Company's Form 10-K
dated July 31, 1992, File No. 1-8303.
10.14 Second Amended and Restated Security and Pledge
Agreement, dated as of November 26, 1991, executed by
the Company in favor of FNBB, as agent, incorporated
herein by reference to Exhibit 10.14 to the Company's
Form 10-K dated July 31, 1992, File No. 1-8303.
10.15 Amendment and Release Agreement, dated as of June 25,
1992, by and among the Company, FNBB and the other
banks which are parties thereto, incorporated herein
by reference to Exhibit 10.15 to the Company's Form
10-K dated July 31, 1992, File No. 1-8303.
10.16 Second Amendment Agreement, dated as of October 30,
1992, by and among the Company, FNBB and the other
banks which are parties thereto, incorporated herein
by reference to Exhibit 10.16 to the Company's Form
10-K dated July 31, 1992, File No. 1-8303.
10.31 Tax Sharing Agreement, dated as of March 15, 1989,
between the Company and Brookwood Companies
Incorporated is incorporated herein by reference to
Exhibit 10.25 to the Company's Form 10-K for the
fiscal year ended July 31, 1989, File No. 1-8303.
22
24
10.33 Amended Tax-Favored Savings Plan Agreement of the
Company, effective as of February 1, 1992,
incorporated by reference to Exhibit 10.33 to the
Company's Form 10-K for the fiscal year ended July
31, 1992, File No. 1-8303.
10.34 Hallwood Special Bonus Agreement, dated as of August
1, 1993, between the Company and all members of its
control group that now, or hereafter, participate in
the Hallwood Tax Favored Savings Plan and its related
trust, and those employees who, during the plan year
of reference are highly-compensated eligible
employees of the Company, filed herewith.
10.35 Consulting Agreement, dated as of August 1, 1989,
between the Company and Atlantic Management
Associates, Inc. is incorporated by reference to
Exhibit 10.28 to the Company's Form 10-Q for the
fiscal quarter ended January 31, 1990, File No.
1-8303.
10.43 Services Agreement, dated September 29, 1992 between
the Company and Hallwood Securities Limited,
incorporated by reference to Exhibit 10.43 to the
Company's Form 10-K for the fiscal year ended July
31, 1992, File No. 1-8303.
10.47 Consulting Agreement, dated June 2, 1992, between the
Company and Hallwood Monaco S.A.M, incorporated by
reference to Exhibit 10.47 to the Company's Form 10-K
for the fiscal year ended July 31, 1992, File No.
1-8303.
10.54 Amended and Restated Loan Agreement, dated as of
December 23, 1992 between The First National Bank of
Boston and the Company, incorporated by reference to
Exhibit 10.54 to the Company's Form 10-Q for the
quarter ended January 31, 1993, File No. 1-8303.
10.55 Credit Agreement and Guaranty, dated as of December
9, 1992, among Brookwood Companies Incorporated as
Borrower, the Guarantor signatory hereto, the Banks
signatory hereto and The Chase Manhattan Bank, N.A.,
as Agent; and the First Amendment to Credit Agreement
and Guaranty, dated as of March 31, 1993,
incorporated by reference to Exhibit 10.55 to the
Company's Form 10-Q for the quarter ended April 30,
1993, File No. 1- 8303.
10.56 Second Amendment to Credit and Guaranty, dated as of
September 27, 1994, among Brookwood Companies
Incorporated as Borrower, Kenyon Industries, Inc. as
Guarantor and The Chase Manhattan Bank, N.A. as Bank
and as agent for the Banks, filed herewith.
10.57 Client's Agreement and related Pledge Agreement,
dated as of June 7, 1993, between Prudential
Securities Incorporated and the Company incorporated
by reference to Exhibit 10.56 to the Company's Form
10-K for the year ended July 31, 1993, File No.
1-8303.
10.58 WCMA Note and Loan Agreement and Pledge and
Collateral Assignment of Securities Account and
Securities, dated as of April 19, 1994 between the
Company and Merrill Lynch Business Financial
Services, Inc.; and Amendment to Loan Documents,
dated September 8, 1994, filed herewith.
23
25
10.59 Employment Agreement, dated as of April 1, 1992,
between the Company's Hallwood Monaco SAM subsidiary
and Anthony J. Gumbiner, filed herewith.
10.60 Financial Consulting Agreement, dated as of August 1,
1994, between the Company and Hallwood Financial
Corporation, filed herewith.
10.61 Financial Consulting Agreement, dated as of June 30,
1994, between the Company and Hallwood Petroleum,
Inc., filed herewith.
11. Statement Regarding Computation of Per Share Earnings.
22. Active Subsidiaries of the Registrant as of
September 30, 1994.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
24
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
By: /s/ MELVIN J. MELLE
Melvin J. Melle
Vice President - Finance
(Principal Financial and Accounting Officer)
Dated: October 26, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant on the 26th day of October 1994.
Signature Title
--------- -----
/s/ MELVIN J. MELLE Vice President - Finance (Principal Financial and
(Melvin J. Melle) Accounting Officer)
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director (Principal
(Anthony J. Gumbiner) Executive Officer)
/s/ ROBERT L. LYNCH Vice Chairman and Director
(Robert L. Lynch)
/s/ BRIAN M. TROUP President and Director (Principal Operating Officer)
(Brian M. Troup)
/s/ CHARLES A. CROCCO, JR. Director
(Charles A. Crocco, Jr.)
/s/ J. THOMAS TALBOT Director
(J. Thomas Talbot)
25
27
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Statements:
Consolidated Balance Sheets, July 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 28-29
Consolidated Statements of Operations, Years ended July 31, 1994, 1993 and 1992 . . . . . . . 30-31
Consolidated Statements of Changes in Stockholders' Equity, Years ended July 31, 1992,
1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Cash Flows, Years ended July 31, 1994, 1993 and 1992 . . . . . . . 33
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 34-67
Supplemental Oil and Gas Reserve Information (Unaudited) . . . . . . . . . . . . . . . . . . . . 68-70
Schedules:
Independent Auditors' Report on Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
I Marketable Securities - Other Investments . . . . . . . . . . . . . . . . . . . . . . 72
III Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . 73-77
VIII Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . . . . 78
X Supplemental Income Statement Information . . . . . . . . . . . . . . . . . . . . . . 79
XI Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . 80
XII Mortgage Loans on Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81-82
All other schedules are omitted since the required information is not
applicable or is included in the financial statements or related notes.
Financial Statements of ShowBiz Pizza Time, Inc.
Form 10-K, for the year ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . 83-134
Form 10-Q, for the period ended July 1, 1994 (Unaudited) . . . . . . . . . . . . . . . . . . . 135-154
26
28
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
The Hallwood Group Incorporated
We have audited the accompanying consolidated balance sheets of The
Hallwood Group Incorporated and its subsidiaries as of July 31, 1994 and 1993,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended July 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Hallwood Group
Incorporated and its subsidiaries as of July 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 18, 1994
27
29
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
July 31
--------------------
1994 1993
--------- --------
ASSET MANAGEMENT
REAL ESTATE (NOTES 2, 3, 4, 7 AND 13)
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,119 $ 7,998
Investments in HRP. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,927 7,869
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,021 2,601
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . 406 636
-------- --------
17,473 19,104
ENERGY (NOTES 5, 7 AND 14)
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . . . 11,005 12,385
Current assets of HEP. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,976 6,157
Noncurrent assets of HEP. . . . . . . . . . . . . . . . . . . . . . . . . 1,868 2,133
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . 1,437 1,035
-------- --------
17,286 21,710
-------- --------
Total asset management assets . . . . . . . . . . . . . . . . . . . . . 34,759 40,814
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 7 AND 15)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,910 14,389
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,723 12,501
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . 8,301 8,058
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982 1,107
-------- --------
34,916 36,055
HOTELS (NOTES 2 AND 7)
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,784 16,940
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . 3,671 1,519
-------- --------
26,455 18,459
-------- --------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . . . 61,371 54,514
ASSOCIATED COMPANIES (NOTES 3 AND 7)
Investment in ShowBiz Pizza Time, Inc. . . . . . . . . . . . . . . . . . . . . 16,444 16,763
Investment in Oakhurst Capital, Inc. . . . . . . . . . . . . . . . . . . . . . -- 1,220
-------- --------
Total associated companies assets . . . . . . . . . . . . . . . . . . . 16,444 17,983
OTHER (NOTES 6 AND 11)
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,900 8,533
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 5,728 11,837
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,482 2,048
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,412 1,602
Investment in insurance contracts . . . . . . . . . . . . . . . . . . . . . . 229 1,047
-------- --------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 14,751 25,067
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $127,325 $138,378
======== ========
See accompanying notes to consolidated financial statements.
28
30
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31,
---------------------
1994 1993
-------- --------
ASSET MANAGEMENT
REAL ESTATE (NOTE 7)
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,399 $ 5,205
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . 492 550
-------- --------
7,891 5,755
ENERGY (NOTE 7)
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,153 8,751
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . . . 4,858 6,963
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,470 3,938
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . 148 165
-------- --------
14,629 19,817
-------- --------
Total asset management liabilities . . . . . . . . . . . . . . . . 22,520 25,572
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTE 7)
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,451 9,198
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . 6,079 6,990
-------- --------
14,530 16,188
HOTELS (NOTE 7)
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,204 7,429
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . 4,460 1,479
-------- --------
16,664 8,908
-------- --------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 31,194 25,096
ASSOCIATED COMPANIES (NOTES 7 AND 8)
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 7,491
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . 26 85
Anticipatory loss - asset held for sale . . . . . . . . . . . . . . . . . . . -- 10,050
-------- --------
Total associated companies liabilities . . . . . . . . . . . . . . 10,026 17,626
OTHER (NOTES 7 AND 9)
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . . . . . 26,866 29,611
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . 22,902 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . . . . . 5,840 3,811
-------- --------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 55,608 56,324
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 119,348 124,618
CONTINGENCIES AND COMMITMENTS (NOTE 18)
STOCKHOLDERS' EQUITY (NOTE 10)
Preferred stock, $.10 par value; authorized 500,000 shares; unissued . . . . . -- --
Common stock, $.10 par value; authorized 10,000,000 shares;
issued 6,394,709 shares in both years;
outstanding 5,487,267 shares in both years . . . . . . . . . . . . . . . 639 639
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 56,442 58,088
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42,894) (38,504)
Equity adjustment from foreign currency translation . . . . . . . . . . . . . 86 (167)
Treasury stock, 907,442 shares in both years; at cost . . . . . . . . . . . . (6,296) (6,296)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 7,977 13,760
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . $127,325 $138,378
======== ========
See accompanying notes to consolidated financial statements.
29
31
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Years ended July 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
ASSET MANAGEMENT
REAL ESTATE (NOTES 3, 4, 7 AND 13)
Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,924 $ 5,939 $ 5,160
Rentals. . . . . . . . . . . . . . . . . . . . . . . . . . . 567 572 927
Interest and discounts from mortgage loans . . . . . . . . . . 354 468 645
Loss from investments in HRP. . . . . . . . . . . . . . . . . (446) (393) (536)
Loss on sale of real estate . . . . . . . . . . . . . . . . . -- -- (36)
-------- -------- --------
4,399 6,586 6,160
Litigation settlement . . . . . . . . . . . . . . . . . . . . 1,500 -- --
Depreciation and amortization . . . . . . . . . . . . . . . . 1,060 1,324 1,324
Administrative expenses . . . . . . . . . . . . . . . . . . . 1,023 1,519 1,882
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 672 713 912
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 32 73 96
Provision for losses . . . . . . . . . . . . . . . . . . . . . -- 340 1,893
-------- -------- --------
4,287 3,969 6,107
-------- -------- --------
Income from real estate operations . . . . . . . . . . . 112 2,617 53
ENERGY (NOTES 5, 7 AND 14)
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . 5,983 6,714 6,680
Other income (including intercompany amounts of $202, $88
and $155 in 1994, 1993 and 1992, respectively) . . . . . . 251 1,741 432
-------- -------- --------
6,234 8,455 7,112
Depreciation, depletion and amortization . . . . . . . . . . . 2,018 2,115 2,485
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 1,556 1,791 2,302
Administrative expenses . . . . . . . . . . . . . . . . . . . 1,049 1,058 1,265
Minority interest . . . . . . . . . . . . . . . . . . . . . . 411 1,235 316
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 378 564 676
-------- -------- --------
5,412 6,763 7,044
-------- -------- --------
Income from energy operations . . . . . . . . . . . . . 822 1,692 68
-------- -------- --------
Income from asset management operations . . . . . . . . 934 4,309 121
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 7 AND 15)
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,624 70,185 71,393
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 62,705 60,518 62,731
Administrative expenses . . . . . . . . . . . . . . . . . . . 5,332 5,354 5,155
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . 2,122 2,135 2,205
Interest (including intercompany amounts of $83, $160 and
$7 in 1994, 1993 and 1992, respectively) . . . . . . . . . 602 671 971
-------- -------- --------
70,761 68,678 71,062
-------- -------- --------
Income from textile products operations . . . . . . . . 863 1,507 331
See accompanying notes to consolidated financial statements.
30
32
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amount)
Years ended July 31,
----------------------------------
1994 1993 1992
--------- --------- ---------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS (NOTES 2 AND 7)
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,896 $ 17,818 $ 19,325
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 17,338 15,283 17,168
Depreciation and amortization . . . . . . . . . . . . . . . . . 2,104 1,610 1,497
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 888 690 1,181
--------- -------- --------
20,330 17,583 19,846
--------- -------- --------
Income (loss) from hotel operations . . . . . . . . . . . 566 235 (521)
--------- -------- --------
Income (loss) from operating subsidiaries . . . . . . . . 1,429 1,742 (190)
ASSOCIATED COMPANIES (NOTES 3, 7 AND 8)
Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,356 12,232 9,547
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 939 883
Loss from asset held for sale . . . . . . . . . . . . . . . . . . -- 4,118 24,178
--------- -------- --------
486 5,057 25,061
--------- -------- --------
Income (loss) from associated companies . . . . . . . . . 870 7,175 (15,514)
OTHER (NOTE 7)
Recovery from investment in Alliance Bancorporation . . . . . . . 1,703 -- --
Interest on short-term investments and other income . . . . . . . 340 382 291
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 472 1,327
--------- -------- --------
2,193 854 1,618
Interest, net of $285, $248 and $162 in 1994, 1993 and
1992, respectively, from other segments . . . . . . . . . . . . 4,322 6,413 7,159
Administrative expenses . . . . . . . . . . . . . . . . . . . . . 3,268 3,629 4,778
Provision for losses (recovery) . . . . . . . . . . . . . . . . . 147 (35) 2,671
--------- -------- --------
7,737 10,007 14,608
--------- -------- --------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . (5,544) (9,153) (12,990)
--------- -------- --------
Income (loss) before income taxes, extraordinary gain and
cumulative effect of SFAS No. 109 adoption . . . . . . . . . . (2,311) 4,073 (28,573)
Income taxes (benefit) (Note 11) . . . . . . . . . . . . . . . . . 2,727 5,498 (1,702)
--------- -------- --------
Loss before extraordinary gain and
cumulative effect of SFAS No. 109 adoption . . . . . . . . . . (5,038) (1,425) (26,871)
Extraordinary gain from extinguishment of debt (Note 9) . . . . . 648 -- 452
--------- -------- --------
Loss before cumulative effect of SFAS No. 109 adoption . . . . . . (4,390) (1,425) (26,419)
Cumulative effect of SFAS No. 109 adoption . . . . . . . . . . . . -- -- 12,133
--------- -------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,390) $ (1,425) $(14,286)
========= ======== ========
PER COMMON SHARE (PRIMARY)
Loss before extraordinary gain and
cumulative effect of SFAS No. 109 adoption . . . . . . . . . . $ (0.92) $ (0.26) $ (4.75)
Extraordinary gain from extinguishment of debt . . . . . . . . . . 0.12 -- 0.08
Cumulative effect of SFAS No. 109 adoption . . . . . . . . . . . . -- -- 2.14
--------- -------- --------
Net loss per common share . . . . . . . . . . . . . . . . . . . . $ (0.80) $ (0.26) $ (2.53)
========= ======== ========
See accompanying notes to consolidated financial statements.
31
33
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1992, 1993 AND 1994
(IN THOUSANDS)
Equity
adjustment
Addi- from Total
Common stock tional Accumu- foreign Treasury stock stock-
---------------- paid-in lated currency ----------------- holders'
shares par value capital deficit translation shares cost equity
------ --------- ------- -------- ----------- ------ --------- -------
BALANCE, AUGUST 1, 1991 . . . . . . 6,395 $639 $58,088 $(22,713) $ 508 364 $(2,682) $ 33,840
Net loss - year ended July 31, 1992 (14,286) (14,286)
Foreign currency translation gain 1,153 1,153
Purchase of treasury stock . . . 568 (3,788) (3,788)
----- ---- ------- -------- ------- --- ------- --------
BALANCE, JULY 31, 1992 . . . . . . 6,395 639 58,088 (36,999) 1,661 932 (6,470) 16,919
Net loss - year ended July 31, 1993 (1,425) (1,425)
Foreign currency translation loss (1,828) (1,828)
Exercise of stock options . . . . (80) (25) 174 94
----- ---- ------- -------- ------- --- ------- --------
BALANCE, JULY 31, 1993 . . . . . . 6,395 639 58,088 (38,504) (167) 907 (6,296) 13,760
Net loss - year ended July 31, 1994 (4,390) (4,390)
Foreign currency translation gain 253 253
Proportionate share of stockholders'
equity transactions of ShowBiz. . . (1,646) (1,646)
----- ---- ------- -------- ------- --- ------- --------
BALANCE, JULY 31, 1994 . . . . . . 6,395 $639 $56,442 $(42,894) $ 86 907 $(6,296) $ 7,977
===== ==== ======= ======== ======= === ======= ========
See accompanying notes to consolidated financial statements.
32
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years ended July 31,
-------------------------------------
1994 1993 1992
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,390) $(1,425) $(14,286)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Gain on sale of investment in associated company . . . . . . . . . . . (30) (9,705) (6,316)
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 6,252 6,161 6,383
Undistributed income from energy affiliate . . . . . . . . . . . . . . (3,543) (5,276) (3,261)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . 2,743 2,748 2,320
Change in deferred tax asset
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . 2,633 5,449 (1,849)
Cumulative effect of SFAS No. 109 adoption . . . . . . . . . . . . . -- -- (12,133)
(Recovery of) provision for losses, net . . . . . . . . . . . . . . . (1,556) 580 5,220
Issuance of note payable for litigation settlement . . . . . . . . . . 1,500 -- --
Equity in net income of associated companies/affiliates . . . . . . . (880) (2,325) (3,009)
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . (648) -- (452)
Proceeds from collections of mortgage loans . . . . . . . . . . . . . 638 1,318 912
Amortization of deferred gain from debenture exchange . . . . . . . . (571) (196) --
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . (51) (79) (85)
Accrued interest on 13.5% Debentures . . . . . . . . . . . . . . . . . 8 5,855 6,942
Loss from asset held for sale . . . . . . . . . . . . . . . . . . . . -- 4,118 24,178
Increase in mortgage loans from sale of real estate . . . . . . . . . -- (76) --
Distributions/dividends from other affiliates . . . . . . . . . . . . -- -- 152
Loss on sale of real estate . . . . . . . . . . . . . . . . . . . . . -- -- 36
Net change in other assets and liabilities . . . . . . . . . . . . . . 250 1,267 (2,330)
Net change in textile products assets and liabilities . . . . . . . . 351 (627) (2,950)
Net change in energy assets and liabilities . . . . . . . . . . . . . (380) 1,285 (215)
-------- ------- --------
Net cash provided by (used in) operating activities . . . . . . . . 2,326 9,072 (743)
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements related to Integra - asset held for sale . . . . . . . . (7,421) (1,818) (11,220)
Less: Integra cash balance at emergence from bankruptcy . . . . . . 2,077 -- --
Proceeds from liquidation of Alliance Bancorporation . . . . . . . . . 1,703 -- --
Capital expenditures and acquisition of real estate and hotels . . . . (1,332) (1,158) (2,062)
Proceeds from sale of investment in associated company . . . . . . . . 1,250 13,504 10,354
Repayment of investments in associated companies . . . . . . . . . . . -- 4,768 4
Investments in textile products property and equipment . . . . . . . . (1,193) (795) (915)
Proceeds from sale (investment in) insurance contracts, net . . . . . 858 (1,016) --
Net change in restricted cash for investing activities . . . . . . . . 450 (153) (316)
Investments in energy property and equipment . . . . . . . . . . . . . (147) (94) (3)
Investments in associated companies/affiliates . . . . . . . . . . . . (8) (427) (10)
Proceeds from sales of real estate and hotels . . . . . . . . . . . . 5 97 2,076
Investments in marketable securities . . . . . . . . . . . . . . . . . -- (776) --
-------- ------- --------
Net cash provided by (used in) investing activities . . . . . . . . (3,758) 12,132 (2,092)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . 6,100 22,400 16,257
Repayment of bank borrowings and loans payable . . . . . . . . . . . . (7,922) (34,965) (1,001)
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . . . . . . (1,526) -- --
Purchase of capital stock by energy subsidiary for treasury . . . . . (1,454) (2,118) --
Net change in restricted cash for financing activities . . . . . . . . 144 1,973 (101)
Repurchase of 13.5% Debentures . . . . . . . . . . . . . . . . . . . . -- (6,461) (1,386)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . -- 94 --
Repurchase and retirement of Convertible Debentures . . . . . . . . . -- -- (6,991)
Purchase of common stock for treasury . . . . . . . . . . . . . . . . -- -- (3,788)
-------- ------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . (4,658) (19,077) 2,990
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . (19) (249) 163
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . (6,109) 1,878 318
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . . . . . . 11,837 9,959 9,641
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . $ 5,728 $11,837 $ 9,959
======== ======= ========
See accompanying notes to consolidated financial statements.
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and the following subsidiaries:
Brookwood Companies Incorporated and subsidiary
Hallwood Energy Corporation and subsidiaries
Hallwood Hotels, Inc.
Hallwood-Integra Holding Company and subsidiaries
Hallwood Investment Company
Hallwood Management Company
Hallwood Monaco S.A.M.
Hallwood Realty Corporation
Hallwood Securities Corporation
Hallwood Services, Inc.
HWG Realty Investors, Inc.
NJ Portfolio Limited
The Lido Beach Hotel, Inc.
The Company fully consolidates all subsidiaries and records a minority
interest in those less than wholly owned. All significant intercompany
balances and transactions have been eliminated in consolidation. Hallwood
Energy Corporation is included on the basis of a June 30 fiscal year end.
(b) Recognition of Income
Fee income. Fee income earned in real estate operations is generally
received in cash and is recognized as the services (e.g. management, leasing,
acquisition, construction) are performed in accordance with various service
agreements. Fee income from restructuring activities is generally earned at
the time of closing and is generally received in the form of shares or other
securities of the issuer. The Company's policy is to record such securities at
fair value. Fee income from other financial services activities may be
received in the form of securities, cash or a combination thereof.
Interest income. Interest on mortgage loans is recognized as earned. The
general policy is to discontinue accruing interest when management believes
collection is unlikely or if foreclosure proceedings are imminent or in
process. Previously accrued interest deemed uncollectible is written off.
Textile products sales. Sales revenue is recognized upon shipment or
release of product, when title passes to the customer.
(c) Carrying Value of Investments
Common shares and other securities are recorded at fair value determined
as of the date acquired. Thereafter, equity accounting is utilized where the
Company is able to exercise significant influence over the issuer's operating
and financial policies.
Investments in other marketable securities are stated at the lower of cost
or market value. Temporary declines in the market value of significant
non-current marketable securities are recorded as a reduction of stockholders'
equity.
34
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Mortgage loans are stated at cost, less allowance for losses.
Investments in insurance contracts are stated at the lower of cost or
market value. The cost basis includes original acquisition cost and subsequent
premiums paid.
Purchased real estate is carried at cost including interest costs
associated with properties under development or renovation. Property acquired
through foreclosure is recorded at the lower of cost or fair value at the date
of foreclosure. In this case, cost is defined as the unpaid principal balance
of the foreclosed loan, plus accrued interest, the unpaid balance of mortgages
assumed and costs of obtaining possession.
(d) Oil and Gas Properties
Hallwood Energy Corporation ("HEC") and its affiliated entity, Hallwood
Energy Partners, L.P. ("HEP"), follow the accounting policy known as "full cost
accounting," whereby all the costs of exploration for and development of oil
and gas reserves, including both productive and nonproductive costs, are
capitalized as incurred. The capitalized costs applicable to evaluated oil and
gas properties and related future development costs are amortized on a
unit-of-production method based on reserve estimates prepared by in-house
petroleum engineers. A portion of these reserves have been reviewed by
independent petroleum engineers.
The full cost method of accounting also provides that capitalized costs of
oil and gas properties shall not exceed the "cost center ceiling." The cost
center ceiling is a function of the present value, discounted at 10%, of future
net revenues from estimated production of proved oil and gas reserves. Future
net revenues are estimated using prices currently in effect, except in
instances where a future price reduction is known.
Unproved property costs are excluded from the amortization base until the
related properties are evaluated. Such unproved property costs are assessed
periodically, and a provision for impairment is made to the full cost
amortization base when appropriate.
HEP has entered into numerous financial contracts to hedge the price of
its oil and natural gas. The purpose of the hedges is to provide protection
against price drops and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. In general, it is HEP's goal
to hedge 50% of its oil and gas production for each of the next two years and
30% for each of the three years thereafter. The revenue associated with these
contracts is recognized as oil or gas revenue at the time the hedged volumes
are sold.
(e) Investment in Energy Affiliate
HEC accounts for its ownership of HEP using the proportionate
consolidation method of accounting, whereby HEC records its proportional share
of HEP's revenues and expenses, current assets, current liabilities, noncurrent
assets, long-term obligations and fixed assets.
(f) Purchase Price in Excess of Fair Value of Net Assets Acquired
The purchase price in excess of fair value of the net assets acquired in
business acquisitions is amortized over the expected period of benefit.
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(g) Allowance for Losses
Adjustments to the allowance for losses are based on periodic reviews of
the investment portfolio by management, including, where necessary,
determination of estimated net realizable values by current appraisals of the
underlying properties and such other significant factors as, in the judgment of
management, result in a reasonable allowance for possible losses.
(h) Depreciation and Amortization
Depreciation of fee-owned real estate is computed on the straight-line
method over periods of twenty to forty years, five to thirty years for
improvements, and three to ten years for furniture and equipment. Amortization
of hotel leasehold interests is computed on the straight-line method over the
remaining lease term and varies from 6 to 10 years.
Expenditures for maintenance and repairs are charged to operations;
renewals and betterments are capitalized and depreciated over the estimated
useful lives of the assets.
(i) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated to United States dollars. All balance sheet accounts are translated
at the year-end exchange rate, and statement of operations items are translated
at the average exchange rate for the year. Resulting translation adjustments
are made directly to a separate component of stockholders' equity.
(j) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), effective August 1, 1991.
(k) Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
(l) Statement of Cash Flows
The Company considers its holdings of highly liquid debt and money
market instruments to be cash equivalents if such securities mature within 90
days from the date of acquisition.
The Company also records the making of mortgage loans to facilitate
the sale of real estate properties and principal collection thereon as cash
flows from operating activities.
(m) Anticipated Adoption Dates of New Accounting Pronouncements
The Company has not adopted Statement of Financial Accounting
Standards No. 114 - Accounting by Creditors for Impairment of a Loan ("SFAS No.
114"), Statement of Financial Accounting Standards No. 118 - Accounting by
Creditors for Impairment of a Loan- Income Recognition and Disclosures ("SFAS
No. 118") and SFAS No. 115 - Accounting for Certain Investments in Debt and
Equity Securities ("SFAS No. 115") and does not anticipate adopting any of
these new standards until the mandatory adoption date, which for the Company is
the year ending July 31, 1996 for SFAS No. 114 and SFAS No. 118 and July 31,
1995 for SFAS No. 115. Based on the Company's current investment portfolio,
the Company does not expect that the statements will
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
have a material effect on the Company's results of operations; however,
substantially all securities would be classified as available-for-sale and
reported at fair value.
Also, the Company has not adopted Statement of Financial Accounting
Standards No. 107 - Disclosure About Fair Value of Financial Information ("SFAS
No. 107"). The Company is not required to adopt SFAS No. 107 until the year
ending July 31, 1996. As SFAS No. 107 relates to disclosure only, the
Company's results of operations will not be impacted upon adoption.
(n) Reclassifications
Certain prior period amounts within the accompanying statements have
been reclassified for comparability.
(o) Earnings per Common Share
Primary earnings per common share are based on the weighted average
number of common shares outstanding during each year presented.
Average common and common share equivalents used in the computation
of loss per share are approximately 5,487,000 in fiscal 1994, 5,483,000 in
fiscal 1993 and 5,652,000 in fiscal 1992.
37
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - REAL ESTATE AND HOTEL PROPERTIES
The following table summarizes the cost, accumulated depreciation and
amortization and allowance for losses of the real estate and hotel segments as
of the balance sheet dates (in thousands):
July 31,
------------------------
1994 1993
-------- --------
Real Estate.
Office-retail property . . . . . . . . . . . . . . . . . . . . $10,314 $ 9,829
Non-operating properties . . . . . . . . . . . . . . . . . . . 290 324
------- -------
10,604 10,153
Less: Accumulated depreciation . . . . . . . . . . . . . . . (1,475) (1,175)
Allowance for losses . . . . . . . . . . . . . . . . . (1,010) (980)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 8,119 $ 7,998
======= =======
Hotels.
Building improvements and equipment . . . . . . . . . . . . . . $16,649 $11,114
Leasehold acquisition costs . . . . . . . . . . . . . . . . . . 8,026 6,625
Land . . . . . . . . . . . . . . . . . . . . . . . . . 3,715 2,750
------- -------
28,390 20,489
Less: Accumulated depreciation and amortization . . . . . . (5,606) (3,549)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . $22,784 $16,940
======= =======
The increase in the cost of the office-retail property is principally due
to the increase in the foreign currency exchange rate.
38
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANIES (DOLLAR AMOUNTS IN
THOUSANDS)
JULY 31, 1994
----------------------- AMOUNT AT WHICH CARRIED INCOME (LOSS) FROM INVESTMENTS
BUSINESS SEGMENTS NUMBER OF COST OR AT JULY 31, YEARS ENDED JULY 31,
AND DESCRIPTION SHARES ASCRIBED ----------------------- ------------------------------
OF INVESTMENT OR UNITS VALUE 1994 1993 1994 1993 1992
------------------ ---------- ------- ------- ------- ------- ------- ------
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P.(A)
-- General partnership
interest . . . . . . . . -- $8,650 $ 6,927 $ 7,718 $ (287) $ (110) $ (422)
-- Limited partnership units 446,345 906 -- 151 (159) (283) (114)
------ ------- ------- ------- ------- --------
Totals . . . . . . . . . $9,556 $ 6,927 $ 7,869 $ (446) $ (393) $ (536)
====== ======= ======= ======= ======= ========
ASSOCIATED COMPANIES
SHOWBIZ PIZZA TIME, INC.(B)
-- Common stock . . . . . . 1,784,193 $5,438 $16,444 $16,763
Equity in earnings . . . $ 1,326 $ 2,718 $ 3,545
Gain on sale
of shares . . . . . . -- -- -- -- 9,705 6,316
-- Floating rate
subordinated bond . . . -- -- -- -- 84 336
------ ------- ------- ------- ------- --------
5,438 16,444 16,763 1,326 12,507 10,197
------ ------- ------- ------- ------- --------
OAKHURST CAPITAL, INC. (C)
-- Common stock . . . . . . -- -- 1,000
Gain on sale
of shares . . . . . . -- -- -- 30 -- --
Writedown to net
realizable value . . . -- -- -- -- (192) --
-- Warrants to purchase
common stock . . . . . . -- -- 220
Writedown to net
realizable value . . . -- -- -- -- ( 83) (650)
------ ------- ------- ------- ------- --------
-- -- 1,220 30 (275) (650)
------ ------- ------- ------- ------- --------
Totals . . . . . . . . . $5,438 $16,444 $17,983 $ 1,356 $12,232 $ 9,547
====== ======= ======= ======= ======= ========
39
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The ownership percentages reported below assume conversion/exercise of all
convertible securities owned by the Company but no conversion/exercise of any
of the convertible securities owned by any other holder of such securities.
(A) On November 1, 1990, the Company, through its wholly-owned subsidiary
Hallwood Realty Corporation ("HRC"), acquired from Equitec Financial
Group, Inc. ("Equitec") the general partnership interests in eight Equitec
sponsored and managed limited partnerships for $8,650,000 and consummated
the consolidation of such limited partnerships into Hallwood Realty
Partners, L.P. ("HRP"). See Note 13. The Company has subsequently
acquired an additional 446,345 limited partnership units of HRP for
$906,000 in open market purchases. The Company accounts for its
investments on the equity method of accounting.
The carrying value of the Company's investment in the general partner
interest of HRP includes the value of intangible rights to provide asset
management and property management services. Equitec initially retained
the property management rights for a three-year period following the
November 1, 1990 sale. On June 1, 1991 the Company purchased the retained
property management rights from Equitec for the balance of the three-year
period, and, as of October 31, 1993, had fully amortized the $2,475,000
cost. Beginning November 1, 1993 the Company commenced amortization of
that portion of the general partnership interest ascribed to the
management rights, and for the nine-month period ended July 31, 1994 such
amortization was $504,000.
Due to the recording of the Company's pro rata share of losses recorded by
HRP as prescribed by equity accounting, the carrying value of the
investment in HRP's limited partnership units has been reduced to zero;
therefore, the Company no longer records its pro rata share of HRP's
losses, as the Company is not liable for any additional amounts. The
Company would have to recover such unrecognized losses, however, before
any equity income could be recognized in the future. As further discussed
in Note 7, the Company has pledged all of its 446,345 HRP limited
partnership units to collateralize a $500,000 note payable.
As of July 31, 1994, the Company owned a 1% general partnership and a 5%
limited partnership interest in HRP.
(B) The Company acquired its investment in ShowBiz Pizza Time, Inc.
("ShowBiz") in 1988 as a result of (i) a spin-off of ShowBiz, formerly a
90%-owned subsidiary of Integra-A Hotel and Restaurant Company
("Integra"), (ii) common stock warrants it received as consideration for
providing a subordinated loan to ShowBiz and for arranging and
guaranteeing a $10,000,000 five-year secured senior loan to ShowBiz from
The First National Bank of Boston ("FNBB"), and (iii) common stock
warrants it received in connection with the conversion of its subordinated
loan into a floating rate subordinated bond, bearing interest at FNBB's
prime rate, which was called in November 1992. A portion of the Company's
investment in Integra, which was based upon the average of the quoted
market values of Integra and ShowBiz following the spin-off, was ascribed
to the initial investment in ShowBiz.
During fiscal 1990, ShowBiz accelerated the exercise period for all of the
common stock warrants. In June 1990, the Company exercised its warrants
to purchase 808,122 shares of common stock of ShowBiz at $4.00 per share
for an aggregate purchase price of $3,232,488.
On October 15, 1990, the Company consented to an assignment by Integra to
the Company of a ShowBiz promissory note in the amount of $4,971,000 (the
"ShowBiz Note") in connection with the satisfaction of obligations under
Integra's 13.5% Bonds. The ShowBiz Note provided for interest at the FNBB
base rate, quarterly principal repayments of $177,358 and was due and
payable on September 30, 1993. On November 1, 1990, the Company purchased
another ShowBiz note from Integra in the amount of $255,327 upon terms
similar to the ShowBiz Note. On April 10, 1991, ShowBiz repaid both of
the aforementioned notes, having a combined remaining principal balance of
$4,862,079, less a pre-payment discount of $50,000.
40
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On March 26, 1991 and again on March 20, 1992, ShowBiz completed 3-for-2
common stock splits in the form of 50% stock dividends, which increased
the number of ShowBiz shares owned by the Company from 1,204,086 to
2,709,193. The Company's percentage ownership was unaffected by these
stock dividends.
In June 1992, the Company completed the sale of 500,000 common shares of
ShowBiz for $10,687,000 ($21.375 per share) to a mutual fund managed by
Fidelity Management & Research Company and certain institutional accounts
managed by Fidelity Management Trust Company. The net gain from the
transaction was $6,316,000, after $333,000 of related expenses.
In November 1992, the Company received $4,851,567, including accrued and
unpaid interest, in full satisfaction of the ShowBiz floating rate
subordinated bonds.
During fiscal 1993, the Company sold 425,000 shares of ShowBiz for
aggregate proceeds of $13,546,000 (average price of $31.87 per share).
The net gain from the various sales was $9,705,000, after $43,000 of
related expenses.
The Company utilizes the equity method of accounting for its investment in
ShowBiz because the Company maintains significant influence by virtue of
having five company directors sitting on the nine-member board of ShowBiz.
The Company's proportionate share of the underlying equity in net assets
of ShowBiz exceeds its investment by $2,304,000, which is being amortized
on the straight-line basis over a period of 15 years.
In accordance with the principles of equity accounting, the Company
records a proportionate share of the ShowBiz shareholders' equity
transactions. These transactions result principally from the purchase of
treasury stock at prices in excess of book value and the exercise of
warrants and options at prices below book value, the effect of which is a
non-cash reduction in the carrying value of the Company's investment in
ShowBiz and a corresponding reduction in additional paid-in capital in the
amount of $1,646,000 for the year ended July 31, 1994.
As of July 31, 1994, the Company owned approximately 15% of the common
stock of ShowBiz and all of its ShowBiz shares are pledged to secure
certain loans payable, as discussed in Note 7.
(C) During fiscal 1989, the Company provided financial advisory services and a
financing guaranty to Hallwood Industries Incorporated ("HII"), a 90%
owned subsidiary of Hallwood Holdings Incorporated ("HHI"). The financial
advisory fee was paid by the issuance of 131,959 shares of common stock
and warrants to purchase 146,621 additional shares of common stock of HII,
at an exercise price of $1.00 per share.
In connection with the confirmation of HII's chapter 11 bankruptcy plan on
September 28, 1989, the Company assisted in obtaining an $8,000,000
working capital line of credit for HII, of which $1,000,000 was guaranteed
by the Company. As consideration for the financing guaranty, the Company
was issued 163,870 shares of common stock of HII. Since the Company's
carrying value per share of HII's common stock exceeded the quoted market
price, the Company ascribed no value to such shares. The guaranty was
subsequently extinguished.
In January 1991, the Company purchased 103,009 additional shares of common
stock of HII for $206,000.
In July 1991, the Company assisted HII in the acquisition of a new
$1,000,000 one-year line of credit secured by a second mortgage on a
building. The Company guaranteed repayment of the line of credit which
was extinguished in October 1992.
In July 1991, HII was merged into a subsidiary of HHI with HII being the
surviving corporation and thus becoming a subsidiary of HHI. Holders of
HII's common stock were issued 100% of the common stock of
41
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HHI, which in turn holds 90% of the voting control of HII, with the
remaining 10% held by HII's existing stockholders.
In September 1990, HII sold all of its retailing assets (which previously
constituted the former Heck's, Inc. department store) to Retail
Acquisition Corporation ("RAC"); however, HII remained contingently liable
for certain leases and mortgages. In April 1991, certain creditors filed
an involuntary chapter 11 bankruptcy petition against RAC and, in May
1992, a plan of reorganization was confirmed. The plan became effective
in September 1992 and provided for HII to be relieved of virtually all
obligations related to the former retail business, in consideration for
the issuance by HII of a $2,500,000 unsecured, non- interest bearing,
six-year note. As a result of the consummation of the RAC bankruptcy, HII
is a viable entity.
In July 1992 the Company reevaluated its investment in HII and recorded a
write-down of its warrants in the amount of $650,000.
In July 1993 HHI changed its name to Oakhurst Capital, Inc. ("Oakhurst")
and HII changed its name to Steel City Products, Inc. ("Steel City") and
the Company again reevaluated its investment in Oakhurst and recorded an
additional write-down of its warrants and common stock in the amount of
$275,000.
On February 14, 1994, the Company completed the all cash sale of its
entire investment in Oakhurst (15% of the common stock of Oakhurst - 20%
assuming exercise of warrants) for $1,250,000, resulting in a gain of
$30,000.
The quoted market price per share and the Company's carrying value per
share of the common shares of ShowBiz and the limited partnership units of HRP
at July 31, 1994 were:
Amount Per Share
--------------------
Security description Market Carrying
and (Quotron Symbol) Price Value
------------------------------- --------- ---------
ShowBiz common shares (SHBZ) . . . . . . . . . $8.55 $9.22
HRP limited partnership units (HRY) . . . . . 2.38 --
The general partnership interest in HRP is not publicly traded.
42
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth certain summarized (unaudited) financial
data as of and for the years ended June 30, 1994 and 1993 (in thousands):
SHOWBIZ HALLWOOD
PIZZA REALTY
TIME, INC. PARTNERS, L.P.
---------- --------------
1994
Balance Sheet Data
Current assets . . . . . . . . . . . . . . . . . . . . . . . $ 18,942 $ 8,442
Non-current assets . . . . . . . . . . . . . . . . . . . . . 171,771 226,894
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 190,713 235,336
Current liabilities . . . . . . . . . . . . . . . . . . . . . 25,667 18,163
Non-current liabilities . . . . . . . . . . . . . . . . . . . 36,191 161,915
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 61,858 180,078
Total stockholders' equity/partners' capital . . . . . . . . 128,855 55,258
Statement of Operations Data
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,337 48,827
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . 8,182 (26,040)
1993
Balance Sheet Data
Current assets . . . . . . . . . . . . . . . . . . . . . . . $ 19,391 $ 7,227
Non-current assets . . . . . . . . . . . . . . . . . . . . . 158,311 241,174
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 177,702 248,401
Current liabilities . . . . . . . . . . . . . . . . . . . . . 23,860 10,528
Non-current liabilities . . . . . . . . . . . . . . . . . . . 11,103 156,575
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 34,963 167,103
Total stockholders' equity/partners' capital . . . . . . . . 142,739 81,298
Statement of Operations Data
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 267,427 52,130
Net income (loss) before extraordinary items . . . . . . . . 15,124 (20,907)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . 15,124 (10,728)
__________
The data used to compile the above table was obtained from published reports,
including Securities and Exchange Commission filings on Forms 10-Q and 10-K.
43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4 - MORTGAGE LOANS
The Company's mortgage loan portfolio consists of various loans on real
estate properties, including residential lots and condominiums. Mortgage loans
outstanding as of the balance sheet dates are as follows (in thousands):
July 31,
------------------------
1994 1993
-------- -------
Face amount of mortgages . . . . . . . . . . . . $2,583 $3,435
Less: Unamortized discounts . . . . . . . . . . (336) (392)
Allowance for losses . . . . . . . . . . (226) (442)
------ ------
Total . . . . . . . . . . . . . . . . . . $2,021 $2,601
====== ======
NOTE 5 - OIL AND GAS PROPERTIES
The following tables summarize certain oil and gas information by
category (full cost method), cost and unproved mineral interest (at cost). The
tables relate to all of HEC's and its proportionate share of HEP's oil and gas
properties. Amounts are as of June 30, 1994 and 1993 and for the years then
ended (in thousands):
(a) Category:
June 30,
-------------------------
1994 1993
--------- ---------
Proved mineral interests . . . . . . . . . . . . $ 111,476 $ 110,478
Unproved mineral interests . . . . . . . . . . . 361 826
--------- ---------
111,837 111,304
Less: Accumulated depreciation, depletion,
amortization and property impairment . . (101,229) (99,352)
--------- ---------
Net mineral interests . . . . . . . . . . 10,608 11,952
--------- ---------
Other property and equipment . . . . . . . . . . 3,733 3,706
Less: Accumulated depreciation . . . . . . . . . (3,336) (3,273)
--------- ---------
Net other property and equipment . . . . 397 433
--------- ---------
Oil and gas properties, net . . . . . . . $ 11,005 $ 12,385
========= =========
44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(b) Cost:
Years ended June 30,
-------------------------------------
1994 1993 1992
------- ------- -------
Development . . . . . . . . . . . . . . . . . $ 835 $ 513 $ 537
Exploration . . . . . . . . . . . . . . . . . 287 281 636
Property acquisition - proved . . . . . . . . 676 247 459
Property acquisition - unproved . . . . . . . 155 104 441
------ ------ ------
Total . . . . . . . . . . . . . . . . . $1,953 $1,145 $2,073
====== ====== ======
Depreciation, depletion and amortization per equivalent barrel
of production for the years ended 1994, 1993 and 1992, was
$4.62, $4.17 and $4.51, respectively.
(c) Unproved mineral interests (at cost):
June 30,
---------------------
1994 1993
------ ------
Foreign . . . . . . . . . . . . . . . . . . . $ 243 $ 90
Exploration acreage . . . . . . . . . . . . . 104 297
Other . . . . . . . . . . . . . . . . . . . . 14 188
San Juan basin . . . . . . . . . . . . . . . . -- 251
----- -----
Total . . . . . . . . . . . . . . . . . $ 361 $ 826
===== =====
NOTE 6 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of the balance sheet dates are as follows
(in thousands):
July 31,
----------------------
1994 1993
------ ------
Cash equivalents . . . . . . . . . . . . . . . $4,804 $11,172
Cash . . . . . . . . . . . . . . . . . . . . . 924 665
------ -------
Total . . . . . . . . . . . . . . . . . . . . $5,728 $11,837
====== =======
Cash equivalents consisted of secured bank repurchase agreements,
commercial paper, treasury bills, eurodollar investments and interest-bearing
demand deposits.
45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 - LOANS PAYABLE
Loans payable at the balance sheet dates (in thousands):
July 31,
----------------------
1994 1993
-------- --------
Real Estate
Term loan, 10.73%, due August 1994 . . . . . . . . . . . . . . $ 5,399 $ 5,205
Promissory note, 7.50%, due August 1996 . . . . . . . . . . . 1,500 --
Promissory note, 8%, due March 1998 . . . . . . . . . . . . . 500 --
------- -------
7,399 5,205
Textile Products
Revolving credit facility, prime + 1%, due December 1994 . . . 7,975 8,550
Equipment financing, 10%, due December 1996 . . . . . . . . . 476 648
------- -------
8,451 9,198
Hotels
Term loan, base + 2%, due December 1995 . . . . . . . . . . . 6,504 7,429
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . . . 5,200 --
Non-interest bearing obligation, due March 1997 . . . . . . . 500 --
------- -------
12,204 7,429
Associated Companies
Line of credit, prime + .7%, due April 1995 . . . . . . . . . 6,000 --
Promissory note, 5%, due March 1997 . . . . . . . . . . . . . 4,000 --
Margin loan, prime + .5% . . . . . . . . . . . . . . . . . . . -- 6,000
Promissory note, prime + 1% . . . . . . . . . . . . . . . . . -- 1,491
------- -------
10,000 7,491
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,054 $29,323
======= =======
Further information regarding loans payable is provided below:
Real Estate. At July 31, 1994 the Company's Hallwood Investment Company
subsidiary was obligated under a term loan to FNBB's London branch for
$5,399,000 (L.3,500,000) secured by the office-retail property with a net
carrying value of $8,029,000. The loan was scheduled to mature on August 31,
1994, bore interest at a 10.73% fixed rate and required a $743,000 (L.500,000)
cash deposit in a restricted account as additional collateral. An extension of
the term loan was completed in August 1994. Significant terms include: (i) an
interest rate equal to Libor plus 2.5%, (ii) maturity date of August 1995, and
(iii) reduction of the loan to L.3,000,000 by application of the aforementioned
restricted cash deposit. The increase in the amount payable from the July 31,
1993 balance of $5,205,000 is due solely to the fluctuation in the foreign
currency exchange rate.
The Company issued a promissory note in the amount of $1,500,000 to the
agent for the plaintiffs in the litigation styled Equitec Roll-up Litigation,
referred to in Note 18. The note is payable in twenty-four installments
beginning in September 1994. The note is guaranteed as to payment by Smith
Barney Shearson Holding Inc. ("Smith Barney"), a co-defendant in the
litigation. The Company has agreed to reimburse Smith Barney for any payment
Smith Barney is required to make pursuant to the guaranty and has granted Smith
Barney a security interest in 187,500 shares of common stock of HEC to secure
this reimbursement agreement. The Company has agreed to maintain a 150%
value-to-loan ratio throughout the term of the note, and has agreed to grant a
security interest in additional shares of HEC held or acquired by the Company
if necessary to maintain this ratio.
In January 1992, the Company issued a $1,613,350 promissory note to
Integra bearing interest at the FNBB Base Rate. On March 8, 1994, the note,
which had a remaining balance of $1,491,000 plus $60,000 of accrued
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
interest, was satisfied by a cash payment of $150,000 and the issuance of a new
four-year, eight percent, interest only $500,000 promissory note, secured by a
pledge of all of the Company's 446,345 HRP limited partnership units pursuant
to a settlement agreement.
The settlement agreement also provides that the pledgee will have the
right to receive from the Company a payment on the Payment Date (as hereinafter
defined) in an amount (the "Participation Amount") equal to 25% of the increase
in the value of the units, but in no event more than an additional $500,000,
from February 25, 1994 (the "Closing Date") to the Value Date (as hereinafter
defined). The value of the units on the Closing Date was $1.69, the "high"
price as quoted on the Closing Date for the units in The Wall Street Journal.
The value of the units on the Value Date will be (i) the "high" price for the
units on the Value Date as quoted in The Wall Street Journal, or (ii) if the
units are no longer traded on the American Stock Exchange or another public
exchange, as determined by an appraiser. The Value Date is defined as five (5)
days prior to the Payment Date. The Payment Date is the earlier to occur of
(a) the maturity date of the note and (b) one hundred twenty (120) days after
pledgee requests payment in writing, provided that the Units are trading at a
"high" price of not less than $9.00 per unit as quoted in The Wall Street
Journal.
Energy. HEC has no direct indebtedness. Reflected in the consolidated
balance sheet are HEP's long-term obligations at June 30, 1994 in the amount of
$4,858,000. This amount represents HEC's share of HEP's outstanding long-term
obligations of $42,313,000. Of HEP's debt, $32,633,000 consists of borrowings
under a line of credit and note purchase agreement. HEP's borrowings are
secured by a first lien on approximately 80% in value of HEP's oil and gas
properties.
Textile Products. In December 1992, Brookwood entered into a two-year
revolving credit facility with The Chase Manhattan Bank, N.A. ("Chase") in the
amount of $13,500,000 (the "Brookwood Revolver") to replace an expiring
facility with Chemical Bank and repay $2,500,000 of bridge financing provided
by the Company. The Company agreed to subordinate the $1,000,000 remaining
balance of bridge financing to the Brookwood Revolver. The Brookwood Revolver
is collateralized by accounts receivable and certain industrial machinery and
equipment located in Kenyon, Rhode Island, and bears interest at Chase's prime
rate plus 1% (8.25% and 7% as of July 31, 1994 and 1993, respectively). The
outstanding balance at July 31, 1994 was $7,975,000.
In September 1994, the Brookwood Revolver was amended which extended the
expiration date to August 1997, reduced the interest to one-half percent over
prime or Libor plus 2.25%, permitted the repayment of the Company's $1,000,000
balance of bridge financing and changed certain of the financial covenants.
In December 1991, Brookwood entered into a $900,000 equipment financing
arrangement with CIT Group/Equipment Financing, Inc. The loan matures in
December 1996, bears a 10% fixed interest rate and is secured by certain dyeing
and finishing equipment. The outstanding balance at July 31, 1994 was
$476,000.
The loan agreements contain covenants, which include maintenance of
certain financial ratios, restrictions on dividends and restrictions on
repayment of subordinated debt or cash transfers to the parent company.
Brookwood was in compliance with all loan covenants as of July 31, 1994.
Hotels. In December 1992, the company entered into a term loan with FNBB
to provide senior debt financing on the Lido Beach Holiday Inn hotel in the
amount of $8,000,000 for three years with an additional two-year option (the
"Term Loan"). The Term Loan is secured by the pledge of all the capital stock
of a special-purpose subsidiary, The Lido Beach Hotel, Inc, the assets of which
are the aforementioned hotel and three residential mortgage loan portfolios.
The proceeds were used, along with an additional $500,000 cash payment, to
fully satisfy the previously outstanding FNBB revolving credit loan which was
reduced from its July 31, 1992 balance of $9,120,000 by a $620,000 principal
repayment made in October 1992. Significant terms of the term loan include:
(i) an interest rate equal to the FNBB Base Rate plus 2%, with a maximum
interest rate of 12% (9.25% as of July 31, 1994); (ii) scheduled principal
repayments of $400,000 per year (payable in equal monthly
47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
installments), plus all principal collections on the pledged mortgage loans;
and (iii) loan covenants regarding maintenance of certain financial ratios of
the subsidiary and certain restrictions on cash distributions. At July 31,
1994, the Company was in compliance with all loan covenants, and the
outstanding balance was $6,504,000.
The Company also assumed various note payable obligations as part of
Integra's emergence from bankruptcy as follows: (i) first mortgage on a
Residence Inn hotel located in Tulsa, Oklahoma - $5,200,000 (based upon
commitment letter from lender); (ii) non- interest bearing obligation to former
preferred shareholders of Integra - $500,000; and (iii) first mortgage on
certain parking lots - $435,000, which was subsequently extinguished upon
completion of foreclosure.
Significant terms of the modified $5,200,000 first mortgage loan include:
(i) a fixed interest rate of 10%; (ii) loan payments based upon a 20 year
amortization schedule with a call after seven years; (iii) participation by
lender of 15% of net cash flow (as defined) after debt service and 15% of
residual value at maturity or upon sale or refinancing; (iv) a 2% restructuring
fee payable one-half in cash and one-half by non-interest bearing note; and (v)
maintenance of a 4% capital reserve.
The $500,000 obligation to the former preferred shareholders of Integra
was issued in connection with the Settlement and Supplemental Settlement
further described in Note 8 and is payable in three equal annual installments
in the amount of $166,667 on March 8, 1995, 1996 and 1997.
Associated Companies. In July 1993, the Company obtained a margin loan
from Prudential Securities Incorporated in the amount of $6,000,000 (the
"Prudential Margin Loan"). The Prudential Margin Loan bore interest at .5% in
excess of the broker call rate, as defined, and was secured by the Company's
1,784,193 shares of ShowBiz common stock. Proceeds from the Prudential Margin
Loan and $6,000,000 of working capital were used to fully satisfy the
previously outstanding $12,000,000 margin loan with Interallianz Bank Zurich
("IBZ").
In April 1994, the Company obtained a line of credit from Merrill Lynch
Business Financial Services in the maximum commitment amount of $6,000,000 and
repaid the Prudential Margin Loan. Significant terms of the new line of credit
are (i) initial maturity date - April 30, 1995; (ii) interest rate - prime plus
0.75% (8% at July 31, 1994); and (iii) collateral - 1,439,365 shares of ShowBiz
common stock. The outstanding balance at July 31, 1994 was $6,000,000. In
August 1994, the Company reduced the line of credit by $750,000 to $5,250,000.
As discussed in Note 8, the Company issued a $4,000,000 note payable to
the Integra Unsecured Creditors' Trust in connection with the consummation of
the Integra Plan of Reorganization. Significant terms are (i) maturity date -
March 8, 1997; (ii) interest rate - 5% fixed; and (iii) collateral - 344,828
shares of ShowBiz common stock.
As discussed in the real estate segment above, the promissory note to
Integra, with a balance of $1,491,000 at July 31, 1993, was satisfied by a cash
payment of $150,000 and the issuance of a new $500,000 secured promissory note.
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Schedule of Maturities. Maturities of aggregate loans payable and sinking
fund requirements for 7% Debentures for the next five years, are as follows (in
thousands):
Business Segment
------------------------------------------------------------------
Years ended Real Textile Associated
July 31, Estate Energy (a) Products Hotels Companies Other (b) Total
- - --------------- ------ ---------- -------- ------ --------- --------- -----
1995 . . . . . . . . . $ 688 $ -- $ 3,165 $ 631 $ 6,000 $ -- $10,484
1996 . . . . . . . . . 6,149 -- 211 6,364 -- 574 13,298
1997 . . . . . . . . . 62 -- 75 268 4,000 -- 4,405
1998 . . . . . . . . . 500 -- 5,000 113 -- 4,122 9,735
1999 . . . . . . . . . -- -- -- 125 -- -- 125
------- ------ ------- ------- ------- ------- -------
Total . . . . . . . . . $ 7,399 $ -- $ 8,451 $ 7,501 $10,000 $ 4,696 $38,047
======= ====== ======= ======= ======= ======= =======
(a) HEP's long-term indebtedness of $34,881,000 is not a direct obligation of
HEC or of the Company. HEP's debt maturities are as follows: $2,246,000 in
1995; $9,937,000 in 1996; $9,937,000 in 1997; $9,937,000 in 1998 and
$2,824,000 in 1999.
(b) Sinking fund requirement under the Indenture for the 7% Debentures.
49
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - ANTICIPATORY LOSS - ASSET HELD FOR SALE
The Company acquired its investment in Integra as a restructuring fee for
its assistance in implementing a plan of financial restructuring in 1986 and
through subsequent stock purchases. On December 30, 1988, Integra completed a
spin-off of its ShowBiz subsidiary, which resulted in an allocation of the
Company's Integra investment between the two entities and a reduction of the
Company's investment in Integra.
The Company resolved to dispose of its Integra investment in July 1990,
therefore reclassifying it as an asset held for sale for financial reporting
purposes. In connection with the planned disposition the Company provided
additional financing to Integra; however, the continuation of the recession
resulted in a deterioration of Integra's financial position and eventually its
July 14, 1992 chapter 11 bankruptcy protection filing. During fiscal 1993 and
1992, the Company recognized a loss on its asset held for sale in the amounts
of $4,118,000 and $24,178,000, respectively. Integra closed and consummated
the transactions under the first amended plan of reorganization (the "Plan").
The Plan, which was confirmed by the Bankruptcy Court on February 11, 1994,
incorporated a settlement agreement by and between Integra, the Company, the
unsecured creditors' committee and others (the "Settlement") and a supplemental
settlement agreement by and between Integra, the unsecured creditors'
committee, and the plaintiffs in the Reese lawsuit (the "Supplemental
Settlement"). The Plan and Settlement provided for the reorganized Integra to
continue in business as a wholly-owned subsidiary of the Company under its new
name, Integra Hotels, Inc.
On March 8, 1994, all of Integra's common and preferred stock was
cancelled and new common stock of Integra Hotels, Inc. was issued to
Hallwood-Integra Holding Company Incorporated, a newly-incorporated,
wholly-owned subsidiary of the Company, for $1,000,000. Integra Hotels, Inc.
is obligated to pay the administrative and priority tax claims of the
bankruptcy case in full which has been fully accrued. Pursuant to the Plan, as
impacted by the Supplemental Settlement, Integra funded a trust for the
unsecured creditors by transferring to the trust $1,000,000 and all potential
litigation claims which Integra has against the Company and certain others.
The cash and claims were transferred to the trust in full satisfaction of the
claims of all of Integra's unsecured creditors.
Pursuant to the Settlement and Supplemental Settlement, the trust released
all of the transferred claims which relate to the Company and certain related
parties, for an immediate payment from the Company to the trust of $9,000,000,
consisting of $5,000,000 in cash and a $4,000,000 note secured by 344,828
shares of ShowBiz stock. The Supplemental Settlement resolved a dispute and
allowed the Bankruptcy Court to enter an order that determined that Integra is
the owner and holder of certain claims described in the Settlement as "Core
Claims", (which Core Claims have been asserted in certain state court
proceedings identified as the Reese, European American and Hermitage Hotel
lawsuits). The Company believes that any pending or remaining non-released
claims are without merit and, if such non-released claims are pursued, the
Company intends to continue to vigorously contest such claims. See also Note
18.
50
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 - 13.5% SUBORDINATED DEBENTURES, EXCHANGE OFFER AND OFFERS TO PURCHASE
FOR CASH AND 7% COLLATERALIZED SENIOR SUBORDINATED DEBENTURES
13.5% Subordinated Debentures. On May 15, 1989, the Company distributed to
its stockholders $46,318,600 aggregate principal amount of a new issue of its
13.5% Subordinated Debentures Due July 31, 2009 (the "13.5% Debentures"). The
Company had authorized the issuance of up to $100,000,000 aggregate principal
amount of 13.5% Debentures. The 13.5% Debentures are subordinate to bank
borrowings, guarantees of the Company and other "Senior Indebtedness" (as
defined in the indenture relating to the 13.5% Debentures). Ten dollars
principal amount of the 13.5% Debentures was distributed for each share of
common stock of the Company outstanding at the close of business on March 31,
1989. The 13.5% Debentures were issued in denominations of $100 and integral
multiples thereof. The Company distributed $228,770 in cash, in lieu of the
issuance of fractional denominations of such debentures.
Interest on the 13.5% Debentures is payable annually on August 15, and, at
the Company's option, up to two annual interest payments in any five-year
period may be paid by the issuance of additional 13.5% Debentures in lieu of
cash. Interest due on August 15, 1989 and 1990 was paid in cash. Interest due
on August 15, 1991 was paid in-kind by the issuance of $6,019,500 additional
13.5% Debentures and $139,200 of cash in lieu of fractional debentures.
Interest due on August 15, 1992 was paid in-kind by the issuance of $6,792,900
additional 13.5% Debentures and $172,500 of cash in lieu of fractional
debentures. Interest due on August 15, 1993 and 1994 was also paid in cash.
The Company is prohibited from issuing additional 13.5% Debentures as payment
of interest in-kind until August 15, 1996, and on August 15, 1995 will be
required to make the interest payment in cash.
In fiscal 1992, the Company repurchased and retired a portion of its 13.5%
Debentures, which resulted in gains from debt extinguishment. The Company
repurchased $81,000 of 13.5% Debentures at a purchase price of $55,000, which
resulted in a gain of $26,000. Additionally, the Company's HEC subsidiary
acquired $2,149,000 of 13.5% Debentures at a purchase price of $1,330,000. The
Company recognized a gain equivalent to 52% (ownership at date of purchase) of
the discount, which resulted in a gain of $426,000.
Exchange Offer and Offers to Purchase for Cash. On January 22, 1993, the
Company announced the commencement of an Exchange Offer with respect to its
13.5% Debentures (Original Series), and Offers to Purchase for Cash its 13.5%
Debentures (1991 Series and 1992 Series). The Exchange Offer and Offers to
Purchase for Cash was completed on March 1, 1993. 13.5% Debentures (Original
Series) in an aggregate principal amount equal to $27,481,000 (60% of the total
issue) were exchanged for a new issue of 7% Debentures, and the Company
purchased $8,077,000 of its 13.5% Debentures 1991 Series and 1992 Series (63%
of the total issues) for $6,461,000, pursuant to the Offers to Purchase for
Cash.
7% Collateralized Senior Subordinated Debentures. Interest on the
$27,481,000 principal amount of new 7% Collateralized Senior Subordinated
Debentures due July 31, 2000 (the "7% Debentures") accrued from March 2, 1993,
is payable quarterly in arrears in cash, and the first payment of such interest
was disbursed on April 30, 1993. The 7% Debentures are secured by shares of
the capital stock of certain wholly-owned subsidiaries of the Company having an
aggregate net carrying value at March 1, 1993 (the issue date) of $27,607,000.
The pledged shares consist of 100% of the outstanding shares of common and
preferred stock of Brookwood, 100% of the outstanding shares of common stock of
Hallwood Hotels, Inc. and 35% of the outstanding shares of common stock of The
Lido Beach Hotel, Inc. The common and preferred stock of Brookwood are also
subject to a prior pledge in favor of Chase and the common stock of The Lido
Beach Hotel, Inc. is also subject to a prior pledge in favor of FNBB.
The Company is obligated to redeem or repurchase 10% of the original issue
of 7% Debentures ($2,748,000) prior to March 1996 and an additional 15% of the
issue ($4,122,000) prior to March 1998. During fiscal 1994 the Company
repurchased 7% Debentures with a principal value of $2,174,000 for a discounted
amount of $1,526,000, which resulted in an extraordinary gain from debt
extinguishment in the amount of $648,000.
51
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company accounted for the Exchange Offer and Offers to Purchase For
Cash in accordance with Statement of Financial Accounting Standards No. 15 --
Accounting by Debtors and Creditors for Troubled Debt Restructuring ("SFAS No.
15"). SFAS No. 15 requires that concessions given the Company by
debentureholders should be accounted for as a modification of an existing
obligation and no current period gain should be recognized.
The amount of unrecognized gain, which is being amortized, using the
constant effective interest rate method over the 7 years and 5 months term of
the 7% Debentures, is composed of the following (in thousands):
Description Amount
----------- ------
Gain on purchase of 1991 Series and 1992 Series
Debentures at 80% of face value . . . . . . . . . $2,207
Gain on exchange of Original Series Debentures
resulting from the waiver of interest for the
period August 15, 1992 through March 1, 1993 . . . 2,013
------
Totals . . . . . . . . . . . . . . . . . . . . . $4,220
======
The total unrecognized gain was recorded as an increase to the carrying
value of the 7% Debentures, and is being amortized as a reduction of interest
expense. This amortization results in an effective interest rate of
approximately 4.2% for the 7% Debentures. The amortization of such
unrecognized gain for fiscal 1994 and 1993 was $570,000 and $196,000,
respectively .
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
July 31,
--------------------------
Description 1994 1993
----------- ---- ----
7% Debentures (face value) . . . . . . . . . . . . $25,306 27,481
Unrecognized gain from purchase and exchange,
net of $766 and $196 accumulated amortization . 3,454 4,024
Elimination of debentures owned by HEC . . . . . . (1,894) (1,894)
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $26,866 $29,611
======= =======
13.5% Debentures (face value)
1989 Series . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . 2,310 2,310
1992 Series . . . . . . . . . . . . . . . . . . 2,389 2,389
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $22,902 $22,902
======= =======
52
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock. The number of outstanding shares of common stock does not
include shares of common stock held as treasury stock. See "Treasury Stock"
below.
Preferred Stock. Under its Restated Certificate of Incorporation, as
amended, the Company is authorized to issue 500,000 shares of preferred stock,
par value $.10 per share. As of July 31, 1994 and 1993, no shares of preferred
stock were issued or outstanding.
Treasury Stock. The Company's HEC subsidiary purchased 896,000 shares of
the Company's outstanding common stock (approximately 14% of the total
outstanding shares) in open market transactions at a cost of $5,825,000. Since
the shares were acquired by a consolidated subsidiary of the Company, the
shares are treated as treasury stock. The remaining 11,442 shares are held by
the Company at a cost of $471,000.
Stock Options. The Company's 1985 Incentive Stock Option Plan, as amended
(the "Stock Option Plan") was adopted for certain key employees, including
certain of the executive officers of the Company. The Stock Option Plan
provides for the granting of options to purchase 300,000 shares of common stock
of the Company during the ten-year period ending November 26, 1995. Two types
of options may be granted pursuant to the Stock Option Plan: (i) options
intended to qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended; and (ii) those not
intended to satisfy the requirements for incentive options. The Company has
granted options to three executives to purchase 100,000 shares, of which
options for 25,000 shares have been exercised. As of July 31, 1994, the
Company had 200,000 shares available for issuance under the Plan and at such
date two executives were holding a total of 75,000 outstanding options
exercisable at prices ranging from $5.125 to $6.00 per share. The exercise
prices of all options were determined at the fair market value on the date of
grant.
Dividends. Approximately $2,600,000 of the Company's retained earnings
are restricted from the payment of cash dividends.
53
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 - INCOME TAXES
The following is a summary (in thousands) of the income tax provision
(benefit):
Years ended July 31,
----------------------------------
1994 1993 1992
-------- ------- -------
State . . . . . . . . . . . . . . . . . . . . . . . . $ 98 $ 208 $ 147
Federal
Current tax (refund) . . . . . . . . . . . . . . . . (4) 220 --
Deferred tax (benefit) . . . . . . . . . . . . . . . 2,633 5,070 (1,849)
-------- ------ -------
Total . . . . . . . . . . . . . . . . . . . . . . $ 2,727 $5,498 $(1,702)
======== ====== =======
Reconciliations of the expected tax or (benefit) at the statutory tax rate
to the effective tax or (benefit) are as follows (in thousands):
Years ended July 31,
-----------------------------------
1994 1993 1992
-------- ------ ------
Expected tax or (benefit) at the statutory tax rate . . $ (565) $ 1,385 $ (9,561)
Increase in deferred tax asset valuation allowance . . . 3,663 3,005 6,842
State taxes . . . . . . . . . . . . . . . . . . . . . . 98 208 147
Alternative minimum tax . . . . . . . . . . . . . . . . -- 220 --
Foreign (gain) loss not taxable . . . . . . . . . . . . (411) 240 603
Net decrease in tax credits . . . . . . . . . . . . . . 103 638 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . (161) (198) 267
------- -------- --------
Effective tax or (benefit) . . . . . . . . . . . . . . $ 2,727 $ 5,498 $ (1,702)
======= ======= ========
The Company paid only a federal alternative minimum tax of $220,000 for
fiscal year 1993, due to the utilization of net operating loss carryforwards
("NOLs") to offset taxable income. The Company has not incurred any actual
federal income taxes or alternative minimum taxes for fiscal years 1994 and
1992.
54
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A schedule of the types and amounts of existing temporary differences and
NOLs, at the blended statutory tax rate of 34%, tax credits and valuation
allowance as of the balance sheet dates are as follows (in thousands):
Deferred Tax
------------------------------------------------
1994 1993
---------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------- -----------
Net operating loss carryforward . . . . . . . . . . . . . . $ 18,127 $ 14,437
Reserves recorded for financial statement purposes
and not for tax purposes . . . . . . . . . . . . . . . . . 869 4,995
Equity in losses or earnings of unconsolidated affiliates . 623 $3,629 678 $3,772
Original issue discounts and cancellation of debt income
on 7% and 13.5% Debentures . . . . . . . . . . . . . . . . 3,426 3,771
Basis differences . . . . . . . . . . . . . . . . . . . . . 693 388
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . 548 647
Litigation costs deferred for tax purposes . . . . . . . . . 1,870
Other temporary differences . . . . . . . . . . . . . . . . 392 327 649 226
Depreciation and amortization . . . . . . . . . . . . . . . 233 329 92 193
-------- ------ -------- ------
Deferred tax assets and liabilities . . . . . . . . . . . . 26,781 $4,285 25,657 $4,191
====== ======
Less deferred tax liabilities . . . . . . . . . . . . . . . (4,285) (4,191)
-------- --------
22,496 21,466
Less valuation allowance (a) . . . . . . . . . . . . . . . . (16,596) (12,933)
-------- --------
Deferred tax asset, net . . . . . . . . . . . . . . . . $ 5,900 $ 8,533
======== ========
Below is a schedule of expiring NOLs by fiscal year (in thousands):
Fiscal
Years Amount
----- --------
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 200
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 400
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 600
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 6,600
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . 21,400
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . 11,400
--------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 53,600
========
The Company also has approximately $548,000 of alternative minimum tax
credits which never expire.
On March 9, 1994 the Company acquired 100% of the common stock of the
reorganized Integra and it will now be included in the filing of the Company's
federal consolidated income tax return. At the date of acquisition Integra had
estimated NOLs of $83,000,000 and net deductible temporary differences of
$2,600,000. Due to the federal tax laws and regulations governing consolidated
groups and changes in ownership, management believes utilization of these tax
attributes is unlikely. Accordingly, these NOLs and temporary differences are
not included in the schedules above.
55
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Current tax laws and regulations relating to specified changes in
ownership may limit the availability of the Company's utilization of its NOLs
and tax credit carryforwards. As of July 31, 1994, management was not aware of
any ownership changes which would limit the utilization of the NOLs and tax
credit carryforwards.
NOTE 12 - SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing activities. The
following transactions affected recognized assets or liabilities but did not
result in cash receipts or cash payments (in thousands):
YEARS ENDED JULY 31,
-------------------------------------
DESCRIPTION 1994 1993 1992
----------------------------------------------------------------- -------- --------- --------
Issuance of promissory note payable in connection
with Integra bankruptcy . . . . . . . . . . . . . . . . . . $ 4,000 $ -- $ --
Assets (liabilities) acquired in connection with the
emergence of Integra from bankruptcy (1)
Hotel properties . . . . . . . . . . . . . . . . . . . . 7,048 -- --
Receivables and other assets . . . . . . . . . . . . . . 2,296 -- --
Loans payable . . . . . . . . . . . . . . . . . . . . . . (6,135) -- --
Accounts payable and accrued expenses . . . . . . . . . . (3,586) -- --
Less: investment in net assets received . . . . . . . . . (1,700) -- --
------- -------- -------
Integra cash balance at emergence from bankruptcy . . . 2,077 -- --
Recording of proportionate share of stockholders' equity
transactions of ShowBiz . . . . . . . . . . . . . . . . . . 1,646 -- --
Issuance of note payable in connection with
litigation settlement . . . . . . . . . . . . . . . . . . . 1,500 -- --
Renegotiate loan payable to reduced amount . . . . . . . . . . . 901 -- --
Deed back to lender of hotel property acquired from Integra . . . 435 -- --
Exchange of 13.5% Debentures for 7% Debentures . . . . . . . . . -- 25,587 --
Payment in kind of annual interest on 13.5% Debentures . . . . . -- 6,792 6,019
Unrecognized gain from completion of Bond Exchange and
Offers to Purchase for Cash . . . . . . . . . . . . . . . . -- 4,220 --
Real estate acquired through foreclosure . . . . . . . . . . . . -- -- 152
Supplemental disclosures of cash payments (in thousands):
Interest paid (including capitalized interest) . . . . . . . . . $7,360 $ 3,956 $ 4,010
Income taxes paid (refunds received) . . . . . . . . . . . . . . 130 210 (37)
(1) The Company has made a preliminary estimate of the net assets distributed
upon Integra's emergence from bankruptcy.
NOTE 13 - ORGANIZATION AND OPERATIONS OF HALLWOOD REALTY PARTNERS, L.P.
On November 1, 1990, Hallwood Realty Partners, L.P., a publicly traded
Delaware limited partnership ("HRP"), consummated an exchange through a series
of mergers (the "Exchange"), of 8,662,298 newly issued units of limited
partnership interest in HRP ("Units") for outstanding limited partnership
interests in eight limited partnerships originally formed by Equitec Financial
Group, Inc. ("EFG") (the "Participating Equitec Partnerships"). The Exchange
was consummated pursuant to a proxy statement/prospectus, dated June 29, 1990,
as supplemented.
56
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the Exchange, HRC, a wholly-owned subsidiary of the
Company, purchased the general partner interests in the Participating Equitec
Partnerships from EFG for $5,155,000. This purchase was pursuant to the terms
of the Amended and Restated Agreement among EFG, Equitec Properties Company
("EPC") and the Company, dated as of October 17, 1989, as amended (EFG, EPC and
its affiliates are collectively referred to as "Equitec"). HRC contributed
such general partnership interests, plus $13,118 in cash, to HRP in exchange
for a 1% general partnership interest in HRP. HWG Realty Investors, Inc., a
wholly-owned subsidiary of the Company, purchased a 0.1% partnership interest
in each of the Participating Equitec Partnerships by making capital
contributions to the Participating Equitec Partnerships aggregating $131,177 in
cash on November 1, 1990. The total acquisition cost of the general partner
interest, which aggregates $8,650,000, includes other capitalized costs of
$3,351,000. In addition, the Participating Equitec Partnerships paid EFG an
aggregate of $8,073,080 in connection with the Exchange.
As a result of the foregoing, HRP acquired 99.9% of the equity interests
in, and thereby became the indirect owner of, all of the real estate and other
assets of the Participating Equitec Partnerships.
As general partner, HRC earns an asset management fee and certain related
fees from HRP properties, which amounted to $435,000 for fiscal 1994, $472,000
for fiscal 1993 and $590,000 for fiscal 1992.
HRC agreed to pay, at its own expense, the amount, if any, by which the
aggregate amount of recurring general and administrative expenses of HRP exceed
$2,500,000 per year (the "Expense Limitation") in the initial 24 months of
HRP's operations, such period commencing on the date of the Exchange. The
Expense Limitation did not apply with respect to expenses incurred that were
non-recurring in nature. Based on general and administrative expenses incurred
during fiscal years 1993 and 1992, HRC has recorded an expense of $129,000 and
$634,000, respectively, pursuant to such Expense Limitation.
On June 1, 1991, the Company's HMC subsidiary purchased the property
management contracts from Equitec which related to the HRP properties for
$2,475,000. Equitec had retained the rights to manage the HRP properties for a
three-year period after the Exchange. The property management contracts
encompass day-to-day property management responsibilities, for which HMC
receives management fees, leasing commissions and certain other fees. HMC
earned fees and commissions from HRP and certain third parties during fiscal
years 1994, 1993 and 1992 of $3,489,000, $5,467,000 and $4,570,000,
respectively.
NOTE 14 - ORGANIZATION AND OPERATIONS OF HALLWOOD ENERGY CORPORATION
Organization. Effective May 4, 1990, and prior to the completion of a
consolidation of various partnership interests by HEP on May 9, 1990, the
Company acquired a majority interest in Hallwood Energy Corporation ("HEC")
through a step acquisition (as that concept is referred to in Accounting
Principles Bulletin No. 16). As of July 31, 1989, the Company owned
approximately 11% of HEC (38% assuming conversion of preferred stock) and
accounted for the investment under the equity method. On May 4, 1990, the
Company converted its 44,846 shares of HEC's Series D preferred stock into
17,938,400 shares of common stock. No consideration was paid by the Company in
connection with the conversion other than the surrender of its Series D
preferred stock. The Company also purchased 8,000,000 shares of HEC common
stock in consideration for the cancellation of the principal amount of the
$1,500,000 note receivable from HEC, all pursuant to the terms of a letter
agreement dated May 3, 1990. As a result of (i) the stock issuance from these
two transactions, (ii) an additional purchase of a small amount of shares, and
(iii) a 1-for-50 reverse split, the Company now owns 596,605 shares of common
stock of HEC. As a result of subsequent purchases by HEC of its own stock for
treasury, the Company owns approximately 70% of the issued and outstanding
shares of common stock of HEC (63% assuming conversion of preferred stock) as
of July 31, 1994.
The $1,164,000 excess of the Company's investment over its proportionate
share of the net assets acquired is being amortized on the straight-line basis
over 15 years. HEC's results of operations have been included in the
consolidated statements of operations since May 1990, including recognition of
the minority interest portion of net income (loss) in the statement of
operations.
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Operations. HEP has entered into financial contracts for hedging
transactions of between 7% and 49% of its forecasted oil production for the
years 1995 through 1998 at prices ranging from $14.75 per barrel to $17.55 per
barrel. HEP has also entered into hedging contracts of between 29% and 55% of
its forecasted gas production for the years 1995 through 1998 at prices ranging
from $1.97 per mcf to $2.18 per mcf.
NOTE 15 - ORGANIZATION AND OPERATIONS OF BROOKWOOD COMPANIES INCORPORATED
Organization. Brookwood Companies Incorporated, a wholly owned subsidiary
of the Company ("Brookwood"), was formed to acquire certain assets and assume
certain liabilities of Coated Sales, Inc., a nylon textile converting and
finishing company, which had filed for protection on June 17, 1988 under
chapter 11 of the Bankruptcy Code. Brookwood is a complete textile service firm
that develops and produces innovative fabrics and related products through
specialized finishing, treating and coating processes.
Operations. Brookwood maintains factoring agreements which provide that
receivables resulting from credit sales to customers, excluding the U.S.
Government, may be sold to the factor without recourse, subject to a commission
of 7/10% and the factor's prior approval. A significant majority of the
receivables are factored. Commissions paid to the factors were approximately
$312,000, $311,000 and $301,000 for the years ended July 31, 1994, 1993 and
1992, respectively.
Inventories consist of the following (in thousands):
July 31,
------------------------
1994 1993
-------- -------
Raw materials . . . . . . . . . . . . . . . . . $ 2,641 $ 3,395
Work in process . . . . . . . . . . . . . . . . 4,055 5,240
Finished goods . . . . . . . . . . . . . . . . . 6,214 5,754
-------- -------
Total . . . . . . . . . . . . . . . . . $ 12,910 $14,389
======== =======
Property, plant and equipment consists of the following (in thousands):
Land . . . . . . . . . . . . . . . . . . . $ 391 $ 391
Buildings and improvements . . . . . . . . . . . 4,234 4,164
Machinery and equipment . . . . . . . . . . . . 5,739 5,295
Furniture, fixtures and fittings . . . . . . . . 1,042 1,006
Construction in progress . . . . . . . . . . . . 994 404
-------- -------
12,400 11,260
Less: Accumulated depreciation . . . . . . . . (4,099) (3,202)
-------- -------
Total . . . . . . . . . . . . . . . . . $ 8,301 $ 8,058
======== =======
58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16 - RENTAL INCOME FROM OPERATING LEASES
The following is a schedule of minimum future rental income from
noncancelable operating leases as of July 31, 1994 (in thousands):
Years ended
July 31, Amount
-------- ------
1995 . . . . . . . . . . . . . . . . . . . . . . . $ 665
1996 . . . . . . . . . . . . . . . . . . . . . . . 665
1997 . . . . . . . . . . . . . . . . . . . . . . . 665
1998 . . . . . . . . . . . . . . . . . . . . . . . 665
1999 . . . . . . . . . . . . . . . . . . . . . . . 665
Thereafter . . . . . . . . . . . . . . . . . . . . 9,735
--------
Total . . . . . . . . . . . . . . . . . . . $ 13,060
========
Rental income is derived from the leasing of space in commercial real
estate properties. The leases are operating leases expiring in various years
through 2015. A portion of the leases contain provisions for tenant
reimbursements of certain real estate and operating costs.
59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17 - RELATED PARTY TRANSACTIONS
Hallwood Securities Limited. Pursuant to an agreement dated September
29, 1992 (the "1992 Consulting Agreement"), Hallwood Securities Limited
("Limited"), a corporation with which Anthony J. Gumbiner, the Company's
chairman and chief executive officer and Brian M. Troup, the Company's
president and chief operating officer, are associated, provided consulting
services to the Company with respect to strategic and tactical advice regarding
the Company's assets and investments and proposed transactions involving the
Company and its affiliates. As compensation for its services under the 1992
Consulting Agreement, Limited was paid a fee of $600,000 (excluding
reimbursement for out-of-pocket and other reasonable expenses of Limited) for
each of the fiscal years ended July 31, 1994, 1993 and 1992. The 1992
Consulting Agreement terminated July 31, 1994.
Hallwood Financial Corporation. Effective August 1, 1994, the Company
entered into an agreement (the "1994 Consulting Agreement"), with Hallwood
Financial Corporation ("Hallwood Financial"), a corporation with which Messrs.
Gumbiner and Troup are associated, pursuant to which Hallwood Financial agreed
to provide international consulting and advisory services to the Company and
its affiliates for an annual fee of $350,000, excluding reimbursement for
out-of-pocket and other reasonable expenses of Hallwood Financial. The initial
term of the 1994 Consulting Agreement expires July 31, 1995, and is
automatically extended for successive one-year terms, unless notice of
termination is provided by either party no less than thirty-one (31) days prior
to the expiration of the end of its term or an extension thereof.
Also effective August 1, 1994, Hallwood Petroleum, Inc. ("HPI"), a wholly
owned subsidiary of HEP, entered into a Compensation Agreement with Mr.
Gumbiner, pursuant to which Mr. Gumbiner is to consult with and assist HPI and
its energy affiliates in connection with their present and future international
activities. HPI is to pay Mr. Gumbiner annual compensation of $250,000. The
Compensation Agreement is to continue in effect until terminated by either
party on not less than six month's notice.
In July 1993, the Company renewed a financial consulting agreement with
HEC, pursuant to which the Company or Limited furnished consulting and advisory
services to HEC and its affiliates, including HEP. The Company assigned this
contract to Limited at its inception. Under the terms of the financial
consulting agreement, HEC and its affiliates paid $300,000 to the Company in
June 1993 and 1992, of which approximately $7,000 in each fiscal year was paid
by HEC, and the remainder by HEP and other affiliates of HEC. This agreement
was terminated June 30, 1994.
The Company entered into a new financial consulting agreement with HPI,
dated as of June 30, 1994, which provides that the Company or its agent shall
provide consulting services to HPI for compensation at the rate of $300,000 per
year. The Compensation Committee determined that these services would be most
appropriately provided by Hallwood Financial, acting as the Company's agent,
through the services of Mr. Gumbiner and Mr. Troup, and that as consideration
for these services the Company would pay to Hallwood Financial the fee to which
the Company is entitled under the agreement. Of the $300,000 payment made in
June 1994, approximately $7,000 was paid by HEC, and the remainder by HEP and
other affiliates of HEC.
Pursuant to an existing agreement, the Company reimburses Hallwood
Financial for reasonable and necessary expenses in providing office space and
administrative services used by Mr. Gumbiner. For the fiscal years ended July
31, 1994, 1993 and 1992, the Company reimbursed Hallwood Financial in the
amount of $271,000, $245,000 and $249,000, respectively. Of the amounts paid
in fiscal 1994, approximately $65,000 was paid by the Company, $3,000 was paid
by HEC and the remainder by HEP and other affiliates of HEC.
Other. The Company shares common offices, facilities and staff with
Stanwick Holdings, Inc. ("Stanwick"). The Company pays the common general and
administrative expenses of the two entities and charges Stanwick a management
fee for its allocable share of the expenses. For the fiscal years ended July
31, 1994, 1993 and 1992, Stanwick reimbursed the Company $25,000, $25,000 and
$31,000, respectively. The Company was owed $6,000 from Stanwick at July 31,
1994 and 1993, respectively. Stanwick is a subsidiary of Hallwood Holdings
S.A. ("HHSA"), a company formerly listed on the Luxembourg Stock Exchange.
Anthony J. Gumbiner and Brian M. Troup are also directors of HHSA. Melvin J.
Melle,
60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the vice president, chief financial officer and secretary of the Company is
also chief financial officer of HHSA and Stanwick.
NOTE 18 - LITIGATION, CONTINGENCIES AND COMMITMENTS
Litigation. The Company, certain of its affiliates and others have been
named as defendants in several lawsuits relating to the HEP oil and gas merger
and exchange offer referred to in Note 14, the HRP real estate consolidation
referred to in Note 13 and the restructuring of Brock Hotel Corporation and
subsequent "spin-off" of ShowBiz. In addition, in connection with a formal
investigation by the Securities and Exchange Commission, the Company and
certain of its officers and directors have provided testimony and produced
documents regarding the Company's sale of shares of ShowBiz in June 1993. The
Company is also a defendant in a separate lawsuit relating to these sales. The
Equitec action and certain claims in the Reese action described below have been
settled. Negotiations with respect to the settlement of certain of the other
actions are in process, as described below. Nevertheless, the cost to the
Company and its affiliates of defending these suits has been significant. In
addition, the remaining lawsuits seek or may seek substantial damages from the
Company and the other defendants, and there can be no assurances as to the
ultimate outcome of these actions. The Company intends to defend, or in some
cases negotiate to settle, the remaining actions and does not currently
anticipate that such actions will have a material adverse effect on its
financial condition beyond the reserves the Company has established for such
purposes. However, it is possible that the costs of litigation and any
settlements could be material to the Company's operations and cash flows.
On September 28, 1994 the Court in the In re Equitec Rollup Litigation
and Aaberg, et al. v. Equitec Financial Group, Inc., et al. actions entered a
final order approving the settlement of these actions. In connection with the
settlement, the Company issued a promissory note in the principal amount of
$1,500,000 to an agent for the plaintiffs. The note is payable over a period
of two years in equal monthly installments and bears interest at the fixed rate
of 7 1/2% per annum. The note is guaranteed by Smith Barney Shearson Holding,
Inc. ("Smith Barney"). The Company has agreed to reimburse Smith Barney for
any payment Smith Barney is required to make pursuant to the guaranty and has
granted Smith Barney a security interest in 187,500 shares of common stock of
HEC to secure this reimbursement agreement. The Company has agreed to maintain
a 150% value-to-loan ratio throughout the term of the note, and has agreed to
grant a security interest in additional shares of HEC held or acquired by the
Company if necessary to maintain this ratio.
On February 21, 1990, two unitholders of Energy Development Partners,
Ltd. ("EDP") filed a class action styled Hoffman, et al. v. The Hallwood
Energy Partners, et al., seeking injunctive relief and damages in the Court of
Chancery, State of Delaware, New Castle County, against EDP, HEP, the Company,
HEC, Quinoco Oil and Gas, Inc., Quinoco Energy, Inc. and three directors of
HEC. In general terms, plaintiffs allege that the defendants sought to effect
the merger of EDP into HEP on terms that were unfair to EDP unitholders and in
breach of their fiduciary duties to EDP unitholders. The defendants have moved
to dismiss the complaint. The parties are attempting to negotiate a settlement
of this case in connection with a settlement of the Hallwood Energy Partners,
L.P. case discussed in the next paragraph.
In March 1990, two other EDP unitholders filed a class action complaint
in the United States District Court for the Southern District of New York
against EDP, HEP, the Company, HEC, Quinoco Oil and Gas, Inc., Quinoco Energy,
Inc. and three directors of Company. These actions and related actions against
other parties have been consolidated and are now pending under the caption In
re Hallwood Energy Partners, L.P. Securities Litigation. The consolidated
complaint asserts claims for the alleged violations of securities laws based on
alleged misstatements and omissions in the prospectus and supplemental proxy
material relating to the merger of EDP into HEP. A claim for breach of
fiduciary duty is also asserted against the Quinoco entities. Plaintiffs seek
damages in an amount to be determined at trial. No class has yet been
certified. The parties are attempting to negotiate a settlement of all claims
in this matter, but any settlement will be subject to negotiation and execution
of a definitive agreement, as well as court approval. Any settlement of this
case would also include settlement of the claims raised in the Hoffman suit
above.
On April 23, 1992, a unitholder of Hallwood Consolidated Partners, L.P.
filed a class action styled Tappe v. Hallwood Consolidated Resources
Corporation, el al., in the Court of Chancery of the State of Delaware
challenging the fairness and legality of the conversion of Hallwood
Consolidated Partners, L.P. ("HCP") into Hallwood Consolidated Resources
Corporation ("HCRC"), a publicly-traded oil and gas company of which HEP is a
40% stockholder. In general terms, plaintiff alleges that defendants HCRC,
HCP, Hallwood Oil and Gas, Inc., HEP and Hallwood Petroleum, Inc., sought to
convert HCP into HCRC on terms that are unfair to HCP unitholders. The
complaint alleges that Hallwood Oil and Gas, Inc. ("HOG"), the general partner
of HCP, misappropriated to itself a disproportionate allocation of common stock
and unfairly converted a revenue interest into equity. In addition, the suit
alleges that HOG had a conflict of interest that placed it at odds with the
interests of the limited partners and that it failed to appoint a special
committee or unaffiliated entity to negotiate on behalf of the limited partners
or review the conversion. Plaintiff also claims that the Consent
Statement/Prospectus dated February 14, 1992 relating to the conversion is
materially misleading and fails to disclose certain information. Defendants
answered the consolidated complaint on May 27, 1992, denying the material
allegations thereof. Discovery is proceeding in the action.
On December 27, 1991, a suit styled Louis G. Reese, Inc., et al. v. the
Hallwood Group Incorporated, et al. was filed in the Fourteenth District Court
of Dallas County, Texas by Louis G. Reese, Inc., various holders of Integra
preferred stock and others against the Company, Integra - A Hotel and
Restaurant Company, ShowBiz Pizza Time, Inc.
61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and eleven current or former officers or directors of such corporate
defendants. A substantially identical suit, styled European American
Reinsurance Corporation v. The Hallwood Group, et al., was filed on January 14,
1992 in Dallas County district court against the same group of defendants. The
plaintiffs in Reese purport to seek certification as representative of classes
of Integra optionholders, Integra warrantholders and Integra preferred
stockholders. The petitions allege violations of Texas statutes governing
securities and stock sales, fraudulent inducement, fraudulent transfer, breach
of fiduciary duty, breach of alleged duties of good faith, and negligent
misrepresentation in connection with various transactions, relating primarily
to the financial restructuring of Brock Hotel Corporation in 1986 and the
subsequent "spin-off" of ShowBiz Pizza Time, Inc. beginning in 1988. Remedies
sought include rescission, an accounting, declaratory judgment, and both actual
and exemplary damages in amounts that are claimed to be substantial. Those
defendants who have answered, including all corporate defendants, have denied
all allegations in both petitions. In connection with the completion of an
Amended Plan of Reorganization for Integra in its chapter 11 bankruptcy
proceeding, certain claims made in these suits have been settled, although the
number and type of claims settled may be disputed by the plaintiffs. See Note
8. From March 1993 to October 1994, these lawsuits were abated pending the
resolution of other proceedings involving the attorney for the plaintiffs in
both cases. The court in the Reese case has now lifted the abatement and set
the case for trial in January 1995. The European American case remains abated.
It is not known when those other proceedings will be resolved and when or if
these cases will become active.
On February 3, 1992, the Company was named as a defendant in a lawsuit
styled Third National Bank in Nashville, Trustee v. The Hallwood Group
Incorporated in federal court in Nashville, Tennessee by the Third National
Bank in Nashville, as trustee. In the lawsuit, the bank seeks damages in
excess of $15 million against the Company, asserting that it tortiously
interfered with an agreement between the bank and Integra concerning certain
municipal bonds issued in connection with the Hermitage Hotel located in
Nashville, Tennessee. The bank alleged that the Company intentionally caused
Integra to breach a minimum net worth requirement of the agreement, by
allegedly instigating the spin-off of Integra's ShowBiz Pizza Time, Inc. stock
holdings in December 1988. After first dismissing and then reinstating the
case, the court denied the Company's motion to dismiss for failure to state
claim. Discovery is complete and the case is set for trial in January 1995.
The parties are attempting to negotiate a settlement of all claims in this
matter, but any settlement will be subject to negotiation and execution of a
definitive agreement, as well as court approval.
On April 13, 1993, the same attorney who represents plaintiffs in the
Reese and European American matters filed another action styled Hermitage
Hotel, Ltd., L.P. v. The Hallwood Group Incorporated, et al. against the
Company and other defendants alleging many of the same causes of action
asserted and remedies sought in those cases, as well as contractual
interference claims similar to those asserted in the Third National Bank
litigation. This lawsuit was filed in the name of Hermitage Hotel, Ltd., L.P.,
individually and as class representative of a class of unsecured creditors of
Integra, in the 68th District Court of Dallas County, Texas, and purports to
seek class certification on behalf of the unsecured creditors of Integra. This
case was subsequently dismissed by the court and refiled in 1994 in the 101st
District Court of Dallas County, Texas. This new action does not purport to be
a class action. The defendants have answered the lawsuit, generally denying
the allegations thereof. The Company believes that all the allegations of the
suit are without merit and
62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
barred by a statute of limitation. The Company intends to vigorously defend
the lawsuit. See Note 8 for a discussion of the Company's participation in the
Amended Plan of Reorganization of Integra in its chapter 11 bankruptcy
proceeding.
The Company is a named defendant in Nitti v. Frank, et al. in the 60th
District Court of Dallas County, Texas, in which the plaintiff, purporting to
act derivatively on behalf of ShowBiz, contends that the defendants made
misleading statements on behalf of ShowBiz to the securities market, breached
fiduciary duties to stockholders of ShowBiz, committed constructive fraud and
unjustly enriched themselves by selling ShowBiz stock prior to ShowBiz's report
of a reduced earnings estimate in 1993. Plaintiffs' demand restitution and/or
unspecified damages and punitive and exemplary damages. The parties have
reached a tentative settlement of the claims in this matter for an immaterial
amount. This tentative settlement is subject to negotiation and execution of a
definitive agreement, as well as Court approval.
The Company and its subsidiaries are from time to time involved in
various other legal proceedings in the ordinary course of their respective
businesses. Management believes that the resolution of these matters will not
have a material adverse effect on the financial position of the Company.
Contingencies. The Company has committed to make additional
contributions to the capital of HRC, the general partner of HRP, upon demand,
up to a maximum aggregate amount of $13,118,000, subject to the terms of a
subscription agreement, to the extent HRC has insufficient capital to satisfy
creditors of HRP. As of the date of this report no such demands have been
made.
The Company remains contingently liable for L.501,103 ($772,000 at July
31, 1994) plus interest at the rate of 12% to maturity (July 31, 1997) on the
12% Convertible Notes ("Notes") issued by the Company's former wholly owned
subsidiary, Atlantic Metropolitan (U.K.) plc ("Atlantic"). Grainger Trust plc
("Grainger") assumed the obligations to make payment of interest and principal
on the Notes in connection with its purchase of the Company's investment in
Atlantic in fiscal 1988. The indenture under which the Notes were originally
issued limits the amount of borrowings or the issuance of other indebtedness by
the Company or its subsidiaries to two and one-half times the Adjusted
Stockholders' Equity (as defined in such indenture). The Company has notified
the indenture trustee that it is in default of this covenant. The Company
believes that this default is not materially prejudicial to the holders of the
Notes, since it is acting solely as a guarantor. The trustee has not indicated
what action, if any, it may take in response to this default.
Commitments. Total lease expense was $4,095,000, $3,665,000 and
$4,240,000 for fiscal 1994, 1993 and 1992, respectively. The Company leases
certain hotel property, including land, buildings and equipment, executive
office facilities at several locations, and certain textile manufacturing
equipment. The leases generally require the Company to pay property taxes,
insurance and maintenance of the leased assets. Lease expense on certain
office facilities is incurred on behalf of partnerships, of which the Company
is general partner and is substantially reimbursed by such partnerships.
Certain of the hotel property leases requires the payment of rent contingent
upon hotel revenue. For fiscal 1994, 1993 and 1992, the contingent rent was
$451,000, $303,000 and $335,000, respectively.
63
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At July 31, 1994, aggregate net minimum annual rental commitments under
noncancelable operating leases having an initial or remaining term of more than
one year, were as follows (in thousands):
Years ended
July 31, Amount
--------- --------
1995 . . . . . . . . . . . . . . . . . . . . . . . $ 4,023
1996 . . . . . . . . . . . . . . . . . . . . . . . 3,907
1997 . . . . . . . . . . . . . . . . . . . . . . . 3,212
1998 . . . . . . . . . . . . . . . . . . . . . . . 742
1999 . . . . . . . . . . . . . . . . . . . . . . . 492
Thereafter . . . . . . . . . . . . . . . . . . . . 205
--------
Total . . . . . . . . . . . . . . . . . . $ 12,581
========
64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19 - BUSINESS BY INDUSTRY SEGMENT
The Company's business by industry segment is summarized below (in thousands):
REAL TEXTILE ASSOCIATED
ESTATE ENERGY PRODUCTS HOTELS COMPANIES OTHER CONSOLIDATED
------ ------ -------- ------ --------- ----- ------------
1994
Total revenue . . . . . . . . $ 4,399 $ 6,234 $ 71,624 $ 20,896 $ 1,356 $ 2,193 $ 106,702
======== =========== ========== ========== ========== ========= ============
Operating income* . . . . . $ 112 $ 822 $ 863 $ 566 $ 870 $ -- $ 3,233
======== =========== ========== ========== ========== =========
Unallocable expenses, net . . $ (5,544) (5,544)
========= ------------
Loss before income taxes . . $ (2,311)
============
Identifiable assets,
July 31, 1994 . . . . . . . $ 17,473 $ 17,286 $ 34,916 $ 26,455 $ 16,444 $ -- $ 112,574
Cash allocable with segment . 1,188 804 170 1,559 -- 3,489 7,210
-------- ----------- ---------- ---------- ---------- --------- ------------
$ 18,661 $ 18,090 $ 35,086 $ 28,014 $ 16,444 $ 3,489 $ 119,784
======== =========== ========== ========== ========== ========= ============
Corporate assets . . . . . . $ 7,541 7,541
========= ------------
Total assets, July 31, 1994 . $ 127,325
============
Depreciation, depletion and
amortization $ 1,060 $ 2,018 $ 1,070 $ 2,104 $ -- $ -- $ 6,252
======== =========== ========== ========== ========== ========= ============
Capital expenditures/
acquisitions $ 44 $ 147 $ 1,193 $ 1,288 $ -- $ -- $ 2,672
======== =========== ========== ========== ========== ========= ============
1993
Total revenue . . . . . . . . $ 6,586 $ 8,455 $ 70,185 $ 17,818 $ 12,232 $ 854 $ 116,130
======== =========== ========== ========== ========== ========= ============
Operating income* . . . . . . $ 2,617 $ 1,692 $ 1,507 $ 235 $ 7,175 $ -- $ 13,226
======== =========== ========== ========== ========== =========
Unallocable expenses, net . . $ (9,153) $ (9,153)
========= ------------
Income before income taxes . $ 4,073
============
Identifiable assets,
July 31, 1993 . . . . . . . $ 19,104 $ 21,710 $ 36,055 $ 18,459 $ 17,983 $ -- $ 113,311
Cash allocable with segment . 80 1,850 615 1,545 -- 9,795 13,885
--------- ----------- ---------- ---------- ---------- --------- ------------
$ 19,184 $ 23,560 $ 36,670 $ 20,004 $ 17,983 $ 9,795 $ 127,196
========= =========== ========== ========== ========== =========
Corporate assets . . . . . . $ 11,182 $ 11,182
========= ------------
Total assets, July 31, 1993 . $ 138,378
============
Depreciation, depletion and
amortization . . . . . . . . $ 1,324 $ 2,115 $ 1,112 $ 1,610 $ -- $ -- $ 6,161
========= =========== ========== ========== ========== ========= ============
Capital expenditures/
acquisitions. . . . . . . . $ 110 $ 94 $ 795 $ 1,048 $ -- $ -- $ 2,047
========= =========== ========== ========== ========== ========= ============
1992
Total revenue . . . . . . . . $ 6,160 $ 7,112 $ 71,393 $ 19,325 $ 9,547 $ 1,618 $ 115,155
======== =========== ========== ========== ========== ========= ============
Operating income (loss)* . . $ 53 $ 68 $ 331 $ (521) $ (15,514) $ -- $ (15,583)
======== =========== ========== ========== ========== ========= ============
Unallocable expenses, net . . $ (12,990) $ (12,990)
========= ------------
Loss before income taxes, extra-
ordinary gain and cumulative
effect of SFAS 109 adoption . $ (28,573)
============
Identifiable assets,
July 31, 1992. . . . . . . . $ 25,142 $ 21,954 $ 33,453 $ 18,673 $ 24,584 $ -- $ 123,806
Cash allocable with segment . 1,828 1,142 208 493 -- 10,156 13,827
-------- ----------- ---------- ---------- ---------- --------- ------------
$ 26,970 $ 23,096 $ 33,661 $ 19,166 $ 24,584 $ 10,156 $ 137,633
======== =========== ========== ========== ========== =========
Corporate assets . . . . . . $ 14,386 14,386
========= ------------
Total assets, July 31, 1992 . $ 152,019
============
Depreciation, depletion and
amortization . . . . . . . . $ 1,324 $ 2,485 $ 1,077 $ 1,497 $ -- $ -- $ 6,383
======== =========== ========== ========== ========== ========= ============
Capital expenditures/
acquisitions . . . . . . . . $ 50 $ 3 $ 915 $ 2,012 $ -- $ -- $ 2,980
======== =========== ========== ========== ========== ========= ============
__________
* Operating income of the textile products industry segment is net of $83, $160
and $7 of intercompany interest expense in fiscal 1994, 1993 and 1992,
respectively.
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The results of operations for the quarters ended in fiscal 1994 and
1993 are summarized below (in thousands, except per share amounts):
QUARTERS ENDED IN FISCAL 1994
-----------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1993 1994 1994 1994
--------------- ------------ ---------- -----------
Operating revenues . . . . . . . $25,441 $22,864 $29,645 $28,652
Gross profit . . . . . . . . . . 2,749 2,701 2,703 2,364
Net income (loss) . . . . . . . (1,340) (447) 540 (3,143)
Net income (loss) per share . . (0.24) (0.09) 0.10 (0.57)
QUARTERS ENDED IN FISCAL 1993
-----------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1992 1993 1993 1993
------------- ------------ ---------- -----------
Operating revenues . . . . . . . $25,304 $30,661 $28,308 $31,857
Gross profit . . . . . . . . . . 2,164 8,368 4,401 3,338
Net income (loss) . . . . . . . (216) 6,321 (1,907) (5,623)
Net income (loss) per share . . (0.04) 1.14 (0.35) (1.02)
Fiscal 1994. Significant transactions which resulted in the fiscal
1994 fourth quarter net loss of $3,143,000 were: (i) a deferred tax charge of
$1,550,000, which was primarily a result of a significant decline in the value
of certain assets considered in the Company's SFAS No. 109 tax planning
strategies, and (ii) additional accrual in the amount of $1,100,000 related to
pending litigation matters.
Fiscal 1993. Significant transactions which resulted in the fiscal
1993 fourth quarter net loss of $5,623,000 were: (i) an additional loss
provision of $3,704,000 for the asset held for sale; (ii) an additional loss
provision of $275,000 for the investment in Oakhurst; (iii) a $3,580,000
capital gain on the sale of 175,000 ShowBiz shares, and; (iv) a deferred tax
charge of $5,956,000, which was primarily a result of a significant decline in
the value of certain assets considered in the Company's SFAS No. 109 tax
planning strategies.
NOTE 21 - EMPLOYEE BENEFIT RETIREMENT PLANS
Effective August 1, 1989, the Company established a contributory,
tax-deferred 401(k) tax favored savings plan covering substantially all of its
non-union employees. The original plan provided that eligible employees may
contribute up to 15% of their compensation to the plan, and the Company would
match 50% of its employees' contributions up to the first 6% contributed.
Amounts contributed by employees are 100% vested and non-forfeitable. The plan
was amended on February 1, 1992 and August 1, 1993 to (i) modify eligibility
requirements; (ii) make the Company's matching contribution discretionary, to
be determined annually by the Company's Board of Directors; (iii) exclude the
Company's hotel hourly employees from a matching contribution; (iv) exclude
highly compensated employees from a matching contribution, although this group
receives a compensatory bonus in lieu of such contribution and diminution of
related benefits; and (v) spin-out Brookwood employees into a separate plan.
The Company matching contributions vest at a rate of 20% per year of service
and become fully vested after five years. Employees of the HRC, HMC and various
hotel subsidiaries also participate in the Company's 401(k) plan. HEC has a
separate 401(k) plan which is similar to the Company's plan. Employer
contributions paid on behalf of HRC and HEC employees are substantially paid by
the respective real estate and energy master limited partnerships. The
Company's contributions to the plan for the fiscal
66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
years ended July 31, 1994, 1993 and 1992, excluding contributions from the HRC
and HEC subsidiaries to the extent paid by the master limited partnership, were
$126,000, $121,000 and $133,000, respectively.
Brookwood's union employees belong to a pension fund maintained by
their union. The Company contributes $72 per month per employee to the fund.
Total contributions for the fiscal years ended 1994, 1993 and 1992 were
$186,000 in each of the three years. At September 30, 1993, the date of the
latest actuarial valuation, Brookwood was not subject to a withdrawal liability
upon termination of the pension plan because it was fully funded.
67
69
THE HALLWOOD GROUP INCORPORATED
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1993
(UNAUDITED)
The following reserve quantity and future net cash flow information for
the Company's share of HEC's and HEP's oil and gas properties represents proved
reserves which are located in the United States. The reserve estimates
presented have been prepared by in-house petroleum engineers and a portion of
these reserves have been reviewed by independent petroleum engineers. The
determination of oil and gas reserves is based on estimates which are highly
complex and interpretive. The estimates are subject to continuing change as
additional information becomes available.
The standardized measure of discounted future net cash flows provides a
comparison of HEC's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes since HEC's tax basis and
net operating loss carryforwards exceed future net cash flows. Under the
guidelines set forth by the Securities and Exchange Commission, the calculation
is performed using year end prices. At December 31, 1993, oil and gas prices
averaged $13.38 per bbl of oil and $2.44 per mcf of gas for HEC, including its
interest in HEP. Future production costs are based on year-end costs and
include severance taxes. This standardized measure is not necessarily
representative of the market value of HEC's properties.
Updated information relating to reserve quantity and future net cash
flow information was not available at July 31, 1994, the Company's year-end,
accordingly, the reserve quantity and future net cash flow information is
presented as of December 31, 1993, HEC's year-end and the most recent date for
which information is presented. During the period from December 31, 1993 to
July 31, 1994 gas prices decreased. While this decline in gas prices will
negatively impact the future net cash flow information contained herein,
management evaluated this impact and determined that as no cost center ceiling
problem would result from this decline in gas prices the impact to the
consolidated financial statements of the Company would not be material.
68
70
THE HALLWOOD GROUP INCORPORATED
RESERVE QUANTITIES
(IN THOUSANDS)
(UNAUDITED)
Oil Gas
Bbls Mcf
---- ---
PROVED RESERVES:
Balance, December 31, 1990 . . . . . . . . . . . . . . . . . . 1,537 23,147
Extensions and discoveries . . . . . . . . . . . . . . . . . . 91 1,286
Revision of previous estimates . . . . . . . . . . . . . . . . (245) (160)
Sales of reserves in place . . . . . . . . . . . . . . . . . . (136) (927)
Purchase of reserves in place . . . . . . . . . . . . . . . . 19 88
Production . . . . . . . . . . . . . . . . . . . . . . . . . . (151) (2,153)
----- ------
Balance, December 31, 1991 . . . . . . . . . . . . . . . . . . 1,115 21,281
Extensions and discoveries . . . . . . . . . . . . . . . . . . 156 2,385
Revision of previous estimates . . . . . . . . . . . . . . . . 51 (468)
Sales of reserves in place . . . . . . . . . . . . . . . . . . (82) (1,657)
Purchase of reserves in place . . . . . . . . . . . . . . . . 4 40
Production . . . . . . . . . . . . . . . . . . . . . . . . . . (137) (2,354)
Effect of conversion (a) . . . . . . . . . . . . . . . . . . . (169) (1,854)
----- ------
Balance, December 31, 1992 . . . . . . . . . . . . . . . . . . 938 17,373
Extensions and discoveries . . . . . . . . . . . . . . . . . . 66 774
Revision of previous estimates (b) . . . . . . . . . . . . . . (205) (1,993)
Sales of reserves in place . . . . . . . . . . . . . . . . . . (37) (460)
Purchases of reserves in place . . . . . . . . . . . . . . . . 70 737
Production . . . . . . . . . . . . . . . . . . . . . . . . . . (110) (2,005)
----- ------
Balance, December 31, 1993 . . . . . . . . . . . . . . . . . . 722 14,426
===== ======
PROVED DEVELOPED RESERVES:
Balance, December 31, 1991 . . . . . . . . . . . . . . . . . . 1,002 19,671
===== ======
Balance, December 31, 1992 . . . . . . . . . . . . . . . . . . 874 15,954
===== ======
Balance, December 31, 1993 . . . . . . . . . . . . . . . . . . 666 12,779
===== ======
(a) HEP's 40% owned affiliate, Hallwood Consolidated Resources Corporation
("HCRC") was converted from a limited partnership to a corporation (the
"Conversion") during 1992. The effect of the Conversion was to change
HEP's method of accounting for its investment in HCRC from the
proportionate consolidation method to the equity method, which reduces
HEP's reserves by its 40% ownership interest in HCRC.
(b) The majority of these revisions relate to the G.S. Boudreaux Estate #1 Well
which, throughout 1993, provided an increasing amount of water, resulting
in higher operating costs and less consistent production rates.
69
71
THE HALLWOOD GROUP INCORPORATED
RESERVE QUANTITIES
(IN THOUSANDS)
(UNAUDITED)
As of December 31,
-------------------------------------------
Description 1993 1992 1991
- - ------------------------------------------------------ ------- ------ ------
Future cash flows . . . . . . . . . . . . . . . . . . $44,000 $52,000 $58,000
Future production and development costs . . . . . . . (13,000) (14,000) (18,000)
------- ------- -------
Future net cash flows before discount . . . . . . . . 31,000 38,000 40,000
10% discount to present value . . . . . . . . . . . . (10,000) (13,000) (14,000)
------- ------- -------
Standardized measure of discounted future
net cash flows . . . . . . . . . . . . . . . . . . $21,000 $25,000 $26,000
======= ======= =======
Years ended December 31,
--------------------------------------
Description 1993 1992 1991
- - ------------------------------------------------------ ------ ------ ------
Standardized measure of discounted future net cash
flows at beginning of year . . . . . . . . . . . . $25,000 $26,000 $39,000
Sales of oil and gas produced, net of production costs (4,363) (4,855) (4,199)
Net changes in prices and production costs . . . . . 1,150 3,374 (11,623)
Extensions, discoveries and other additions,
net of future production and development costs . . 1,361 3,632 1,721
Changes in estimated future development costs . . . . (643) (623) (580)
Development costs incurred . . . . . . . . . . . . . 585 704 938
Revisions of previous quantity estimates (a) . . . . (3,750) (167) (1,531)
Purchases of reserves in place . . . . . . . . . . . 1,346 70 190
Sales of reserves in place . . . . . . . . . . . . . (793) (2,350) (1,638)
Effect of Conversion (b) . . . . . . . . . . . . . . -- (4,676) --
Accretion of discount . . . . . . . . . . . . . . . . 2,500 2,600 3,900
Changes in production rates and other . . . . . . . . (1,393) 1,291 (178)
------- ------- -------
Standardized measure of discounted future net
cash flows at end of year . . . . . . . . . . . . $21,000 $25,000 $26,000
======= ======= =======
(a) See Note (b) to the Reserve Quantities Schedule.
(b) See Note (a) to the Reserve Quantities Schedule.
70
72
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
We have audited the consolidated financial statements of The Hallwood
Group Incorporated and its subsidiaries at July 31, 1994 and 1993 and for each
of the three years in the period ended July 31, 1994 and have issued our report
thereon dated October 18, 1994, which report is included elsewhere in this Form
10-K. Our audits also included the financial statement schedules of The
Hallwood Group Incorporated and its subsidiaries, listed in the accompanying
index at Item 14(a) 2. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 18, 1994
71
73
SCHEDULE I
MARKETABLE SECURITIES - OTHER INVESTMENTS
(IN THOUSANDS)
AS OF JULY 31, 1994
Number
of Shares --
Principal
Amount of Market Carrying
NAME OF ISSUER Loan Stock Cost Value Value
-------------- ---------- ------- ------- --------
INVESTMENT IN INSURANCE CONTRACTS
Various (Note 1) . . . . . . . . . . . . . . . . . . . . -- $229 $229 $229
INVESTMENT IN ATLANTIC METROPOLITAN U.K.
Loan stock . . . . . . . . . . . . . . . . . . . . . . L.518 $758 $610 $610
INVESTMENT IN OTHER MARKETABLE SECURITIES
Various* . . . . . . . . . . . . . . . . . . . . . . . various $224 $ 53 $ 53
____________
* Individual investments are less than 2% of total consolidated assets.
(Note 1) - Represents acquisition cost and subsequent premiums to acquire
whole life insurance policies. The policies contain an investment
feature which provides for increasing cash values. A developing
financial market in the United Kingdom provides liquidity for such
investments.
72
74
SCHEDULE III
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
July 31,
------------------------------
1994 1993
----------- ----------
ASSETS
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . $ 51,295 $ 52,549
Investments in associated companies . . . . . . . . . . . . . . . 16,444 17,983
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . 5,900 8,533
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 3,304 8,546
Receivables and other assets . . . . . . . . . . . . . . . . . . 1,187 1,469
Real estate properties, net . . . . . . . . . . . . . . . . . . . 90 124
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . 69 193
Investment in real estate affiliate . . . . . . . . . . . . . . . -- 151
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . $ 78,289 $ 89,548
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
7% Collateralized Senior Subordinated Debentures . . . . . . . . $ 28,718 $ 31,463
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . 22,902 22,902
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 7,491
Accounts payable, accrued interest
and other accrued expenses . . . . . . . . . . . . . . . . . . 6,692 3,882
Anticipatory loss - asset held for sale . . . . . . . . . . . . . -- 10,050
--------- ---------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 70,312 75,788
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 639 639
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 56,442 58,088
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (42,894) (38,504)
Foreign currency translation adjustment . . . . . . . . . . . . . 86 (167)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . (6,296) (6,296)
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . 7,977 13,760
--------- ---------
Total Liabilities and Stockholders' Equity . . . . . . . . . $ 78,289 $ 89,548
========= =========
The "Notes To Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
73
75
SCHEDULE III (CONTINUED)
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Years ended July 31,
-------------------------------------
1994 1993 1992
--------- -------- ---------
INCOME
Intercompany income from subsidiaries
Interest income . . . . . . . . . . . . . . . . $ 2,132 $ 1,205 $ 1,276
Dividends . . . . . . . . . . . . . . . . . . . 1,814 2,500 --
Management fees . . . . . . . . . . . . . . . . 1,596 2,187 1,200
Rents . . . . . . . . . . . . . . . . . . . . . -- -- 24
Income from investments in associated
companies/affiliates . . . . . . . . . . . . . 1,197 11,949 9,433
Fee income . . . . . . . . . . . . . . . . . . . . 150 354 375
Interest on short-term investments . . . . . . . . 114 290 198
Equity in net income (loss) of subsidiaries . . . . (27) 490 (6,582)
Other income . . . . . . . . . . . . . . . . . . . 18 -- 12
Interest and discounts from mortgage loans . . . . 17 218 645
Loss on sale of real estate . . . . . . . . . . . . -- -- (36)
Hotel and real estate revenues . . . . . . . . . . -- 1,743 4,797
------- -------- --------
Total income . . . . . . . . . . . . . . . . . 7,011 20,936 11,342
EXPENSES
Interest expense . . . . . . . . . . . . . . . . . 4,892 7,588 9,230
Administrative expenses . . . . . . . . . . . . . . 2,775 3,025 4,325
Provision for losses . . . . . . . . . . . . . . . 1,647 305 3,553
Intercompany expenses of subsidiaries
Management fees . . . . . . . . . . . . . . . . 300 300 100
Interest expense . . . . . . . . . . . . . . . 38 38 50
Hotel and real estate operating expenses . . . . . 120 1,478 3,420
Loss from asset held for sale . . . . . . . . . . . -- 4,118 18,794
Depreciation . . . . . . . . . . . . . . . . . . . -- 165 354
------- -------- --------
Total expenses . . . . . . . . . . . . . . . . 9,772 17,017 39,826
------- -------- --------
Income (loss) before income taxes, extraordinary gain
and cumulative effect of SFAS No. 109 adoption (2,761) 3,919 (28,484)
Income taxes (benefit) . . . . . . . . . . . . . . 2,277 5,344 (2,039)
------- -------- --------
Loss before extraordinary gain and cumulative
effect of SFAS No. 109 adoption . . . . . . . . (5,038) (1,425) (26,445)
Extraordinary gain from extinguishment of debt . . 648 -- 26
------- -------- --------
Loss before cumulative effect of SFAS No. 109
adoption . . . . . . . . . . . . . . . . . . . (4,390) (1,425) (26,419)
Cumulative effect of SFAS No. 109 adoption . . . . -- -- 12,133
------- -------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . $(4,390) $ (1,425) $(14,286)
======= ======== ========
The "Notes To Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
74
76
SCHEDULE III (CONTINUED)
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years ended July 31,
--------------------------------
1994 1993 1992
------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . $ (572) $ 3,639 $ (1,450)
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements related to asset held for sale . . . . . . . (5,721) (1,818) (10,028)
Return of (additional) investment in subsidiaries . . . . . 1,480 (4,118) --
Proceeds from sale of investments in associated companies . 1,250 13,504 10,354
Investments in associated companies/affiliates . . . . . . (8) (427) (10)
Proceeds from sale of real estate . . . . . . . . . . . . . 5 97 --
Repayment of investments in associated companies . . . . . -- 4,768 4
Investments in marketable securities . . . . . . . . . . . -- (776) (106)
Capital expenditures and acquisition of real estate
and hotels . . . . . . . . . . . . . . . . . . . . . . . -- (96) (827)
------ -------- --------
Net cash provided by (used in) investing activities . . . (2,994) 11,134 (613)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . 6,000 14,000 14,083
Repayment of bank borrowings and loans payable . . . . . . (6,150) (24,158) (531)
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . (1,526) -- --
Repurchase of 13.5% Debentures . . . . . . . . . . . . . . -- (6,461) (55)
Net change in restricted cash for financing activities . . -- 3,000 --
Proceeds from exercise of stock options . . . . . . . . . . -- 94 --
Repurchase and retirement of convertible debentures . . . . -- -- (6,991)
------ -------- --------
Net cash provided by (used in ) financing activities . . (1,676) (13,525) 6,506
------ -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . (5,242) 1,248 4,443
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . 8,546 7,298 2,855
------ -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . $3,304 $ 8,546 $ 7,298
====== ======== ========
The "Notes To Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
75
77
SCHEDULE III (CONTINUED)
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Supplemental schedule of non-cash investing and financing activities. The
following transactions affected recognized assets or liabilities but did not
result in cash receipts or cash payments (in thousands):
Years ended July 31,
------------------------------
Description 1994 1993 1992
- - ------------------------------------------------------------------------- ------- --------- -------
Issuance of promissory note payable in connection with
Integra bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000 $ -- $ --
Recording of proportionate share of stockholders' equity
transactions of ShowBiz . . . . . . . . . . . . . . . . . . . . . . . 1,646 -- --
Issuance of note payable in connection with litigation settlement . . . . 1,500 -- --
Renegotiate loan payable to reduced amount . . . . . . . . . . . . . . . 901 -- --
Exchange of 13.5% Debentures for 7% Debentures . . . . . . . . . . . . . -- 27,481 --
Payment in-kind of annual interest on 13.5% Debentures . . . . . . . . . -- 6,792 6,019
Transfer of non-cash assets to subsidiary, net of liabilities . . . . . . -- 5,787 --
Unrecognized gain from completion of Bond Exchange and
Offers to Purchase for Cash . . . . . . . . . . . . . . . . . . . . . -- 4,220 --
Real estate acquired through foreclosure . . . . . . . . . . . . . . . . -- -- 152
Supplemental disclosures of cash payments (in thousands):
Interest paid (including capitalized interest) . . . . . . . . . . . . . $5,452 $2,205 $2,080
Income taxes paid (refunds received) . . . . . . . . . . . . . . . . . . 31 142 (54)
The "Notes to Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
76
78
SCHEDULE III (CONTINUED)
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE 1 - BASIS OF PRESENTATION
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Statements of the Registrant do not include
all of the information and notes normally included with financial statements
prepared in accordance with generally accepted accounting principles. In
addition, for purposes of this schedule, the investments in majority owned
subsidiaries are accounted for using the equity method of accounting which is
not in accordance with generally accepted accounting principles. It is,
therefore, suggested that these Condensed Financial Statements be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in the Registrant's Annual Report as referenced in Form 10-K, Part II,
Item 8.
NOTE 2 - DEBENTURE ISSUES AND LOANS PAYABLE
As further referenced to Notes 7 and 9 in the Consolidated Financial
Statements, the Registrant's debenture issues and loans payable are comprised
of the following:
July 31,
-----------------------
Description 1994 1993
----------- ------- ------
Debenture Issues
7% Debentures . . . . . . . . . . . . . . . . . . . $28,718 $31,463
13.5% Debentures . . . . . . . . . . . . . . . . . . 22,902 22,902
------- -------
51,620 54,365
Loans Payable
Associated companies . . . . . . . . . . . . . . . . 10,000 7,491
Real estate . . . . . . . . . . . . . . . . . . . . 2,000 --
------- -------
12,000 7,491
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . $63,620 $61,856
======= =======
Maturities over the next five years are as follows (in thousands):
1995 - $6,688; 1996 - $1,324; 1997 - $4,062; 1998 - $4,622; 1999 - $-0-.
NOTE 3 - LITIGATION, CONTINGENCIES AND COMMITMENTS
See Note 18 to the Consolidated Financial Statements.
77
79
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE, CHARGED TO CHARGED BALANCE,
BEGINNING COSTS AND TO OTHER END OF
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
--------- ----------- -------- ---------- ---------
REAL ESTATE
Allowance for losses -- real estate:
Years ended July 31,
1994 . . . . . . . . . . . . . . $ 980 $ -- $ -- $ 30 (a) $1,010
1993 . . . . . . . . . . . . . . 1,111 100 -- (231) (a) 980
1992 . . . . . . . . . . . . . . 100 1,011 -- -- 1,111
Allowance for losses --
mortgage loans:
Years ended July 31,
1994 . . . . . . . . . . . . . . 442 -- -- (216) (b) 226
1993 . . . . . . . . . . . . . . 1,334 240 -- (1,132) (b) 442
1992 . . . . . . . . . . . . . . 499 882 -- (47) (b) 1,334
TEXTILE PRODUCTS
Allowance for losses --
accounts receivable:
Years ended July 31,
1994 . . . . . . . . . . . . . . 365 232 -- (130) (c) 467
1993 . . . . . . . . . . . . . . 513 89 (69) (168) (c) 365
1992 . . . . . . . . . . . . . . 618 341 -- (446) (c) 513
ASSOCIATED COMPANIES
Allowance for losses -- investments
in associated companies:
Years ended July 31,
1994 . . . . . . . . . . . . . . 925 (30) (d) -- (895) (b) --
1993 . . . . . . . . . . . . . . 650 275 -- -- 925
1992 . . . . . . . . . . . . . . -- 650 -- -- 650
OTHER
Allowance for losses --
marketable securities:
Years ended July 31,
1994 . . . . . . . . . . . . . . 718 (1,556) (d) -- 1,115 (b) 277
1993 . . . . . . . . . . . . . . 1,038 (35) (e) -- (285) (b) 718
1992 . . . . . . . . . . . . . . 778 260 -- -- 1,038
____________
Notes:
(a) Change in foreign currency exchange rate
(b) Write-off upon disposition/foreclosure
(c) Write-off, net of recoveries
(d) Gain from disposition in excess of net book value, net of additional
expense
(e) Net recovery
78
80
SCHEDULE X
SUPPLEMENTAL INCOME STATEMENT INFORMATION
(IN THOUSANDS)
Charged to Costs and Expenses
------------------------------
Years ended July 31,
-------------------------------
1994 1993 1992
-------- -------- ---------
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,008 $1,769 $1,633
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,127 904 1,064
Property and oil production taxes . . . . . . . . . . . . . . . . . . . 860 962 1,168
- - -----------------
Note: Other amounts are not presented, as such amounts are less than 1% of net
revenues.
79
81
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
JULY 31, 1994
(IN THOUSANDS)
GROSS AMOUNT WHICH
INITIAL COST CARRIED AT CLOSE
TO COMPANY COSTS CAPI- OF PERIOD
---------------- TALIZED SUB- ----------------------
BUILD- SEQUENT TO BUILD- ACCUMU- DEPRE-
INGS AND ACQUISITIONS INGS AND LATED DE- CIABLE
ENCUM- IMPROVE- (IMPROVE- IMPROVE- PRECIA- DATE LIFE IN
BRANCES LAND MENTS MENTS) LAND MENTS TOTAL TION ACQUIRED YEARS
------- ---- -------- ------------ ---- -------- ----- --------- -------- -------
REAL ESTATE OPERATIONS
Office-retail
United Kingdom . . . . . . . . $5,399 $1,677 $ -- $ 8,637 $1,677 $8,637 $10,314 $1,475 1/86 40
Miscellaneous investments . . . -- 290 -- -- 290 -- 290 -- various --
------ ------- ------- ------ ------- ------- ------
Subtotal . . . . . . . . . . 1,967 -- 8,637 1,967 8,637 10,604 1,475
HOTEL OPERATIONS
Sarasota, Florida (a) . . . . 6,504 2,750 7,836 1,745 2,750 9,581 12,331 1,692 12/89 31
Sarasota, Florida (b) . . . . (c) -- 5,100 1,673 -- 6,773 6,773 2,674 6/91 7
Tulsa, Oklahoma . . . . . . . 5,200 915 4,285 14 915 4,299 5,214 182 3/94 10
Oklahoma City, Oklahoma (b) . (c) -- 1,525 1,090 -- 2,615 2,615 993 6/91 6
Miscellaneous investments . . -- 50 1,401 6 50 1,407 1,457 65 3/94 various
------ ------- ------- ------ ------- ------- ------
Subtotal . . . . . . . . . 3,715 20,147 4,528 3,715 24,675 28,390 5,606
TEXTILE PRODUCTS OPERATIONS
Industrial plant
Kenyon, Rhode Island . . . . . (c) 391 2,355 1,879 391 4,234 4,625 883 3/89 20
------ ------- ------- ------ ------- ------- ------
Totals . . . . . . . . . . $6,073 $22,502 $15,044 $6,073 $37,546 $43,619 $7,964
====== ======= ======= ====== ======= ======= ======
Changes in real estate owned and accumulated depreciation for the
years ended July 31, 1994, 1993 and 1992 are summarized below (in thousands):
YEARS ENDED JULY 31,
----------------------------------------------------------------------------------------
1994 1993 1992
----------------------- ------------------------- ------------------------
REAL ACCUMULATED REAL ACCUMULATED REAL ACCUMULATED
ESTATE DEPRECIATION ESTATE DEPRECIATION ESTATE DEPRECIATION
------- ------------ -------- ------------- -------- ------------
BALANCE, BEGINNING OF YEAR . . . . . . . $35,307 $5,411 $37,582 $3,296 $34,244 $1,400
Additions during the year
Costs capitalized . . . . . . . . . . 7,876 -- 1,295 -- 3,068 --
Foreclosures . . . . . . . . . . . . . -- -- -- -- 153 --
Depreciation . . . . . . . . . . . . . -- 2,553 -- 2,115 -- 1,970
Foreign exchange adjustment . . . . . 441 -- (3,423) -- 1,848 --
Deductions during the year
Sales . . . . . . . . . . . . . . . . (5) -- (147) -- (1,731) (74)
------- ------ ------- -------- ------- ------
BALANCE, END OF YEAR . . . . . . . . . . $43,619 $7,964 $35,307 $5,411 $37,582 $3,296
======= ====== ======= ====== ======= ======
- - --------------------
Notes:
See Note 1(c) to the Company's consolidated financial statements
regarding the accounting policy for property acquired through
foreclosure.
See Note 1(g) to the Company's consolidated financial statements and
Schedule VIII for information regarding the allowance for possible losses.
The aggregate cost basis for real estate owned, for federal income tax
purposes, was approximately $0.5 million higher than the basis for
financial reporting purposes.
(a) Pledged as collateral under the FNBB term loan agreement described
in Note 7 to the Company's consolidated financial statements.
(b) Leasehold interest. Cost represents price paid for leasehold
interest, plus furnishings and equipment.
(c) The stock of the subsidiary which holds this asset is pledged as
collateral for the 7% Debentures as described in Note 9 to the
Company's consolidated financial statements.
80
82
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
July 31, 1994
(in thousands)
Principal
Amount
of Loans
Face Carrying Subject to
Final Periodic Amount Amount Delinquent
Interest Maturity Payment Prior of of Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
----------- ---------- ---------- -------- ----- --------- --------- -----------
Single-family condominiums
Dallas, Texas (2) . . . . . . . . 7%-12.9% 2012-2014 (7) (8) $1,288 $1,008 (1)(3) $ --
Sevier County, Tennessee (4) . . . 9%-12.875% 2000-2003 (7) (8) 550 381 (1)(5) --
Single-family lots
Calaveras County, California (6) . 8%-13.75% 1997-2001 (7) (8) 676 563 (1) --
Miscellaneous . . . . . . . . . . . . 7.75%-11.75% 1994-2008 (7) -- 69 69 --
------ ------ ----
Total . . . . . . . . . . . . $2,583 $2,021 $ --
====== ====== ====
_______________________
Notes:
(1) Includes deferred interest recorded to adjust interest rate to estimated
market at date mortgage assumed or acquired, which amount is being
amortized over loan term.
(2) Conventional (29 loans, original principal amounts from $18,000 to
$79,000).
(3) Includes a reserve of $150,000 for loan losses.
(4) Conventional (34 loans, original principal amounts from $25,000 to
$32,000).
(5) Includes a reserve of $76,000 for loan losses.
(6) Conventional (90 loans, original principal amounts from $4,000 to
$38,000).
(7) Monthly principal and interest payments to maturity.
(8) Pledged as collateral under a FNBB term loan as described in Note 7 to
the Company's consolidated financial statements.
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Mortgage loan activity for the years ended July 31, 1994, 1993 and 1992
(in thousands):
Years ended July 31,
---------------------------------
1994 1993 1992
-------- -------- --------
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,601 $3,954 $5,815
Additions during period
New mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . -- 76 --
Amortization of loan discounts . . . . . . . . . . . . . . . . . . . . 50 79 85
Charge-offs against loan loss reserve . . . . . . . . . . . . . . . . 18 1,236 19
------ ------ ------
68 1,391 104
Deductions during period
Collections of principal (includes principal amount of
loans sold or satisfied) . . . . . . . . . . . . . . . . . . . . . 648 2,500 931
Additional loan loss reserve . . . . . . . . . . . . . . . . . . . . . -- 240 882
Transfer to real estate owned upon foreclosure . . . . . . . . . . . . -- 4 152
------ ------ ------
648 2,744 1,965
------ ------ ------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,021 $2,601 $3,954
====== ====== ======
________________
Notes:
See Note 1(c) to the Company's consolidated financial statements and
Schedule VIII for information regarding the allowance for possible
losses.
The aggregate cost basis for federal income tax purposes is approximately
the same as the carrying amount.
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================================================================================
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1993.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _____.
COMMISSION FILE NUMBER 0-15782
SHOWBIZ PIZZA TIME, INC.
(Exact name of registrant as specified in its charter)
KANSAS 48-0905805
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 WEST AIRPORT FREEWAY
P.O. BOX 152077
IRVING, TEXAS 75015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 258-8507
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.10 each
(Title of Class)
Class A Preferred Stock, par value $60.00 each
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
At March 18, 1994, an aggregate of 13,022,675 shares of the
registrant's Common Stock, par value of $.10 each (being the registrant's only
class of common stock), were outstanding, and the aggregate market value
thereof (based upon the last reported sale price on March 18, 1994) held by
non-affiliates of the registrant was $131,370,053.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, filed pursuant
to Section 14(a) of the Act in connection with the registrant's 1994 annual
meeting of shareholders, have been incorporated by reference in Part III of
this report.
================================================================================
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P A R T I
Item 1. Business
GENERAL
ShowBiz Pizza Time, Inc. (the "Company"), was incorporated in the State
of Kansas in 1980 and is engaged in the family restaurant/entertainment center
business. The Company considers this to be its sole industry segment.
The Company operated, as of March 18, 1994, 219 Chuck E. Cheese's
Pizza(R) ("Chuck E. Cheese's") and ShowBiz Pizza(R) ("ShowBiz") restaurants
(including six restaurants managed by the Company for others). In addition, as
of March 18, 1994, franchisees of the Company operated 109 Chuck E. Cheese's
and ShowBiz restaurants. BHC Acquisition Corporation ("BAC"), a wholly owned
subsidiary of the Company, operated 27 Monterey's Tex-Mex Cafe(R) restaurants
as of March 18, 1994.
CHUCK E. CHEESE'S AND SHOWBIZ RESTAURANTS
BUSINESS DEVELOPMENT
Chuck E. Cheese's and ShowBiz restaurants offer a variety of pizza, a
salad bar, and selected sandwiches and desserts and feature musical and comic
entertainment by life-size, computer-controlled robotic characters, family
oriented games, rides and arcade-style activities. The restaurants are
intended to appeal to families with children between the ages of 2 and 12. The
first ShowBiz restaurant was opened in March 1980.
The Company and its franchisees operate in a total of 45 states and the
Company has concentrated its ownership and operation of Chuck E. Cheese's and
ShowBiz restaurants within a 28-state area. See "Item 2. Properties."
The following table sets forth certain information with respect to the
Chuck E. Cheese's and ShowBiz restaurants owned by the Company (excludes
restaurants managed by the Company for others and franchised restaurants):
1993 1992 1991
---- ---- ----
Average annual revenues
per restaurant (1) $1,259,000 $1,354,000 $1,297,000
Number of restaurants open at end
of period 209 176 153
Percent of total store restaurant revenues:
Food and beverage 71.6% 71.9% 72.2%
Games 25.3% 25.3% 25.2%
Merchandise sales 3.1% 2.8% 2.6%
- - -------
(1) In computing these averages, only restaurants which were open for a
period greater than one year at the beginning of each respective year
were included (139, 129, and 121 restaurants in 1993, 1992, and 1991,
respectively). Fiscal year 1992 consisted of 53 weeks while each of
fiscal years 1993 and 1991 consisted of 52 weeks.
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86
Revenues from Chuck E. Cheese's and ShowBiz restaurants owned by the
Company increased by 8.1% during 1993 over 1992, due to new restaurant openings
during both years.
The revenues from Chuck E. Cheese's and ShowBiz restaurants are seasonal
in nature. The restaurants tend to generate more revenues during the first and
third fiscal quarters as compared to the second and fourth fiscal quarters.
In the fourth quarter of 1993, the Company implemented a plan to
increase the number of Regional Vice Presidents from 3 to 5 while substantially
increasing the number of district managers directly supervising the
restaurants. The Company believes this organization structure will enhance the
quality of operations by allowing field management personnel to have a narrower
focus on the day to day restaurant issues and devote greater emphasis to
employee development.
Each Chuck E. Cheese's and ShowBiz restaurant generally employs a
manager, one or two assistant managers, an electronic specialist who is
responsible for repair and maintenance of the robotic characters and games, and
45 to 75 food preparation and service employees, most of whom work only
part-time.
The Company opened 33 and 23 new Chuck E. Cheese's restaurants in 1993
and 1992, respectively. The Company plans to open approximately 50 new Chuck
E. Cheese's restaurants during 1994 and 1995, with approximately 25 of such
restaurants to be opened in 1994. The reduction on expected new store openings
in 1994 compared to 1993, is intended to create a more balanced commitment of
capital and human resources between new development and existing restaurants.
The Company believes that capital expenditures related to its new restaurant
development will be funded through internally generated cash flow.
In the event certain site characteristics considered essential for the
success of a restaurant deteriorate, the Company will consider relocating the
restaurant to a more desirable site. The Company relocated one restaurant in
1992 and two restaurants in 1993.
To maintain a unique and exciting environment in the restaurants, the
Company believes it is essential to reinvest capital through the evolution of
its games, rides and entertainment packages and continuing enhancement of the
facilities. The Company initiated a remodel program in 1986 under which all
Company-operated restaurants were remodeled by the end of 1992. In 1993, the
Company committed approximately $9.3 million to the updating and upgrading of
its existing restaurants. In 1994, the Company plans to make capital
expenditures to its existing restaurants of approximately $14.0 million.
During 1991 through 1993, the Company converted all Company-operated
ShowBiz restaurants to Chuck E. Cheese's restaurants. The Company believes
that the unification of its Chuck E. Cheese's and ShowBiz restaurants under a
single trade name and utilizing identical in-store entertainment robotic
animation will be beneficial to its future operations and will lead to certain
marketing efficiencies. As of March 18, 1994, five franchised ShowBiz
restaurants remain to be converted to Chuck E. Cheese's.
The Company and its franchisees previously had a different set of
robotic animation characters in the ShowBiz restaurants than were in the Chuck
E. Cheese's restaurants. During 1991 and 1990, the Company and its franchisees
converted the robotic animation characters in all ShowBiz restaurants to be the
same as in Chuck E. Cheese's restaurants.
The Company believes its ownership of trademarks to the names and
character likenesses featured in the robotic animation stage show (and other
in-store entertainment) in its restaurants to be an important competitive
advantage.
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87
Restaurant Design and Entertainment
Chuck E. Cheese's and ShowBiz restaurants are typically located in
shopping centers or in free-standing buildings and are generally 8,000 to
14,000 square feet in area. Depending primarily on the demographic
characteristics of a specific site, the building design of new restaurants
developed by the Company range from 7,000 to 10,000 square feet in area. The
Company is analyzing and testing the development of a building design of
approximately 7,000 square feet in area to be utilized in market areas which
are less densely populated than areas in which a typical restaurant would be
located.
The dining area of each Chuck E. Cheese's and ShowBiz restaurant
features a variety of comic and musical entertainment by computer-controlled
robotic characters, together with various animated props, located on various
stage type settings. The dining area typically provides table and chair
seating for 250 to 375 customers.
Each Chuck E. Cheese's and ShowBiz restaurant typically contains a
separate family-oriented playroom area offering approximately 40 coin-and
token-operated attractions, including arcade-style games, kiddie rides, video
games, skill oriented games and other similar entertainment. Certain games
dispense tickets that can be redeemed by the guests for prizes. Also included
in the playroom area is a ball-crawl or other free attraction for young
children. The playroom area normally occupies approximately 40% of the
restaurant's public area and contributes significantly to its revenues. A
limited number of free tokens are furnished with food orders. Additional
tokens may be purchased.
Food and Beverage Products
Each Chuck E. Cheese's and ShowBiz restaurant offers varieties of pizza,
a salad bar and selected sandwiches and desserts. Standard beverages are also
served, along with beer and wine where permitted by local laws. The Company
believes that the quality of its food compares favorably with that of its
competitors.
The majority of food, beverages and other supplies used in the
Company-operated restaurants is currently distributed under a system-wide
agreement with a major food distributor. The Company believes that this
distribution system creates certain cost and operational efficiencies for the
Company.
Marketing
The primary customer base for the Company's restaurants consists of
families having children between 2 and 12 years old. The Company runs
advertising campaigns which target families with young children and features
the family entertainment experiences available at Chuck E. Cheese's and ShowBiz
restaurants, and is primarily aimed at increasing the frequency of return
visits. The primary advertising medium continues to be television, due to its
broad access to family audiences and its ability to communicate the Chuck E.
Cheese's and ShowBiz experience. The television advertising campaigns are
supplemented by select radio campaigns and promotional offers in newspapers and
direct mail advertisements.
Franchising
The Company began franchising ShowBiz restaurants in October 1981 and
the first franchised ShowBiz restaurant opened in June 1982. At March 18,
1994, 109 Chuck E. Cheese's and ShowBiz restaurants were operated by a total of
58 different franchisees, as compared to 110 of such restaurants at March 19,
1993. The Company sold one franchise in 1993. The sale of additional
franchises within the United States is anticipated to be limited in future
years due to the Company's development plans.
The Company expects to open a franchise restaurant in Chile during the
second quarter of 1994. Opportunities for further international franchise
development are being reviewed by the Company.
86
88
The Chuck E. Cheese's and ShowBiz standard franchise agreements grant to
the franchisee the right to develop and operate a restaurant and use the
associated trademarks within the standards and guidelines established by the
Company. The franchise agreement presently offered by the Company has an
initial term of 15 years and includes a 15-year renewal option. The earliest
expiration dates of outstanding Chuck E. Cheese's and ShowBiz franchises are in
1997 and 2000, respectively.
The franchise agreements governing existing franchised Chuck E. Cheese's
and ShowBiz restaurants currently require each franchisee to pay: (i) to the
Company, in addition to an initial franchise fee of $50,000, a continuing
monthly royalty fee equal to 3.8% of gross sales; (ii) to the Advertising Fund
(an independent fund established and managed by an association of the Company
and its franchisees to pay costs of system-wide advertising (the
"Association")) an amount equal to 0.9% of gross sales; and (iii) to the
Entertainment Fund (an independent fund established and managed by such
association to further develop and improve entertainment attractions) an amount
equal to 0.4% of gross sales. The Chuck E. Cheese's and ShowBiz franchise
agreements also require franchisees to expend at least 3% of gross sales for
local advertising. Under the Chuck E. Cheese's and ShowBiz franchise
agreements, the Company is required, with respect to Company-operated
restaurants, to spend for local advertising and to contribute to the
Advertising Fund and the Entertainment Fund at the same rates as franchisees.
Competition
The restaurant and entertainment industries are highly competitive, with
a number of major national and regional chains being engaged in the pizza
restaurant or entertainment business. Although there are few other restaurant
chains presently utilizing the concept of combining robotic characters and
restaurant operations, there are several competitors presently combining family
entertainment and restaurant operations. The Company believes that it has and
will continue to encounter increased competition in the future. Major national
and regional chains, some of which have capital resources as great or greater
than the Company, are expanding into the family restaurant/entertainment
market. The Company believes that the principal competitive factors affecting
Chuck E. Cheese's and ShowBiz restaurants are the relative quality of food and
service, quality and variety of offered entertainment, and location and
attractiveness of the restaurants as compared to their competitors in the
restaurant or entertainment industries.
MONTEREY'S TEX-MEX CAFE RESTAURANTS
Business Development
Monterey's Tex-Mex Cafe restaurants, which are operated by BAC, are full
service family oriented restaurants featuring a casual atmosphere and a variety
of Mexican appetizers, entrees and dinners. Emphasis is placed on the service
of generous portions of quality food at moderate prices. Standard beverages
are also served, along with beer, wine and other alcoholic beverages where
permitted by local laws.
BAC acquired 58 Monterey House restaurants in July 1987. During late
1988 and early 1989, BAC developed the new trade name "Monterey's Tex-Mex Cafe"
and developed an interior and exterior remodeling package for the purposes of
upgrading the facilities of the restaurants. BAC closed 31 of its restaurants
in 1989. The remaining 27 Monterey's Tex-Mex Cafe restaurants, 20 of which are
located in the Houston, Texas vicinity, were subsequently remodeled in 1989.
BAC opened one new restaurant in Mobile, Alabama in August 1992 which
was subsequently sold in November 1993. BAC has not sold franchises for
restaurants since it acquired the "Monterey House" concept in 1987.
The Company has agreed to sell substantially all of the assets of its
Monterey's Tex-Mex Cafe restaurants, subject to certain conditions and
contingencies including but not limited to the completion of due diligence and
financing. The Company presently expects the transaction to be consummated in
the second quarter of 1994.
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Revenues from the Monterey's Tex-Mex Cafe restaurants are seasonal,
generally being higher in the second and third fiscal quarters as compared
with the first and fourth fiscal quarters.
The following table sets forth certain information with respect to the
Monterey's Tex-Mex Cafe restaurants operated by the Company:
1993 1992 1991
------ ------ ------
Average annual revenues
per restaurant (1) . . . . . . . . . . . . . $674,000 $ 691,000 $626,000
Number of restaurants open
at end of period . . . . . . . . . . . . . . 27 28 27
Operating income . . . . . . . . . . . . . $652,000 $1,049,000 $640,000
--------
(1) Fiscal year 1992 consisted of 53 weeks while each of fiscal years 1993 and
1991 consisted of 52 weeks.
Monterey's Tex-Mex Cafe restaurants are typically located in free
standing buildings, although several are in shopping centers. The restaurants
are generally 3,500 to 5,000 square feet in area. Each restaurant generally
employs a general manager, an assistant manager and 15 to 50 food preparation
and service employees, most of whom work only part-time. General managers
report to area supervisors, and area supervisors report to a director of
operations.
Competition
The restaurant industry is highly competitive, with a number of national
and regional chains being engaged in the Mexican restaurant business. The
Company believes that the principal competitive factors affecting Monterey's
Tex-Mex Cafe restaurants are the price and relative quality of food and service
and the location and relative attractiveness of the restaurants as compared
with their competitors.
TRADEMARKS
The Company and BAC own various trademarks, including "Chuck E. Cheese,"
"ShowBiz Pizza" and "Monterey's Tex-Mex Cafe," that are used in connection with
the restaurants and have been registered with the United States Patent and
Trademark Office. The duration of such trademarks is unlimited, subject to
continued use. The Company and BAC believe that they hold the necessary rights
for protection of the marks essential to the conduct of their present
restaurant operations.
GOVERNMENT REGULATION
The development and operation of Chuck E. Cheese's, ShowBiz and
Monterey's Tex-Mex Cafe restaurants are subject to various federal, state and
local laws and regulations, including but not limited to those that impose
restrictions, levy a fee or tax, or require a permit or license on the service
of alcoholic beverages and the operation of games and rides. The Company is
subject to the Fair Labor Standards Act, the Americans With Disabilities Act,
and family leave mandates. A significant portion of the Company's and BAC's
restaurant personnel are paid at rates related to the minimum wage established
by federal and state law. Increases in such minimum wage result in higher
labor costs to the Company and BAC, which may be partially offset by price
increases and operational efficiencies.
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New legislation including mandated health care is currently under
review. If certain legislation is passed, it could negatively impact the
business community by increasing costs. The Company would attempt to minimize
the impact of increased costs by operational efficiency improvements and
increased menu prices as permitted within the competitive market.
WORKING CAPITAL PRACTICES
The Company attempts to maintain only sufficient inventory of supplies
in the restaurants which it operates to satisfy their current operational
needs. The Company's accounts receivable consist primarily of credit card
receivables, franchise royalties, management fees and advances for managed
properties.
The Company will provide funds for working capital to BAC, if necessary.
BAC maintains cash accounts separate from those of the Company.
EMPLOYEES
The number of persons employed by the Company varies seasonally, with
the greatest number being employed during the summer months. On March 18,
1994, the Company had approximately 15,000 employees, including 14,000 in the
operation of Chuck E. Cheese's and ShowBiz restaurants, 850 employed by BAC in
the operation of Monterey's Tex-Mex Cafe restaurants and 200 employed by the
Company or BAC in the Company's executive offices. None of the Company's
employees is a member of any union or collective bargaining group. The Company
considers its employee relations to be good.
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Item 2. Properties
The following table sets forth certain information regarding the Chuck
E. Cheese's restaurants operated by the Company (excluding six restaurants
managed by the Company for others) and the Monterey's Tex-Mex Cafe restaurants
operated by BAC as of March 18, 1994.
Number of
Restaurants
Chuck E. Monterey's
Cheese's/ Tex-Mex
State ShowBiz Cafe
----- --------- ----------
Alabama 5 --
Arkansas 2 --
California 45 --
Colorado 5 --
Connecticut 4 --
Florida 15 --
Georgia 7 --
Illinois 14 --
Indiana 7 --
Kansas 1 --
Kentucky 1 --
Louisiana 4 --
Maryland 10 --
Massachusetts 9 --
Michigan 11 --
Missouri 7 --
Nevada 1 --
Nebraska 2 --
New Hampshire 2 --
New Jersey 7 --
New York 4 --
North Carolina 2 --
Ohio 11 --
Oklahoma -- 4
Pennsylvania 6 --
Tennessee 2 --
Texas 23 23
Virginia 3 --
Wisconsin 3 --
--- --
213 27
=== ==
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Of the 213 Chuck E. Cheese's and ShowBiz restaurants operated by the
Company as of March 18, 1994, 199 were leased by the Company and 14 were owned
by the Company. The leases of these restaurants will expire at various times
from 1994 to 2008, as described in the table below.
Year of Number of Range of Renewal
Expiration Restaurants Options (Years)
---------- ----------- ----------------
1994 7 None to 15
1995 11 None to 10
1996 16 None to 20
1997 25 None to 20
1998 and thereafter 140 None to 20
The leases of Chuck E. Cheese's and ShowBiz restaurants contain terms
which vary from lease to lease, although a typical lease provides for a primary
term of 10 years, with two additional five-year options to renew, and provides
for annual minimum rent payments of approximately $6.00 to $22.00 per square
foot, subject to periodic adjustment. Most of the restaurant leases require
the Company to pay the cost of repairs, insurance and real estate taxes and, in
most instances, provide for additional rent equal to the amount by which a
percentage (typically 6%) of gross revenues exceeds the minimum rent.
BAC owns nine of its Monterey's Tex-Mex Cafe restaurants and leases the
remaining restaurants. The provisions of the leases vary, but typically
include a primary term of 15 to 25 years, one or two renewal options of five
years each, and annual minimum rent between approximately $3.00 and $13.00 per
square foot, and require payment by BAC of repairs, insurance and real estate
taxes and, in some cases, percentage rent equal to the amount by which 5% or 6%
of gross revenues exceeds the minimum rent. The leases of Monterey's Tex-Mex
Cafe restaurants will expire at various times from 1994 to 2005, as described
in the table below.
Year of Number of Range of Renewal
Expiration Restaurants Options (Years)
---------- ----------- ----------------
1994 3 None to 5
1995 1 None
1996 2 None
1997 3 None to 10
1998 and thereafter 9 None to 20
Item 3. Legal Proceedings.
In December 1991, the Company, The Hallwood Group Incorporated,
("Hallwood"), Integra-A Hotel and Restaurant Company ("Integra"), and their
individual directors were named defendants in two separate but related lawsuits
brought in the 14th and 134th District Courts of Dallas County, Texas. In
April 1993, the Company and its two directors who are also employees of the
Company, were dismissed as defendants in the lawsuit brought in the 134th
District Court by an Integra common stockholder. Integra owned approximately
90% of the outstanding Common Stock of the Company prior to Integra's
distribution of such Common Stock in December 1988 (the "1988 Distribution") to
its shareholders of record. The plaintiffs in the remaining lawsuit constitute
certain holders of warrants, options and preferred stock of Integra who seek to
serve as representatives of proposed classes of other holders of such
securities. The plaintiffs allege that the Company has (i) violated Texas
statutes related to securities fraud and the fraudulent transfer of assets,
(ii) committed common law fraud, and (iii) breached fiduciary and other duties
to the plaintiffs. As amended, this suit seeks recission of the 1988
distribution actual damages in excess of $184 million, and punitive damages in
excess of $500 million. In May 1993, further action in this case was abated by
order of the Court pending the resolution of disciplinary proceedings in
process against the plaintiffs' counsel in a separate court action in Dallas
County, Texas. The Company believes that the claims made against it in this
suit are without merit and intends to vigorously defend against such claims.
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93
In July 1992, Integra sought protection from its creditors under Chapter
11 of the Federal Bankruptcy Code in the United States Bankruptcy Court
("Bankruptcy Court") in Denver, Colorado (the "Integra Bankruptcy"). Integra,
its Bankruptcy Court-appointed Unsecured Creditors Committee, Hallwood and
other parties including certain of the Company's officers and directors and the
individual plaintiffs in the lawsuit discussed above, are parties to either one
or both Settlement Agreements (the "Settlement Agreements") in conjunction with
a modified plan of reorganization of Integra approved by the Bankruptcy Court
in February 1994. One of the Settlement Agreements provides for the creation
of a trust to which certain claims of Integra are to be transferred. The trust
will retain the right to investigate, compromise or adjudicate the claims
transferred from Integra against defendants other than the parties released
under the Settlement Agreements. The Company and many of its shareholders are
not parties to the Settlement Agreements.
In April 1993, the Company, Hallwood and certain directors of the
Company individually were named as defendants in a lawsuit brought in the 68th
District Court of Dallas County, Texas, by a plaintiff claiming to be an
unsecured creditor of Integra and seeking to serve as a representative of a
class of all unsecured creditors of Integra. The plaintiff has alleged that
the defendants (i) tortiously interfered with its contractual relationship with
Integra, (ii) made negligent misrepresentations to the plaintiff regarding
Integra and, (iii) violated Texas statutes related to the fraudulent transfer
of assets. The plaintiff is seeking approximately $18 million in actual
damages and $54 million in punitive damages on behalf of the individual
plaintiff and unspecified damages on behalf of the class. In November 1993,
the court entered an order closing the lawsuit in light of the pendency of the
Integra Bankruptcy. The order states that it is without prejudice to the right
of plaintiff to reopen the case.
In June 1993, the Company was named as a nominal defendant in a
shareholders' derivative action in the 68th Judicial District Court in Dallas
County, Texas in which three of the Company's executive officers, four of the
Company's outside directors and Hallwood were named defendants. The plaintiffs
in this lawsuit have alleged the individual defendants (i) breached their
fiduciary duties to stockholders, (ii) committed constructive fraud and (iii)
unjustly enriched themselves as a result of alleged violations of federal
securities laws and illegal insider trading between July 13, 1992 and June 11,
1993. The Company does not believe that this action will result in any
significant damages to the Company.
In July 1993, the Company was named a defendant in a lawsuit brought in
the Circuit Court for Davidson County, Nashville, Tennessee by Third National
Bank in Nashville, as Trustee pursuant to a municipal bond issuance of $6.4
million made in 1980, for which Integra executed a guaranty. The plaintiff has
alleged that Integra's guaranty of the municipal bond issuance was binding on
successors of Integra and that the Company is the legal successor to Integra.
The plaintiff is seeking to recover a judgement against the Company in the full
amount of its claim against Integra, which is unspecified, as well as
attorneys' fees and costs. The Company believes the allegations made in this
suit to be without merit and will offer a vigorous defense in this lawsuit.
In January 1994, the Company was named a defendant in a lawsuit brought
in the Supreme Court of the State of New York, County of Queens, by Big Six
Towers, Inc., in its purported capacity as a Landlord to the Company with
regard to a restaurant/entertainment center location in Queens County, New York
which the Company had contracted to lease from the plaintiff. The plaintiff
has alleged that the Company has breached the lease and is seeking total
damages in excess of $4.0 million against the Company. The Company believes it
validly terminated the lease in question pursuant to an agreement with the
plaintiff and believes the allegations made in this suit to be without merit
and therefore intends to vigorously defend this lawsuit.
Certain other pending legal proceedings exist against the Company which
the Company believes are not material in amount or have arisen in the ordinary
course of its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of 1993.
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P A R T I I
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
As of March 18, 1994, there were an aggregate of 13,022,675 shares of
the Company's Common Stock outstanding and approximately 5,508 stockholders of
record.
The Company's Common Stock is listed on the National Market System of
the National Association of Securities Dealers Automated Quotation ("NASDAQ")
system under the symbol "SHBZ". The following table sets forth the highest and
lowest prices per share of the Common Stock during each quarterly period within
the two most recent years, as reported on the National Market System of NASDAQ
and as adjusted for a three-for-two stock split in the form of a stock dividend
distributed on March 20, 1992:
High Low
---- ---
1992 - 1st quarter $ 29 1/2 $ 23
- 2nd quarter 27 3/4 19 3/4
- 3rd quarter 28 1/4 19 3/4
- 4th quarter 34 5/8 23 3/4
1993 - 1st quarter 35 1/2 25 1/2
- 2nd quarter 34 1/2 16
- 3rd quarter 17 1/2 12 1/4
- 4th quarter 15 12 1/2
The Company may not pay any dividends to holders of its Common Stock
(except in shares of Common Stock) unless an amount equal to all dividends then
accrued on its Class A Preferred Stock par value $60.00 per share ("the
Preferred Stock") has been paid or set aside to be paid. A dividend to holders
of record of Preferred Stock as of December 31, 1993 in the amount of $1.20 per
share was declared on January 11, 1994 and will be paid on March 31, 1994. The
Company also may not pay any dividend or make any other distribution on its
Common Stock (except in shares of Common Stock or rights to acquire capital
stock of the Company) so long as any amount is outstanding under the terms of
its revolving loan agreement.
The Company has not paid any dividends on its Common Stock and has no
present intention of paying cash dividends thereon in the future, and is
currently restricted from paying cash dividends under the terms of its current
revolving loan agreement. The Company plans to retain any earnings to finance
anticipated capital expenditures, repurchase shares of its Common Stock and
reduce its long-term debt. Future dividend policy with respect to the Common
Stock will be determined by the Board of Directors of the Company, taking into
consideration factors such as future earnings, capital requirements, potential
loan agreement restrictions and the financial condition of the Company.
93
95
Item 6. Selected Financial Data.
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(Thousands, except per share data)
Operating results (1):
Revenues $271,998 $253,124 $208,118 $181,558 $167,443
Costs and expenses . . . . . . . . . . . . . . . 253,300 226,686 187,295 164,305 161,467
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . . . . . . 18,698 26,438 20,823 17,253 5,976
Other income (expenses) . . . . . . . . . . . . . (451) (1,188) (1,890) (3,354) (3,159)
-------- -------- -------- -------- --------
Income before income taxes . . . . . . . . . . 18,247 25,250 18,933 13,899 2,817
Income taxes (2):
Current expense . . . . . . . . . . . . . . . . 1,751 1,161 1,050 678 363
Deferred expense . . . . . . . . . . . . . . . . 4,605 8,586 6,285 4,769 712
-------- -------- -------- -------- --------
6,356 9,747 7,335 5,447 1,075
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . $ 11,891 $ 15,503 $ 11,598 $ 8,452 $ 1,742
======== ======== ======== ======== ========
Per Share (3):
Primary:
Net income . . . . . . . . . . . . . . . . . . . . $ .86 $ 1.11 $ .82 $ .61 $ .12
Weighted average shares outstanding . . . . . . . . 13,455 13,662 13,700 13,254 12,165
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . . $ .86 $ 1.11 $ .82 $ .61 $ .11
Weighted average shares outstanding . . . . . . . . 13,464 13,713 13,728 13,367 12,711
Cash flow data:
Cash provided by operations . . . . . . . . . . . . $ 44,905 $ 44,246 $ 36,097 $ 29,884 $ 20,038
Purchases of property and equipment . . . . . . . . 44,600 33,903 25,088 21,471 15,730
Balance sheet data:
Total assets . . . . . . . . . . . . . . . . . . . . $193,649 $173,217 $158,563 $146,435 $142,662
Long-term obligations (including
redeemable preferred stock) . . . . . . . . . . . . 29,765 16,051 20,468 25,788 36,731
Shareholders' equity . . . . . . . . . . . . . . . . 136,647 132,167 115,500 99,973 86,957
Number of restaurants at year end:
Chuck E. Cheese's and ShowBiz:
Company operated . . . . . . . . . . . . . . . . . 215 182 159 144 130
Franchise . . . . . . . . . . . . . . . . . . . . 110 113 113 123 127
-------- -------- -------- -------- --------
325 295 272 267 257
Monterey's Tex-Mex Cafe's . . . . . . . . . . . . 27 28 27 27 27
-------- -------- -------- -------- --------
352 323 299 294 284
======== ======== ======== ======== ========
94
96
Item 6. Selected Financial Data (Continued)
- - ----------------------
(1) Fiscal year 1992 was 53 weeks in length while fiscal years 1993, 1991, 1990
and 1989 were 52 weeks in length. Certain reclassifications have been made to
conform to the fiscal year 1993 presentation. See Notes to Consolidated
Financial Statements elsewhere herein.
(2) During 1992, the Company adopted Statement of Financial Accounting
Standards No. 109 -- "Accounting for Income Taxes" and retroactively restated
the financial statements of prior years.
(3) Per share information has been adjusted to give effect to three-for-two
splits in the form of 50% stock dividends of the Company's common stock on
March 20, 1992 and March 26, 1991. No cash dividends on common stock were paid
in any of the years presented.
95
97
Item 7. Management's Discussion and Analysis of Financial
Condition and Results Of Operations.
RESULTS OF OPERATIONS
Revenues increased 7.5% to $272.0 million in 1993 from $253.1 million in
1992. Revenue generated by the Company's Chuck E. Cheese's and ShowBiz
restaurants increased by 8.1% to $253.0 million in 1993 from $234.0 million in
1992 due to the net addition of 33 Company restaurants in 1993 and 23 Company
restaurants in 1992. Sales from the Company's Chuck E. Cheese's and ShowBiz
restaurants which were open during all of 1993 and 1992 ("comparable store
sales") declined 5.3% between the years. Revenues from the Company's
Monterey's Tex-Mex Cafe restaurants declined slightly to $19.0 million in 1993
from $19.1 million in 1992 primarily due to a decline in comparable store sales
of .6% between the years. Fiscal years 1993 and 1992 consisted of 52 and 53
weeks, respectively.
Operating income decreased to $18.7 million in 1993 from $26.4 million in
1992 due primarily to declines in comparable store sales and operating margins
in both restaurant concepts. A material portion of operating costs are fixed
resulting in an erosion of operating margins at lower sales levels.
A summary of the results of operations of the Company as a percentage of
revenue for the last three fiscal years is shown below.
1993 1992 1991
------ ------ ------
Revenue . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Costs of sales . . . . . . . . . . . . . . 50.5% 49.5% 49.6%
Selling, general and administrative . . . . 15.5% 15.7% 15.8%
Depreciation and amortization . . . . . . . 8.5% 7.6% 7.8%
Provision for loss on
property transactions . . . . . . . . . . 0.2% 0.3% 0.1%
Other operating expenses . . . . . . . . . 18.4% 16.5% 16.7%
----- ----- -----
93.1% 89.6% 90.0%
----- ----- -----
Operating income . . . . . . . . . . . . . . 6.9% 10.4% 10.0%
===== ===== =====
Chuck E. Cheese's and ShowBiz Restaurants
Revenues
Revenues from the Company's Chuck E. Cheese's and ShowBiz restaurants
increased by 8.1% to $253.0 million in 1993 from $234.0 million in 1992 due to
sales from new restaurants opened throughout 1993 and 1992. Comparable store
sales of Chuck E. Cheese's and ShowBiz restaurants which were open during all
of both 1993 and 1992 declined by 5.3% between the years. Average comparable
store sales decreased to approximately $1,259,000 in 1993. Menu prices were
increased approximately 1.1% between the two years.
Management believes that several factors may have contributed to the
comparable store sales decline, including generally severe winter weather and a
March snowstorm which caused the brief closing of numerous restaurants,
ineffective advertising and the decrease in number and apparent effectiveness
of restaurants remodeled during 1992 and 1993. Other factors that management
believes contributed to the decline in comparable store sales include increased
competition and the impact of newly opened restaurants on comparable store
sales of existing restaurants in certain markets. Some of the factors
impacting comparable store sales are believed to be negatively impacting sales
volumes of newer restaurants opened since 1988. New restaurants opened from
1988 through 1992 averaged approximately $1,341,000 in sales during 1993, which
is slightly in excess of the sales volume of the average Company restaurant.
This compares to the prior year in which new restaurants had sales volumes
significantly higher than the average Company restaurant.
96
98
Revenues from franchise fees and royalties decreased by 11.1% from 1992
to 1993 primarily due to 52 weeks of revenue in 1993 compared to 53 weeks of
revenue in 1992, a 1.0% decline in comparable franchise store sales for
restaurants open all of 1993 and 1992, and a decline in the number of
restaurants operated each year. During 1993, the Company purchased two
franchise restaurants, one new franchise restaurant opened and two franchise
restaurants closed.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 92.9% in
1993 from 89.1% in 1992.
Costs of sales increased as a percentage of revenues to 49.7% in 1993
from 48.5% in 1992. Cost of food, beverage, prize and merchandise items as a
percentage of restaurant sales remained constant at 18.0% in both 1993 and
1992. Labor expenses as a percentage of restaurant sales increased slightly to
29.0% in 1993 from 28.0% in 1992 primarily due to the decline in comparable
store sales.
Selling, general and administrative expenses as a percentage of revenues
declined to 15.6% in 1993 from 15.9% in 1992 due primarily to a decrease in
management bonus expense and other corporate overhead expenses as a percentage
of revenues which was partially offset by an increase in advertising expense as
a percentage of revenues.
Depreciation and amortization expense as a percentage of revenues
increased to 8.5% in 1993 from 7.6% in 1992 primarily due to the higher
depreciation and amortization expense of new restaurants relative to older
restaurants and the decline in comparable store sales.
Other operating expenses increased as a percentage of revenues to 18.9%
in 1993 from 16.9% in 1992 primarily due to increased rent, utility and
insurance expenses as a percentage of revenues and the decline in comparable
store sales.
The Company provided for a loss on property transactions of $585,000 in
1993 compared to $654,000 in 1992 primarily due to closing three restaurants in
1993 and to the replacement of certain assets in conjunction with the
remodeling of restaurants.
Operating Income
As a result of the changes in revenues and expenses discussed above,
operating income decreased to $18.0 million in 1993 from $25.4 million in 1992.
Monterey's Tex-Mex Cafe Restaurants
Revenues
Revenues decreased to $19.0 million in 1993 from $19.1 million in 1992
due primarily to a .6% decline in comparable store sales between the two years.
One restaurant was opened in the third quarter of 1992 and was subsequently
sold in the fourth quarter of 1993. Menu prices were increased approximately
2.0% between the periods.
Costs and Expenses
Costs and expenses increased as a percentage of revenues to 96.6% in
1993 from 94.5% in 1992.
97
99
Cost of sales declined slightly to 61.3% in 1993 from 61.8% in 1992.
The cost of food and beverage items as a percentage of restaurant sales
decreased slightly to 27.4% in 1993 compared to 27.7% in 1992 due primarily to
lower food prices on certain items resulting from a change in food distributors
in the third quarter of 1992 and the increase in menu prices implemented in the
second quarter of 1993. These factors were slightly offset by a change in
product ingredients which was implemented in the third quarter of 1992. Labor
expenses as a percentage of restaurant sales increased slightly to 31.7% in
1993 from 31.6% in 1992 primarily as a result of the decline in comparable
store sales.
Selling, general and administrative expenses as a percentage of revenues
increased to 14.1% in 1993 from 13.6% in 1992 primarily due to an increase in
advertising expense and in corporate overhead expenses including an increase in
research and development costs.
Other operating expenses increased as a percentage of revenues to 12.5%
in 1993 from 11.3% in 1992 primarily due to an increase in rent and utility
expenses as a percentage of revenues and the decline in comparable store sales.
The company provided for a loss on property transactions of $90,000 from
the sale of one restaurant in the fourth quarter of 1993.
Operating Income
Operating income declined to $652,000 in 1993 from $1,049,000 in 1992 as
a result of the changes in revenues and expenses discussed above.
Consolidated Income
Interest expense declined to $797,000 in 1993 from $1.5 million in 1992
due primarily to reductions in long-term debt of $1.8 million in the first
three quarters of 1993 and $4.6 million in 1992 and reduced interest rates
between the years. Income taxes were decreased approximately $971,000 in the
third quarter of 1993 due to a non-recurring tax gain resulting from the
increased valuation of the Company's deferred tax asset due to an increase in
federal corporate income tax rates enacted in 1993. The Company's net income
decreased to $11.9 million in 1993 from $15.5 million in 1992 due to the
changes in revenues and expenses as discussed above. The Company's primary
and fully diluted earnings per share decreased to $.86 per share in 1993 from
$1.11 per share in 1992.
1992 Compared to 1991
Revenues for fiscal 1992 increased by 21.6% to $253.1 million from
$208.1 million in 1991. Revenue generated by the Company's Chuck E. Cheese's
and ShowBiz restaurants increased by 22.4% to $234.0 million in 1992 from
$191.2 million in 1991, due primarily to the addition of 23 Company restaurants
in 1992 and 15 Company restaurants in 1991, and a 3.2% increase in sales from
the Company's Chuck E. Cheese's and ShowBiz restaurants which were open during
all of 1992 and 1991. Revenues from the Company's Monterey's Tex-Mex Cafe
restaurants increased to $19.1 million in 1992 from $16.9 million in 1991 due
primarily to a 8.4% increase in comparable store sales. Fiscal years 1992 and
1991 consisted of 53 and 52 weeks, respectively.
Operating income increased significantly to $26.4 million in 1992 from
$20.8 million in 1991 due to the increase in comparable store sales, new
restaurant openings and improved operating margins in both of the Company's
restaurant concepts.
98
100
Chuck E. Cheese's and ShowBiz Restaurants
Revenues
The 22.4% increase in revenues from the Company's Chuck E. Cheese's and
ShowBiz restaurants in 1992 over 1991 resulted primarily from new restaurant
openings in 1992 and 1991 and a 3.2% increase in comparable store sales over
1991 levels. Price increases were responsible for approximately one-fourth of
the increase in comparable store sales. Average comparable store sales per
restaurant increased to approximately $1,354,000 in 1992. The Company opened
23 new restaurants in 1992 and 14 new restaurants in 1991. These restaurants
had significantly higher average sales volumes than the average Company
restaurant. New restaurants opened from 1988 through 1991 averaged $1.6
million in sales during 1992.
Other factors which contributed to the increase in revenues were the
remodeling of 26 restaurants in 1992 and 41 restaurants in 1991, and the
addition of new games, rides and entertainment attractions in both years.
Revenues from franchise fees and royalties increased by 17.6% from 1991
to 1992. Franchise royalty revenue increased due to a 4.0% increase in
comparable franchise store sales for restaurants open all of 1992 and 1991 and
an increase in the standard royalty rate charged to franchisees from 3.4% in
1991 to 3.8% in 1992. During 1992, the Company purchased one franchise
restaurant, five new franchise restaurants opened and four franchise
restaurants closed.
Costs and Expenses
Costs and expenses as a percentage of revenues declined to 89.1% in 1992
from 89.4% in 1991.
Cost of food, beverage, prize and merchandise items as a percentage of
restaurant sales decreased slightly to 18.0% in 1992 from 18.1% in 1991. This
was offset by a slight increase in labor expenses as a percentage of restaurant
sales to 28.0% in 1992 from 27.8% in 1991 primarily due to a federal minimum
wage increase in April 1991.
Selling, general and administrative expenses as a percentage of revenues
declined to 15.9% in 1992 from 16.0% in 1991 due primarily to a decrease in
advertising expense as a percentage of restaurant sales between the two years.
The Company provided for a loss on property transactions of $654,000 in
1992 and $599,000 in 1991 primarily due to the replacement of certain assets
resulting from the remodeling of restaurants, a reserve recorded in 1992 for
the anticipated closing of one restaurant, and the replacement of signage
arising from the name change from ShowBiz to Chuck E. Cheese's in connection
with the unification of its Chuck E. Cheese's and ShowBiz concepts within
certain markets in 1991.
Operating Income
As a result of the changes in revenues and expenses discussed above,
operating income increased by 25.8% to $25.4 million in 1992 from $20.2 million
in 1991.
99
101
Monterey's Tex-Mex Cafe Restaurants
Revenues
Revenues increased to $19.1 million in 1992 from $16.9 million in 1991
due primarily to comparable store sales increases of 8.4% and the opening of
one new restaurant in 1992. Price increases were responsible for approximately
one-fifth of the increase in comparable store sales.
Costs and Expenses
Costs and expenses declined as a percentage of revenues to 94.5% in 1992
from 96.2% in 1991.
Cost of sales increased slightly as a percentage of revenues to 61.8% in
1992 from 61.7% in 1991. The cost of food and beverage items as a percentage
of restaurant sales increased slightly to 27.7% in 1992 from 27.6% in 1991 due
primarily to a change in product ingredients implemented in 1992. Labor
expenses as a percentage of restaurant sales increased slightly to 31.6% in
1992 from 31.5% in 1991 primarily due to a federal minimum wage increase in
April 1991.
Selling, general and administrative expenses as a percentage of revenues
decreased to 13.6% in 1992 from 13.9% in 1991 primarily due to a decrease in
advertising expense as a percentage of restaurant sales between the two years.
Other operating expenses declined as a percentage of revenues to 11.3%
in 1992 from 13.8% in 1991 primarily due to reduced insurance and repair costs.
In 1991, income of $301,000 was recognized in provision for gains and
losses on property transactions related to the selling of restaurants closed in
1989 for an amount greater than the reserve established in 1989.
Operating Income
Operating income increased to $1,049,000 in 1992 from $640,000 in 1991
due primarily to increased store sales and improved operating margins.
Consolidated Income
Interest expense declined to $1.5 million in 1992 from $2.2 million in
1991 due primarily to reductions in long-term debt of $4.6 million in 1992 and
$5.7 million in 1991 and reduced interest rates between the two years. The
Company's net income increased by 33.7% to $15.5 million in 1992 from $11.6
million in 1991 due to the changes in revenues and expenses discussed above.
The Company's primary and fully diluted earnings per share increased to $1.11
per share in 1992 from $.82 per share in 1991.
INFLATION
The Company's costs of operations, including but not limited to, labor,
supplies, utilities, financing and rental costs, are significantly affected by
inflationary factors. The Company pays most of its part-time employees rates
that are related to federal and state mandated minimum wage requirements.
Increases in any such costs would result in higher costs to the Company, which
the Company expects would be partially offset by menu price increases and
increased efficiencies in operations.
100
102
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations increased to $44.9 million in 1993 from
$44.2 million in 1992. The Company's primary requirements for cash relate to
planned capital expenditures, the repurchase of the Company's common stock and
debt service.
The Company plans to make capital expenditures of approximately $40
million in 1994 primarily related to construction of approximately 25 new Chuck
E. Cheese's restaurants and for the evolution of its games, rides and
entertainment packages and continuing enhancements of the facilities at certain
restaurants.
The Company has announced that it plans to repurchase shares of the
Company's common stock at an aggregate purchase price of up to $30 million. As
of March 18, 1994, the Company has purchased shares of its common stock in the
open market for an aggregate purchase price of approximately $21.2 million.
The Company expects that it will satisfy its stock repurchase plan, debt
service and capital expenditure requirements from cash provided by operations
and funds available under the revolving loan agreement.
In December 1993, the Company amended its revolving loan agreement up to
$50 million available through 1997. The Company is required to comply with
certain financial ratio tests during the term of the revolving loan agreement.
Primarily due to the purchase of shares of its common stock, borrowings under
this agreement increased to $26 million at March 18, 1994 from $12 million at
the end of 1992. The amendment to the revolving loan agreement provides the
Company with greater flexibility to meet its capital requirements and
repurchase shares of the Company's common stock.
The Company believes that new restaurant development will continue to be
a significant factor in its ability to generate increased revenues over the
foreseeable future. If the decline in comparable store sales of the Company's
Chuck E. Cheese's and ShowBiz restaurants experienced in 1993 continues to be
experienced over the longer term, an adverse impact on the Company's results of
operations could continue.
The Company is implementing several strategies designed to strengthen
the sales vitality of its existing unit base in what management believes will
become an increasingly competitive market. The Company has appointed a new
advertising agency; the Company has accelerated its commitment of capital to
existing stores and completed 20 unit remodels in the last half of 1993
compared to five remodeled units in the first half of 1993; the Company has
increased the number of its operational regional and district managers to
provide a more concentrated focus on guest satisfaction; and the Company is
limiting its 1994 new unit development to approximately 25 new stores in order
to ensure that new unit growth and the sales vitality of the Company's existing
unit base are both given equal priority. The Company believes that certain
operating costs will increase as a result of implementing these strategies
designed to strengthen existing unit sales.
The Company is involved in a number of lawsuits. The Company presently
believes that it will continue to incur expense to defend against and resolve
such litigation, and anticipates that it will satisfy such expense with cash
flow from operations.
The Company believes it will realize substantial benefit from
utilization of approximately $81 million in net operating loss carryforwards to
reduce federal income tax liability. Although the use of such carryforwards
could, under certain circumstances, be limited, the Company is presently
unaware of the occurrence of any event which would result in the imposition of
such limitation. The Company has adopted an amendment to its Restated Articles
of Incorporation which is intended to prevent changes in ownership of its
common stock that would cause such limitation. In addition, the Company has
investment tax credit, job tax credit and alternative minimum tax credit
carryforwards of approximately $7 million.
101
103
In 1994, the Company implemented a plan to generate targeted jobs tax
credits through the hiring of qualified employees. To the extent that this
program is effective, the Company expects to recognize a reduction in its
income tax provision.
The Company has agreed to sell substantially all of the assets of its
Monterey's Tex-Mex Cafe restaurants, subject to certain conditions and
contingencies including but not limited to the completion of due diligence and
financing. The Company presently expects the transaction to be consummated in
the second quarter of 1994. The expected asset purchase price consists of
approximately $6.7 million in cash, a $4.7 million promissory note and a 12
1/2% equity interest in the acquiring company.
102
104
Item 8. Financial Statements and Supplementary Data
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 1993, JANUARY 1, 1993,
AND DECEMBER 27, 1991
CONTENTS
PAGE
----
Independent auditors' report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated financial statements:
Consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated statements of earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated statements of shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . 26
103
105
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShowBiz Pizza Time, Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of ShowBiz Pizza
Time, Inc. and subsidiary as of December 31, 1993 and January 1, 1993 and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years (52 or 53 weeks) in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ShowBiz Pizza Time, Inc. and
subsidiary as of December 31, 1993 and January 1, 1993 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Dallas, Texas
March 18, 1994
104
106
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND JANUARY 1, 1993
(THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31, JANUARY 1,
1993 1993
------------ ----------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 4,511 $ 3,462
Accounts receivable, including receivables from related parties
of $309 and $151, respectively . . . . . . . . . . . . . . . . . . . . . 3,694 2,922
Current portion of notes receivable, including receivables from
related parties of $368 and $466, respectively . . . . . . . . . . . . . 521 587
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,909 2,512
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,771 2,277
Current portion of deferred tax asset . . . . . . . . . . . . . . . . . . 6,013 9,846
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 20,419 21,606
---------- ----------
Investments in related parties . . . . . . . . . . . . . . . . . . . . . . 237 225
---------- ----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 133,007 110,377
---------- ----------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,479 30,288
---------- ----------
Other assets:
Notes receivable, less current portion, including receivables from
related parties of $1,676 and $1,732, respectively . . . . . . . . . . 2,886 2,754
Deferred charges, less amortization . . . . . . . . . . . . . . . . . . 4,357 4,585
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,264 3,382
---------- ----------
10,507 10,721
---------- ----------
$ 193,649 $ 173,217
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including payable to a related
party of $1,658 in 1992 . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ 1,692
Accounts payable and accrued liabilities, including payable to a
related party of $59 in 1992 . . . . . . . . . . . . . . . . . . . . . 24,762 21,578
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 24,813 23,270
---------- ----------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 26,846 13,397
---------- ----------
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,424 1,729
---------- ----------
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120 959
---------- ----------
Commitments and contingencies
Redeemable preferred stock, $60 par value, redeemable for
$2,974 in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,799 1,695
---------- ----------
Shareholders' equity:
Common stock, $.10 par value; authorized 30,000,000 shares;
14,282,520 and 12,965,133 shares issued, respectively . . . . . . . . 1,428 1,297
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 157,226 143,219
Retaining earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . 4,677 (6,872)
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . (9,934) (666)
Less treasury shares of 1,045,984 and 211,789, respectively, at cost . . (16,750) (4,811)
---------- ----------
136,647 132,167
---------- ----------
$ 193,649 $ 173,217
========== ==========
See notes to consolidated financial statements.
105
107
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
(THOUSANDS, EXCEPT PER SHARE DATA)
1993 1992 1991
-------- -------- --------
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,090 $183,798 $152,134
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 70,242 64,033 51,689
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,321 4,863 4,134
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 430 161
-------- -------- --------
271,998 253,124 208,118
-------- -------- --------
Costs and expenses:
Costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,343 125,279 103,154
Selling, general and administrative expenses, including related
party expenses of $125, $125, and $(15), respectively . . . . . . . . . . . . . 42,129 39,733 32,923
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 23,058 19,249 16,143
Provision for loss on property transactions . . . . . . . . . . . . . . . . . . . 675 654 298
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,095 41,771 34,777
-------- -------- --------
253,300 226,686 187,295
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,698 26,438 20,823
-------- -------- --------
Other income (expenses):
Interest income, including related party income of $177, $219, and $127,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 320 271
Interest expense, including related party expense of $99, $376, and $843,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (797) (1,508) (2,161)
-------- -------- --------
(451) (1,188) (1,890)
-------- -------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,247 25,250 18,933
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,751 1,161 1,050
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,605 8,586 6,285
-------- -------- --------
6,356 9,747 7,335
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,891 $ 15,503 $ 11,598
======== ======== ========
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .86 $ 1.11 $ .82
======== ======== ========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 13,455 13,662 13,700
======== ======== ========
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .86 $ 1.11 $ .82
======== ======== ========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 13,464 13,713 13,728
======== ======== ========
See notes to consolidated financial statements.
106
108
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
(THOUSANDS, EXCEPT PER SHARE DATA)
COMMON TREASURY
STOCK CAPITAL IN RETAINED DEFERRED STOCK
------------------ EXCESS OF EARNINGS COMPEN- -----------------
SHARES PAR VALUE PAR VALUE (DEFICIT) SATION SHARES COST
------ --------- ----------- --------- ---------- ------ ----
Balances, December 28, 1990 . . . . . . . . . 12,355 $ 1,236 $132,106 $(33,291) 28 $ (78)
Net income . . . . . . . . . . . . . . . . 11,598
Redeemable preferred stock accretion . . . (103)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . . . 172 17 523
Stock grant plan . . . . . . . . . . . . . 13 1 466
Tax benefit from exercise of stock options
and stock grants . . . . . . . . . . . . 3,330
Stock split costs . . . . . . . . . . . . . (18)
Cancellation of fractional shares . . . . . (2) (49)
------ ------- -------- -------- ----- --------
Balances, December 27, 1991 . . . . . . . . . 12,538 1,254 136,358 (22,034) 28 (78)
Net income . . . . . . . . . . . . . . . . 15,503
Redeemable preferred stock accretion . . . (103)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . . . 353 35 1,324
Warrants exercised . . . . . . . . . . . . 74 8 124
Stock grant plan . . . . . . . . . . . . . 2 1,040 $ (999)
Tax benefit from exercise of stock options
and stock grants . . . . . . . . . . . . 4,436
Treasury stock acquired . . . . . . . . . . 184 (4,733)
Amortization of deferred compensation . . . 333
Stock split costs . . . . . . . . . . . . . (17)
Cancellation of fractional shares . . . . . (2) (46)
------ ------- -------- -------- -------- ----- --------
Balances, January 1, 1993 . . . . . . . . . . 12,965 1,297 143,219 (6,872) (666) 212 (4,811)
Net income . . . . . . . . . . . . . . . . 11,891
Redeemable preferred stock accretion . . . (104)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . . . 48 5 573
Warrants exercised . . . . . . . . . . . . 855 85 1,435
Stock grant plan . . . . . . . . . . . . . 414 41 12,000 (12,000)
Tax expense from exercise of stock options
and stock grants . . . . . . . . . . . . (37)
Treasury stock acquired . . . . . . . . . . 834 (11,939)
Amortization of deferred compensation . . . 2,732
Stock issued under 401(k) plan . . . . . . 1 36
------ ------- -------- -------- -------- ----- --------
Balances, December 31, 1993 . . . . . . . . . 14,283 $ 1,428 $157,226 $ 4,677 $ (9,934) 1,046 $(16,750)
====== ======= ======== ======== ======== ===== ========
See notes to consolidated financial statements.
107
109
SHOWBIZ PIZZA TIME, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993 AND DECEMBER 27, 1991
(THOUSANDS)
1993 1992 1991
------ ------ ------
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,891 $ 15,503 $11,598
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 23,058 19,249 16,143
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 4,605 8,586 6,285
Provision for loss on property transactions . . . . . . . . . . . 675 654 298
Compensation expense under stock grant plan . . . . . . . . . . . 2,756 418 438
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 756 230
Net change in receivables, inventory, prepaids, payables and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 1,521 (920) 1,105
-------- -------- -------
Cash provided by operations . . . . . . . . . . . . . . . . . 44,905 44,246 36,097
-------- -------- -------
Investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . (44,600) (33,903) (25,088)
Proceeds from disposition of property and equipment . . . . . . . 250 23
Payments received on notes receivable . . . . . . . . . . . . . . 978 1,041 334
Additions to notes receivable . . . . . . . . . . . . . . . . . . (724) (928) (2,903)
Change in deferred charges, investments and other assets . . . . . (1,813) (2,082) (1,470)
-------- -------- -------
Cash used in investing activities . . . . . . . . . . . . . . (45,909) (35,872) (29,104)
-------- -------- -------
Financing activities:
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . 24,050 16,650 6,270
Payments on line of credit . . . . . . . . . . . . . . . . . . . . (10,550) (8,650) (5,970)
Reduction of debt and capital lease obligations, including
payments to related parties of $1,658, $6,447 and $5,301,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . (1,692) (12,231) (7,168)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . (238) (238) (238)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . (11,939) (4,733)
Exercise of stock options and warrants, including exercise by a
related party of $1,488 and $130 in 1993 and 1992, respectively. 2,098 1,491 540
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 80 263
-------- -------- -------
Cash used in financing activities . . . . . . . . . . . . . . 2,053 (7,631) (6,303)
-------- -------- -------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . 1,049 743 690
Cash and cash equivalents, beginning of year . . . . . . . . . . . . 3,462 2,719 2,029
-------- -------- -------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . $ 4,511 $ 3,462 $ 2,719
======== ======== =======
See notes to consolidated financial statements.
108
110
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations:
ShowBiz Pizza Time, Inc. (the "Company") operates and franchises
family restaurant entertainment centers as Chuck E. Cheese's and
ShowBiz restaurants, and through BHC Acquisition Corporation ("BAC"),
its wholly owned subsidiary, also operates Monterey's Tex-Mex Cafe
restaurants.
Fiscal year:
The Company's fiscal year is 52 or 53 weeks and ends on the
Friday nearest December 31. References to 1993, 1992 and 1991 are for
the fiscal years ended December 31, 1993, January 1, 1993 and December
27, 1991, respectively. 1992 was 53 weeks in length, while 1993 and
1991 were each 52 weeks in length.
Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and BAC. All significant intercompany accounts and transactions
have been eliminated.
Cash and cash equivalents:
Cash and cash equivalents of the Company are composed of demand
deposits with banks and short-term cash investments with remaining
maturities of less than three months from the date of purchase by the
Company.
Inventories:
Inventories of food, paper products and supplies are stated at
the lower of cost or market on a first-in, first-out basis.
Property and equipment, depreciation and amortization:
Property and equipment are stated at cost. Depreciation and
amortization are provided by charges to operations over the estimated
useful lives of the assets by the straight-line method.
Deferred charges and related amortization:
Deferred charges include noncompetition and consulting agreements
which are amortized over six years. Loan costs are deferred and
amortized over the term of the respective agreements. Franchise rights
are amortized over the remaining life of the franchise agreements.
Preopening costs are amortized over a two year period. Other deferred
charges are amortized over various periods up to five years. All
amortization is provided by the straight-line method.
Franchise fees and royalties:
The Company recognizes initial franchise fees upon fulfillment of
all significant obligations to the franchisee. Royalties from
franchisees are accrued as earned.
109
111
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Common stock:
All share and per share amounts have been adjusted to give effect
to three-for-two stock splits effected on March 20, 1992 and March 26,
1991.
Earnings per share:
Earnings per share are computed on the weighted average number of
shares outstanding for each of the fiscal years presented.
Reclassifications:
Certain reclassifications of 1992 and 1991 amounts have been made
to conform to the 1993 presentation.
2. ACCOUNTS RECEIVABLE:
1993 1992
------- -------
(THOUSANDS)
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309 $ 315
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,651 2,757
------- -------
3,960 3,072
Less allowance for doubtful collection . . . . . . . . . . . . . . . . . . . . . (266) (150)
------- -------
$ 3,694 $ 2,922
======= =======
3. NOTES RECEIVABLE:
The Company's notes receivable at December 31, 1993 and January
1, 1993 arose principally as a result of the sale of restaurants,
advances to franchisees, joint ventures and managed properties and lines
of credit established with the International Association of ShowBiz
Pizza Time Restaurants, Inc., a related party (Note 18). The notes
have various terms, but most are payable in monthly installments of
principal and interest through 1997, with interest rates ranging from
prime to 13.5%. Substantially all notes are collateralized by the
related property and equipment. Balances of notes receivable are net of
an allowance for doubtful collection of $320,000 at January 1, 1993.
There is no allowance at December 31, 1993.
110
112
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
4. PROPERTY AND EQUIPMENT:
1993 1992
-------- ---------
(THOUSANDS)
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,538 $ 5,538
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,445 91,561
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 9,061 9,061
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . 80,562 60,918
Property leased under capital leases (Note 7) . . . . . . . . . . . . . . . . . 1,486 1,486
--------- ---------
206,092 168,564
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . (77,142) (62,422)
--------- ---------
128,950 106,142
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,057 4,235
--------- ---------
$ 133,007 $ 110,377
========= =========
5. DEFERRED CHARGES:
1993 1992
-------- -------
(THOUSANDS)
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 $ 5,000
Preopening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,088 3,057
Loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370 1,322
Information system development costs . . . . . . . . . . . . . . . . . . . . . 1,369
Consulting contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643 643
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563 983
------- -------
10,664 12,374
Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . (6,307) (7,789)
------- -------
$ 4,357 $ 4,585
======= =======
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
1993 1992
------- -------
(THOUSANDS)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,683 $ 7,691
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,367 5,011
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,291 4,619
Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,941 2,300
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,480 1,957
-------- --------
$ 24,762 $ 21,578
======== ========
111
113
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
7. LEASES:
The Company leases certain restaurants and related property and
equipment under operating and capital leases. All leases require the
Company to pay property taxes, insurance and maintenance of the leased
assets. The leases generally have initial terms of seven to 30 years
with various renewal options.
Following is a summary of property leased under capital leases:
1993 1992
------- ------
(THOUSANDS)
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,486 $ 1,486
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . (735) (619)
------- -------
$ 751 $ 867
======= =======
Scheduled annual maturities of the obligations for capital and
operating leases as of December 31, 1993, are:
YEARS CAPITAL OPERATING
-------- ------- ---------
(THOUSANDS)
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ 26,199
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 26,377
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 25,543
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 23,187
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 19,939
1999-2008 (aggregate payments) . . . . . . . . . . . . . . . . . 1,580 74,050
------- --------
Minimum future lease payments . . . . . . . . . . . . . . . . . . 3,218 $195,295
========
Less amounts representing interest . . . . . . . . . . . . . . . (1,821)
-------
Present value of future minimum lease payments . . . . . . . . . 1,397
Less current portion . . . . . . . . . . . . . . . . . . . . . . (51)
-------
$ 1,346
=======
Rent Expense:
Certain of the Company's real estate leases, both capital and
operating, require payment of contingent rent in the event defined
revenues exceed specified levels.
The Company's rent expense is comprised of the following:
1993 1992 1991
------ ------ ------
(THOUSANDS)
Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,305 $20,485 $17,530
Contingent . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 525 389
------- ------- -------
$25,490 $21,010 $17,919
======= ======= =======
112
114
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993
JANUARY 1, 1993, AND DECEMBER 27, 1991
8. LONG-TERM DEBT:
1993 1992
-------- --------
(THOUSANDS)
Revolving bank loan, at prime or LIBOR plus 1.0%
due December 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,500 $ 12,000
Term loans payable to related parties, at prime,
paid December 1993 (Note 18) . . . . . . . . . . . . . . . . . . . . . . . 1,658
Obligations under capital leases (Note 7) . . . . . . . . . . . . . . . . . . 1,397 1,431
-------- --------
26,897 15,089
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51) (1,692)
-------- --------
$ 26,846 $ 13,397
======== ========
The Company's revolving loan agreement was amended in December
1993 to provide the Company with a credit line of up to $50 million
which declines to $45 million on December 31, 1995 and $40 million on
December 31, 1996 and is due on December 31, 1997. Interest is provided
at a rate equal to prime, 6.0% at December 31, 1993, or, at the
Company's option, up to the 60 day London Interbank Offered Rate
("LIBOR"), 3.25% at December 31, 1993, plus .75% to 1.25% subject to
compliance with certain financial ratio tests. A 1/5% annual
commitment fee is payable on any unused credit line.
Under the terms of the revolving loan agreement, the Company is
prohibited from paying dividends on its common stock and must achieve
certain profitability levels.
In November 1992, the Company redeemed its floating rate
subordinated bonds, payable at prime and due in July 1993, in the
aggregate principal amount of $6,313,300. Approximately $4.8 million of
the floating rate subordinated bonds were held by The Hallwood Group,
Incorporated ("Hallwood"), a related party.
In December 1993, the Company paid approximately $1.7 million in
a term loan payable to Integra - A Hotel and Restaurant Company
("Integra"), a related party.
The Company has a substantial portion of its assets pledged as
collateral for the bank loan, including $3,407,000 in notes receivable
and property and equipment owned with a net book value of $70,821,000.
9. COMMITMENTS AND CONTINGENCIES:
The Company has guaranteed certain obligations related to
restaurant building and equipment leases. The underlying assets are
collateral for the leases and the makers or assignees of all of the
obligations are required to perform thereunder before the Company is
required to fulfill its guarantee. In the event of default by the maker
or assignee, the Company, in almost all cases, may make payment under
the guarantees in accordance with the original payment schedule and has
the right to locate potential buyers or subtenants for the assets. As
of December 31, 1993, such guarantees aggregated approximately $
1,669,000.
10. LITIGATION:
The Company has been named a defendant in litigation brought by
plaintiffs as individuals and as representatives of a purported class
who are holders of securities issued by Integra which has sought
protection from creditors under Chapter 11 of the Federal Bankruptcy
Code. This suit has alleged that the Company, Integra and Hallwood
violated state securities' laws, committed common law fraud and breached
fiduciary duties to the plaintiffs in connection with the Integra
securities acquired by the plaintiffs from 1986 through 1988 and that
the 1988 Integra distribution of 90% of the common stock of the Company
to holders of Integra common stock constituted a fraudulent transfer
under Texas law. The plaintiffs have sought actual damages in an amount
equal to the alleged loss of value of their Integra securities,
recission of the Company's 1988 spin-off and punitive damages.
113
115
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
10. LITIGATION (CONTINUED):
In July 1992, Integra sought protection from its creditors under
Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court ("Bankruptcy Court") in Denver, Colorado (the "Integra
Bankruptcy"). Integra, its Bankruptcy Court-appointed Unsecured
Creditors Committee, Hallwood and other parties including certain of the
Company's officers and directors and the individual plaintiffs in the
lawsuit discussed above, are parties to either one or both Settlement
Agreements (the"Settlement Agreements") in conjunction with a modified
plan of reorganization of Integra approved by the Bankruptcy Court in
February 1994. One of the Settlement Agreements provides for the
creation of a trust to which certain claims of Integra are to be
transferred. The trust will retain the right to investigate, compromise
or adjudicate the claims transferred from Integra against defendants
other than the parties released under the Settlement Agreements. The
Company and many of its shareholders are not parties to the Settlement
Agreements.
The Company has been named a defendant in litigation brought by
the trustee of a municipal bond issuance made in 1980 upon which Integra
executed a guaranty. The plaintiff in this suit has alleged that
Integra's guaranty of the municipal bond issuance was binding on
successors of Integra and that the Company is a legal successor to
Integra. The plaintiff in this action seeks to recover judgement in the
full amount of its claim against Integra.
The Company is a nominal defendant in a shareholders' derivative
action in which three of the Company's executive officers, four of the
Company's outside directors and Hallwood were named defendants. The
plaintiffs in this lawsuit have alleged the individual defendants
breached fiduciary duties to shareholders and unjustly enriched
themselves as a result of alleged violations of federal securities laws.
The plaintiffs in this action have sought unspecified damages.
The Company has also been named a defendant in a suit brought by
a former landlord alleging that the Company breached a restaurant lease,
which the Company contends it has rightfully terminated.
The Company presently believes that the ultimate resolution of
these lawsuits will not have a material adverse impact on the Company.
Certain other suits are pending against the Company which involve claims
for damages which are not material and which have arisen in the ordinary
course of business.
11. REDEEMABLE PREFERRED STOCK:
As of December 31, 1993, the Company had 49,570 shares of its
redeemable preferred stock authorized and outstanding. The stock pays
dividends at $4.80 per year, subject to a minimum cash flow test. As of
December 31, 1993, one quarterly dividend, totaling $59,484 or $1.20 per
share, was accrued but not yet paid. The redeemable preferred stock has
been recorded at the net present value and is being accreted on the
straight-line basis. The Company's restated articles of incorporation
provide for the redemption of such shares at $60 per share in 2005.
During the continuation of any event of default by the Company, the
preferred shareholders shall be able to elect a majority of the
directors of the Company.
114
116
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
12. EARNINGS PER COMMON SHARE:
Earnings per common and common equivalent share were computed
based on the weighted average number of common and common equivalent
shares outstanding during the period. Net income available per common
share has been adjusted for the items indicated.
Earnings per common and common equivalent share were computed as
follows (thousands, except per share data):
1993 1992 1991
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,891 $ 15,503 $ 11,598
Accretion of redeemable preferred stock . . . . . . . . . . . . . . . . . (104) (103) (103)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . . . . (238) (238) (238)
-------- -------- --------
Adjusted income applicable to common shares . . . . . . . . . . . . . . . $ 11,549 $ 15,162 $ 11,257
======== ======== ========
Primary:
Weighted average common shares outstanding . . . . . . . . . . . . . . . 12,816 12,666 12,448
Common stock equivalents:
Stock purchase warrants . . . . . . . . . . . . . . . . . . . . . . . . 426 839 840
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 157 412
-------- -------- --------
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . 13,455 13,662 13,700
======== ======== ========
Earnings per common and common equivalent share . . . . . . . . . . . . $ .86 $ 1.11 $ .82
======== ======== ========
Fully Diluted:
Weighted average common shares outstanding . . . . . . . . . . . . . . 12,816 12,666 12,448
Common stock equivalents:
Stock purchase warrants . . . . . . . . . . . . . . . . . . . . . . . 426 852 852
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 195 428
-------- -------- --------
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . 13,464 13,713 13,728
======== ======== ========
Earnings per common and common equivalent share . . . . . . . . . . . . $ .86 $ 1.11 $ .82
======== ======== ========
13. FRANCHISE FEES AND ROYALTIES:
At December 31, 1993, 110 Chuck E. Cheese's and ShowBiz
restaurants were operated by a total of 58 different franchisees. The
standard franchise agreements grant to the franchisee the right to
develop and operate a restaurant and use the associated trade names,
trademarks, and service marks within the standards and guidelines
established by the Company.
Initial franchise fees included in revenues were $82,500,
$197,000 and $112,500 in 1993, 1992 and 1991, respectively.
14. COSTS OF SALES:
1993 1992 1991
-------- -------- --------
(THOUSANDS)
Food, beverage and related supplies . . . . . . . . . . . . . . . . $ 48,435 $ 45,881 $ 38,629
Games and merchandise . . . . . . . . . . . . . . . . . . . . . . . 11,375 10,202 8,972
Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,533 69,196 55,553
-------- -------- --------
$137,343 $125,279 $103,154
======== ======== ========
115
117
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
15. INCOME TAXES:
The significant components of income tax expense are as follows:
1993 1992 1991
-------- -------- --------
(THOUSANDS)
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,751 $ 1,161 $ 1,050
Deferred expense:
Benefits of operating loss carryforwards . . . . . . . . . . . . . . 6,078 4,441 3,145
Tax benefits (expense) from exercise of stock
options and stock grants . . . . . . . . . . . . . . . . . . . . . (37) 4,436 3,330
Increase in valuation of deferred tax asset . . . . . . . . . . . . . (971)
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (465) (291) (190)
------- ------- -------
$ 6,356 $ 9,747 $ 7,335
======= ======= =======
In August 1993, new federal tax legislation was enacted that
increased the Company's federal tax rate to 35% effective January 1,
1993. As a result, the Company's deferred tax asset and net income
were increased by approximately $971,000 and deferred tax expense
decreased in the same amount.
The Company's deferred tax asset of approximately $35.5 million
at December 31, 1993 is primarly due to a $28.3 million tax effect of
$81.0 million unused net operating loss carryforwards ("NOL's"), $7.0
million in tax credit carryforwards and tax effected net taxable
temporary differences of $200,000 all of which the Company expects to
realize in future years. No valuation allowance is required.
As of December 31, 1993, the Company has NOL's of approximately
$81.0 million for federal income tax purposes. While the Company
believes that it is likely that it will realize these carryforwards,
there can be no assurance that they will be available to such extent.
In addition, as of December 31, 1993, the Company has investment tax
credit and jobs tax credit carryforwards totaling $5,258,000 and
$489,000, respectively, and alternative minimum tax credits of
$1,235,000.
A schedule of expiring NOL's and tax credits by fiscal year are
as follows:
AMOUNT
--------------------
YEARS NOL'S TAX CREDIT
-------- ----- ----------
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,104
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,007
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,000 395
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 149
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 19
2002 - 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 73
------- --------
$81,000 $ 5,747
======= ========
The Company's alternative minimum tax credits have no expiration date.
116
118
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
15. INCOME TAXES (CONTINUED):
Current tax laws and regulations relating to substantial changes
in control may limit the utilization of net operating loss and tax
credit carryforwards in any one year. As of December 31, 1993, no
limitation of such carryforwards has occurred.
A reconciliation of the statutory rate to taxes provided is as
follows:
1993 1992 1991
----- -------- --------
(THOUSANDS)
Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 34.0% 34.0%
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 5.1% 4.6% 4.7%
Increase in valuation of deferred tax asset . . . . . . . . . . . . . (5.3%)
---- ----- -----
Income taxes provided . . . . . . . . . . . . . . . . . . . . . . . . 34.8% 38.6% 38.7%
==== ===== =====
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company has certain financial instruments consisting
primarily of cash, cash equivalents, notes receivable, notes payable and
redeemable preferred stock. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of
those instruments. The fair values of the Company's notes receivable,
notes payable and redeemable preferred stock are estimated based on the
interest rates charged on instruments with similar terms and risks. The
estimated fair value of the Company's redeemable preferred stock is $3.0
million. The carrying values of all other financial instruments
approximate the fair values.
17. SUPPLEMENTAL CASH FLOW INFORMATION:
1993 1992 1991
-------- -------- --------
(THOUSANDS)
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 912 $1,416 $ 1,923
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,769 935 1,253
Supplemental schedule of noncash investing and financing activities:
Notes receivable and other assets cancelled in connection with
the acquisition of property and equipment . . . . . . . . . . . . . . 24 1,049
Liabilities assumed or incurred in connection with the acquisition
of property and equipment . . . . . . . . . . . . . . . . . . . . . . 674 675
Notes received in connection with the disposition of property and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
117
119
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
18. RELATED PARTY TRANSACTIONS:
Hallwood is the beneficial owner of 15.3% of the outstanding
common stock of the Company. The directors of Hallwood serve as a
majority of the directors of the Company and Integra.
In 1991, the Company prepaid term loans to Hallwood of
approximately $4.9 million. In February 1992, the Company prepaid
$1,583,000 in a term loan payable to Hallwood which had been assigned to
them by Integra. In December 1993, the Company fully repaid
approximately $1.7 million in a term loan payable to Integra.
In November 1992, the Company redeemed $4,768,300 in floating
rate subordinated bonds held by Hallwood.
The Company made annual payments to Hallwood of $125,000 for
consulting services in 1993, 1992 and 1991. In addition, the Company
made interest payments to Hallwood of $261,000 and $541,000 in 1992 and
1991, respectively. In consideration for rent reductions resulting from
Hallwood's negotiation of the Company's home office lease agreement in
December 1990, the Company assigned to Hallwood its sublease interest in
the home office building subleased to Integra with a fair value of
approximately $120,000 per year.
The Company received $140,000 for shared costs from Integra in
1991. The Company paid $99,000, $115,000 and $302,000 in interest to
Integra for 1993, 1992 and 1991, respectively. The Company had a
payable to Integra for interest of $59,000 at January 1, 1993.
In 1993 and 1992, Hallwood and its affiliate exercised warrants
to purchase 835,873 and 73,263 shares of common stock, respectively.
The exercise price of the warrants was $1.78 per share.
During 1993, 1992 and 1991, the Company advanced $30,000,
$437,000 and $1,491,000, respectively, to joint ventures in which the
Company has a 50% interest or less. Principal and interest are payable
in monthly installments, with interest at various rates from prime to
12%. The Company also has miscellaneous accounts receivable from the
joint ventures of approximately $279,000 and $108,000 at December 31,
1993 and January 1, 1993, respectively.
In September 1990, the Company entered into an agreement to
grant the International Association of ShowBiz Pizza Time Restaurants,
Inc. (the "Association") a $2.0 million line of credit, at prime, which
allowed the Association to accelerate the conversion of all robotic
characters into Chuck E. Cheese's characters and to begin improvements
to existing Chuck E. Cheese's characters. In December 1993, the
Company granted the Association a $1.0 million line of credit, at prime,
for advertising production. The Association was established to develop
and improve entertainment attractions and produce system wide
advertising. Three officers of the Association are also officers of the
Company. At December 31, 1993, $1,039,000 was outstanding under these
lines of credit. The Company also had a miscellaneous account
receivable from the Association of $30,000 and $43,000 at December 31,
1993 and January 1, 1993, respectively.
19. EMPLOYEE BENEFIT PLANS:
The Company has employee benefit plans that include: a)
executive bonus compensation plans based on the performance of the
Company and certain of its senior officers; b) a non-statutory stock
option plan and c) a stock grant plan.
118
120
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
19. EMPLOYEE BENEFIT PLANS (CONTINUED):
In 1993, the number of shares of the Company's common stock
which may be issued under the stock option plan was increased by 250,000
shares to an aggregate of 1,348,025 shares. All shares must be granted
before December 31, 1998. The exercise price for options granted under
the plan may not be less than the fair market value of the Company's
common stock at date of grant. Options may not be exercised until the
employee has been continuously employed at least one year after the date
of grant. Options which expire or terminate may be regranted under the
plan.
1993 1992 1991
-------- -------- --------
Options outstanding, beginning of year . . . . 276,297 445,388 504,618
Granted . . . . . . . . . . . . . . . . . . 158,800 162,030 82,050
Exercised . . . . . . . . . . . . . . . . . . (47,885) (321,369) (136,105)
Terminated . . . . . . . . . . . . . . . . . . (14,550) (9,752) (5,175)
-------- -------- --------
Options outstanding, end of year
($2.45-$33.50 per share) . . . . . . . . . . 372,662 276,297 445,388
======== ======== ========
Options:
Exercisable . . . . . . . . . . . . . . . . . 261,490 114,267 363,338
Available for grant . . . . . . . . . . . . . 357,558 251,808 154,087
The options granted in 1993 are at exercise prices ranging from
$15.75 to $33.50 per share. In January 1994, the Stock Option Committee
of the Board of Directors granted 244,500 additional options at an
exercise price of $13.75 per share, subject to the surrender of certain
options granted in 1993.
In 1993, the number of shares of the Company's common stock
which may be awarded to senior executives of the Company under the Stock
Grant Plan was increased by 414,508 shares to an aggregate of 1,145,758
shares of the Company's common stock. An aggregate of 414,508 shares
and 15,300 shares were awarded pursuant to the plan in 1993 and 1991,
respectively. None were awarded in 1992. Compensation expense recognized
by the Company pursuant to this plan was $2,756,000, $418,000, and
$438,000, in 1993, 1992, and 1991, respectively. All shares are subject
to forfeiture upon termination of the participant's employment by the
Company over vesting periods ranging from 2 years to 6 years. The
shares are nontransferable during the vesting periods.
As a result of shares awarded to the Company's Chairman of the
Board and Chief Executive Officer, the Company recognized deferred
compensation of $12.0 million and $999,000 in 1993 and 1992,
respectively. The deferred compensation is amortized over the
compensated periods of service through 1997.
In January 1992, the Board of Directors accelerated the vesting
provisions of 350,955 shares of common stock granted in 1989 to the
Company's Chairman of the Board and Chief Executive Officer.
Concurrently, 112,053 shares were surrendered to the Company to satisfy
federal income tax withholding obligations. As of December 31, 1993,
116,990 shares remain in an irrevocable trust to secure his continuing
obligations to the Company under his employment and consulting
agreements.
The Company has adopted the ShowBiz 401(k) Retirement and Savings
Plan, to which it may at its discretion make an annual contribution out
of its current or accumulated earnings of up to the lesser of 50% of
employee contributions or $750 per employee. Contributions by the
Company may be made in the form of its common stock or in cash. In
1993, the Company made a contribution of approximately $36,000 in common
stock for the 1992 plan year. No contributions were made in 1991 or are
anticipated to be made for 1993.
119
121
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993,
JANUARY 1, 1993, AND DECEMBER 27, 1991
20. SUBSEQUENT EVENT:
The Company has agreed to sell substantially all of the assets of
its Monterey's Tex-Mex Cafe restaurants, subject to certain conditions
and contingencies including but not limited to the completion of due
diligence and financing. The Company presently expects the transaction
to be consummated in the second quarter of 1994. If the transaction is
consummated, the Company expects to realize a gain.
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of
operations for the years ended December 31, 1993 and January 1, 1993.
Certain reclassification have been made to conform to the fiscal year
1993 presentation (thousands, except per share data).
Fiscal year ended December 31, 1993
--------------------------------------------
April 2 July 2 Oct. 1 Dec. 31
------- ------ ------ -------
Revenues . . . . . . . . . . . . . . . . . . . $ 73,381 $ 64,669 $ 71,636 $ 62,312
Gross operating profit . . . . . . . . . . . . 38,235 31,542 35,985 28,893
Operating income (loss) . . . . . . . . . . . . 10,854 2,962 5,366 (484)
Net income (loss) . . . . . . . . . . . . . . . 6,583 1,799 3,895 (386)
Per Share:
Primary and fully diluted:
Net income (loss) . . . . . . . . . . . . . $ .48 $ .13 $ .28 $ (.04)
Fiscal year ended January 1, 1993
--------------------------------------------
March 27 June 26 Sept. 25 Jan. 1
-------- ------- -------- ------
Revenues . . . . . . . . . . . . . . . . . . . $ 64,851 $ 58,896 $ 65,810 $ 63,567
Gross operating profit . . . . . . . . . . . . 33,793 29,446 33,482 31,124
Operating income . . . . . . . . . . . . . . . 9,384 5,494 7,305 4,255
Net income . . . . . . . . . . . . . . . . . . 5,558 3,203 4,328 2,414
Per Share:
Primary and fully diluted:
Net income . . . . . . . . . . . . . . . . . $ .40 $ .23 $ .31 $ .17
120
122
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShowBiz Pizza Time, Inc.
Irving, Texas
We have audited the consolidated financial statements of ShowBiz Pizza Time,
Inc. and subsidiary as of December 31, 1993 and January 1, 1993, and for each
of the three years (52 or 53 weeks) in the period ended December 31, 1993 and
have issued our report thereon dated March 18, 1994; such report is included
elsewhere in this Form 10-K. Our audits also included the consolidated
financial statement schedules of ShowBiz Pizza Time, Inc. and subsidiary,
listed in Item 14. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE
Dallas, Texas
March 18, 1994
121
123
SCHEDULE II
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
- - --------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - --------------------------------------------------------------------------------------------------------------------
BALANCES AT
DEDUCTIONS END OF PERIOD
BALANCE AT ------------------------- ----------------------
BEGINNING AMOUNTS AMOUNTS NOT
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT CURRENT
====================================================================================================================
(THOUSANDS)
Year ended December 31, 1993:
International Association (A) . . $ 798 $ 649 $ 378 $ 30 $ 1,039
Mid-South Venture (B) . . . . . $ 1,325 $ 148 $ 443 $ 393 $ 637
Burlingame Joint Venture (C) . . $ 226 $ 112 $ 84 $ 254
Year ended January 1, 1993:
International Association (A) . . $ 858 $ 43 $ 103 $ 43 $ 755
Mid-South Venture (B) . . . . . . $ 1,211 $ 415 $ 301 $ 422 $ 903
Burlingame Joint Venture (C) . . $ 280 $ 22 $ 76 $ 152 $ 74
Year ended December 27, 1991:
ShowBiz Pizza Place -
Denver, Ltd.(D) . . . . . . . . . $ 661 $ 661
Animated Entertainment
Fund(E) . . . . . . . . . . . . $ 400 $ 400
International Association (A) . . $ 858 $ 858
Mid-South Venture (B) . . . . . . $ 1,211 $ 199 $ 1,012
Burlingame Joint Venture (C) . . $ 280 $ 138 $ 142
____________
(A) Lines of credit, interest at prime, and miscellaneous accounts
receivable.
(B) Miscellaneous accounts receivable, and notes receivable due from May
1993 through July 1997, interest from 10% through 12%. All notes are
secured by personal property.
(C) Note of $215,000, interest at prime, and miscellaneous accounts
receivable.
(D) Note due July 1991, interest at 15%, payable in monthly installments of
$10,536 including principal and interest, secured by deed of trust.
The Company discharged the unpaid balance in exchange for the
acquisition of the real and personal property which secured the note.
(E) Account receivable due from Animated Entertainment Fund, settled in
1991 through the distribution of fixed assets.
122
124
SCHEDULE IV
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT
- - --------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - --------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------INDEBTEDNESS TO------------------------------------------------------
BALANCE AT BALANCE AT
BEGINNING END OF
NAME OF PERSON OF PERIOD ADDITIONS DEDUCTIONS PERIOD
====================================================================================================================
(THOUSANDS)
Integra (A):
Year ended December 31, 1993 . . . . . . . $ 1,658 $ 1,658
Year ended January 1, 1993 . . . . . . . . $ 3,337 $ 1,679 $ 1,658
Year ended December 27, 1991 . . . . . . . $ 3,589 $ 252 $ 3,337
Hallwood (B):
Year ended January 1, 1993 . . . . . . . . $ 4,666 $ 4,666
Year ended December 27, 1991 . . . . . . . $ 9,639 $ 4,973 $ 4,666
__________________________
(A) This table presents net changes in the amount owed on the notes
payable to Integra for each of the three periods. The deductions resulted from
scheduled payments and prepayments.
(B) Floating rate subordinated bonds due July 1993, interest payable
annually at the prime rate established by the First National Bank of Boston,
less discount for warrants issued in connection with the Bonds which were
redeemed in November 1992.
123
125
SCHEDULE V
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
PROPERTY AND EQUIPMENT
- - ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ------------------------------------------------------------------------------------------------------------------
BALANCE AT OTHER BALANCE AT
BEGINNING ADDITIONS CHANGES - END OF
DESCRIPTION OF PERIOD AT COST RETIREMENTS ADD(DEDUCT)(B) PERIOD
==================================================================================================================
(THOUSANDS)
Year ended December 31, 1993:
Land and improvements . . . . . . . . . $ 5,538 $ 5,538
Leasehold improvements . . . . . . . . . 91,561 $ 1,992 $ 1,469 $ 17,361 109,445
Buildings and improvements . . . . . . . 9,061 9,061
Furniture, fixtures and equipment . . . 60,918 821 1,368 20,191 80,562
-------- -------- ---------- -------- --------
167,078 2,813 2,837 37,552 204,606
Property under capital leases(A): . . . 1,486 1,486
-------- -------- ---------- -------- --------
168,564 2,813 2,837 37,552 206,092
Construction in progress . . . . . . . . 4,235 41,787 136 (41,829) 4,057
-------- -------- ---------- -------- --------
$172,799 $ 44,600 $ 2,973 $ (4,277) $210,149
======== ======== ========== ======== ========
Year ended January 1, 1993:
Land and improvements . . . . . . . . . $ 4,929 $ 609 $ 5,538
Leasehold improvements . . . . . . . . . 79,418 $ 1,615 $ 1,431 11,959 91,561
Buildings and improvements . . . . . . . 8,493 568 9,061
Furniture, fixtures and equipment . . . 46,335 996 430 14,017 60,918
-------- -------- ---------- -------- --------
139,175 2,611 1,861 27,153 167,078
Property under capital leases(A): . . . 1,486 1,486
-------- -------- ---------- -------- --------
140,661 2,611 1,861 27,153 168,564
Construction in progress . . . . . . . . 1,352 31,942 113 (28,946) 4,235
-------- -------- ---------- -------- --------
$142,013 $ 34,553 $ 1,974 $ (1,793) $172,799
======== ======== ========== ======== ========
Year ended December 27, 1991:
Land and improvements . . . . . . . . . $ 4,310 $ 23 $ 642 $ 4,929
Leasehold improvements . . . . . . . . . 67,582 $ 982 845 11,699 79,418
Buildings and improvements . . . . . . . 7,719 774 8,493
Furniture, fixtures and equipment . . . 48,259 1,213 354 (2,783) 46,335
-------- -------- ---------- -------- --------
127,870 2,195 1,222 10,332 139,175
Property under capital leases(A): . . . 1,895 (409) 1,486
-------- -------- ---------- -------- --------
129,765 2,195 1,222 9,923 140,661
Construction in progress . . . . . . . . 1,194 23,942 48 (23,736) 1,352
-------- -------- ---------- -------- --------
$130,959 $ 26,137 $ 1,270 $(13,813) $142,013
- - ------------------------- ======== ======== ========== ======== ========
(A) Leased property consists of land, buildings and equipment. Cost
is computed at the net present value of minimum rental payments or fair market
value, whichever is less.
(B) This column includes the reclassification of assets between
categories and the write-off of fully depreciated assets. There is no change
to the estimated useful life of the assets as a result of the reclassification.
(C) Depreciation and amortization are provided by charges to
operations over the estimated useful lives of the assets on the straight-line
method. Estimated useful lives (in years) of depreciable property are:
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-20
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-25
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-10
Property leased under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-25
124
126
SCHEDULE VI
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY AND EQUIPMENT
- - ---------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
CHARGED
BALANCE AT TO COST OTHER BALANCE AT
BEGINNING AND CHANGES-- END OF
DESCRIPTION OF PERIOD EXPENSE RETIREMENTS ADD(DEDUCT)(A) PERIOD
=================================================================================================================================
(THOUSANDS)
Year ended December 31, 1993:
Leasehold improvements . . . . . . . . . $ 36,528 $ 11,630 $ 1,025 $ (2,179) $ 44,954
Buildings and improvements . . . . . . . 1,297 369 1,666
Furniture, fixtures and equipment . . . 23,960 8,829 933 (2,091) 29,765
Land improvements . . . . . . . . . . . 18 4 22
--------- -------- --------- --------- --------
61,803 20,832 1,958 (4,270) 76,407
Property under capital leases . . . . . 619 116 735
--------- -------- --------- --------- --------
$ 62,422 $ 20,948 $ 1,958 $ (4,270) $ 77,142
========= ======== ========= ========= ========
Year ended January 1, 1993:
Leasehold improvements . . . . . . . . . $ 27,982 $ 10,249 $ 1,021 $ (682) $ 36,528
Buildings and improvements . . . . . . . 950 347 1,297
Furniture, fixtures and equipment . . . 18,590 6,749 281 (1,098) 23,960
Land improvements . . . . . . . . . . . 14 4 18
--------- -------- --------- --------- --------
47,536 17,349 1,302 (1,780) 61,803
Property under capital leases . . . . . 503 116 619
--------- -------- --------- --------- --------
$ 48,039 $ 17,465 $ 1,302 $ (1,780) $ 62,422
========= ======== ========= ========= ========
Year ended December 27, 1991:
Leasehold improvements . . . . . . . . . $ 20,428 $ 9,182 $ 346 $ (1,282) $ 27,982
Buildings and improvements . . . . . . . 629 321 950
Furniture, fixtures and equipment . . . 25,994 4,948 261 (12,091) 18,590
Land improvements . . . . . . . . . . . 12 2 14
--------- -------- --------- --------- --------
47,063 14,453 607 (13,373) 47,536
Property under capital leases . . . . . 728 160 (385) 503
--------- -------- --------- --------- --------
$ 47,791 $ 14,613 $ 607 $ (13,758) $ 48,039
========= ======== ========= ========= ========
______________________________
(A) This column includes the reclassification of assets between
categories and the write-off of fully depreciated assets. There is no change
to the estimated useful life of the assets as a result of the reclassification.
125
127
SCHEDULE VIII
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- - ----------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ----------------------------------------------------------------------------------------------------------
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
==========================================================================================================
(THOUSANDS)
Allowance for doubtful accounts:
Years ended:
December 31, 1993 . . . . . . . $ 150 $ 116 $ 266
======== ======== ========
January 1, 1993 . . . . . . . . $ 234 $ 84 (A) $ 150
======== ========= ========
December 27, 1991 . . . . . . . $ 317 $ 83 (A) $ 234
======== ========= ========
Accumulated amortization -- deferred
charges:
Years ended:
December 31, 1993 . . . . . . . $ 7,789 $ 2,110 $ 3,592 (B) $ 6,307
======== ========= ========= ========
January 1, 1993 . . . . . . . . $ 6,424 $ 1,784 $ 419 (B) $ 7,789
======== ========= ========= ========
December 27, 1991 . . . . . . . $ 4,838 $ 1,530 $ (56)(B) $ 6,424
======== ========= ========= ========
Reserve for uncollectible notes
receivable:
Years ended:
December 31, 1993 . . . . . . . $ 320 $ 320 (C)
======== =========
January 1, 1993 . . . . . . . . $ 320 $ 320
======== ========
December 27, 1991 . . . . . . . $ 352 $ 32 (C) $ 320
======== ========= ========
________________
(A) Settlement of previously reserved accounts.
(B) Write-off of deferred charges.
(C) Adjustment to notes receivable reserve.
126
128
SCHEDULE X
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
SUPPLEMENTARY INCOME STATEMENT INFORMATION
COLUMN A COLUMN B
- - -------------------------------------------------------------------------------------------------------------------
CHARGED TO COSTS AND EXPENSES
FISCAL YEARS
- - -------------------------------------------------------------------------------------------------------------------
ITEM 1993 1992 1991
===================================================================================================================
(THOUSANDS)
Maintenance and repairs . . . . . . . . . . . . . . . . . . . . . $ 6,990 $ 6,280 $ 5,268
======= ======= =======
Amortization of deferred charges . . . . . . . . . . . . . . . . $ 2,110 $ 1,784 $ 1,530
======= ======= =======
Taxes, other than payroll and income taxes:
Real estate and personal property taxes . . . . . . . . . . . $ 3,746 $ 3,225 $ 2,650
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (21) (6)
------- ------- -------
$ 3,741 $ 3,204 $ 2,644
======= ======= =======
Advertising costs . . . . . . . . . . . . . . . . . . . . . . . . $13,265 $11,666 $10,654
======= ======= =======
127
129
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
P A R T I I I
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item regarding the directors and
executive officers of the Company is included in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1994 annual meeting of stockholders, under the captions "Election of
Directors," "Executive Officers" and "Business History of Directors and
Executive Officers," and is incorporated herein by reference thereto.
Item 11. Executive Compensation.
The information required by this Item regarding the directors and
executive officers of the Company is included in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1994 annual meeting of stockholders, under the captions "Summary
Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values,"
"Non-Statutory Stock Option Plan," "Stock Grant Plan," "Compensation of
Directors," "Compensation Committee and Board of Directors Interlocks and
Insider Participation," "Richard M. Frank Employment Agreement," "Compensation
Committee and Board of Directors Report on Executive Compensation" and "Stock
Performance Graph," and is incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with Company's 1994 annual meeting of stockholders, under the captions
"Principal Holders of Capital Stock," "Executive Officers" and "Business
History of Directors and Executive Officers," and is incorporated herein by
reference thereto.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1994 annual meeting of stockholders, under the caption
"Certain Relationships and Related Transactions," and is incorporated herein by
reference thereto.
128
130
P A R T I V
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) Financial Statements and Supplementary Data:
Independent auditors' report.
ShowBiz Pizza Time, Inc. and Subsidiary consolidated
financial statements: Consolidated balance sheets
as of December 31, 1993 and January 1, 1993.
Consolidated statements of earnings for the years
ended December 31, 1993, January 1, 1993, and
December 27, 1991. Consolidated statements of
shareholders' equity for the years ended December
31, 1993, January 1, 1993, and December 27, 1991.
Consolidated statements of cash flows for the years
ended December 31, 1993, January 1, 1993, and
December 27, 1991. Notes to consolidated financial
statements.
(2) Financial Statement Schedules:
ShowBiz Pizza Time, Inc. and Subsidiary
Independent auditors' report.
II --- Amounts receivable from related parties and
underwriters, promoters and employees
other than related parties.
IV --- Indebtedness of and to related parties --
not current.
V --- Property and equipment.
VI --- Accumulated depreciation and amortization of
property and equipment.
VIII --- Valuation and qualifying accounts and
reserves.
X --- Supplementary income statement information.
129
131
(3) Exhibits:
Number Description
------ -----------
3(a) --- Restated Articles of Incorporation of the Company, as
amended to date. (Filed as Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended January 1,
1993 and incorporated herein by reference).
3(b) --- Bylaws of the Company, as amended to date (filed as Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
year ended January 1, 1993 and incorporated herein by
reference).
4(a) --- Specimen form of certificate representing $.10 par value
Common Stock (filed as Exhibit 4(a) to the Company's Annual
Report on Form 10-K for the year ended December 28, 1990 and
incorporated herein by reference).
4(b) --- Specimen form of certificate representing $60 par value
Class A Preferred Stock (filed as Exhibit 4(b) to the
Company's Annual Report on Form 10-K for the year ended
December 28, 1990 and incorporated herein by reference).
4(c) --- Fourth Amended and Restated Revolving Credit Note in the
stated amount of $50,000,000 dated December 15, 1993 from
the Company to the First National Bank of Boston.
10(a)(1) --- Amended and Restated Employment Agreement dated April 14,
1993 between the Company and Richard M. Frank (filed as
Exhibit 10(a)(8) to the Company's Quarterly Report on Form
10-Q for the quarter ended April 2, 1993 and incorporated
herein by reference).
10(a)(2) --- Consulting Agreement dated January 5, 1989 between the
Company and Richard M. Frank (filed as Exhibit 10(a)(5) to
the Company's Annual Report on Form 10-K for the year ended
December 27, 1991 and incorporated herein by reference).
10(a)(3) --- Amendment to Consulting Agreement dated January 29, 1992,
amending the Consulting Agreement dated January 5, 1989
between the Company and Richard M. Frank (filed as Exhibit
10(a)(6) to the Company's Annual Report on Form 10-K for the
year ended December 27, 1991 and incorporated herein by
reference).
10(a)(4) --- Stock Grant Trust Agreement dated January 29, 1992 among the
Company, Richard M. Frank, Ronald F. Saupe and Kevin J.
Shepherd (filed as Exhibit 10(a)(7) to the Company's Annual
Report on Form 10-K for the year ended December 27, 1991 and
incorporated herein by reference).
10(b) --- Employment Agreement dated January 4, 1994 between the
Company and Michael H. Magusiak.
130
132
10(c)(1) --- Non-Statutory Stock Option Plan of the Company, as amended.
10(c)(2) --- Specimen form of Contract under the Non-Statutory Stock
Option Plan of the Company (filed as Exhibit 10(c)(2) for
the year ended December 30, 1988 and incorporated herein by
reference).
10(d)(1) --- Stock Grant Plan of the Company, as amended.
10(d)(2) --- Specimen form of Certificate of Participation to certain
participants under the Stock Grant Plan of the Company
(filed as Exhibit 10(e)(3) to Company's Annual Report on
Form 10-K for the year ended December 29, 1989 and
incorporated herein by reference).
10(e)(1) --- Specimen current form of the Company's Franchise Agreement
(filed as Exhibit 10(d)(1) to the Company's Annual Report on
Form 10-K for the year ended December 27, 1991 and herein by
reference).
10(e)(2) --- Specimen current form of the Company's Development Agreement
(filed as Exhibit 10(d)(2) to the Company's Annual Report on
Form 10-K for the year ended December 27, 1991 and herein by
reference).
10(f)(1) --- Second Restated Revolving Credit Agreement dated November
19, 1992 between The First National Bank of Boston and the
Company (filed as Exhibit 10(e)(1) to the Company's Annual
Report on Form 10-K for the year ended January 1, 1993 and
incorporated herein by reference).
10(f)(2) --- First Amendment to Second Amended and Restated Revolving
Credit Agreement dated December 15, 1993 between the First
National Bank of Boston and the Company.
10(f)(3) --- Second Amended and Restated ShowBiz Security Agreement dated
November 19, 1992 between The First National Bank of Boston
and the Company (filed as Exhibit 10(e)(2) to the Company's
Annual Report on Form 10-K for the year ended January 1,
1993 and incorporated herein by reference).
10(f)(4) --- Second Amended an Restated Monterey Security Agreement dated
November 19, 1992 between the First National Bank of Boston
and BHC Acquisition Corporation ("BAC") (filed as Exhibit
10(e)(3) to the Company's Annual Report on Form 10-K for
the year ended January 1, 1993 and incorporated herein by
reference).
10(f)(5) --- Second Amended and Restated Guaranty Agreement dated
November 19, 1992 between The First National Bank of Boston
and BAC (filed as Exhibit 10(e)(4) to the Company's Annual
Report on Form 10-K for the year ended January 1, 1993 and
incorporated herein by reference).
131
133
10(f)(6) --- Second Amended and Restated Stock Pledge Agreement dated
November 19, 1992 between The First National Bank of Boston
and the Company (filed as Exhibit 10(e)(5) to the Company's
Annual Report on Form 10-K for the year ended January 1,
1993 and incorporated herein by reference).
10(g) --- Financial and Management Consulting Services Agreement
between the Company and The Hallwood Group Incorporated
(filed as Exhibit 10(i) to the Company's Annual Report on
Form 10-K for the year ended December 30, 1988 and
incorporated herein by reference).
10(h) --- Second Amended and Restated Line of Credit Agreement dated
December 31, 1993 between the Company and International
Association of ShowBiz Pizza Time Restaurants, Inc.
10(i) --- Stock Purchase and Registration Agreement dated as of May 5,
1992 among the Company, The Hallwood Group Incorporated and
certain shareholders of the Company (filed as Exhibit 28 to
the Company's Registration Statement on Form S-3 (No.
33-48307) and incorporated herein by reference).
22 --- List of subsidiaries.
24 --- Independent Auditors' Consent.
________________
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed in the fourth quarter of 1993.
(C) EXHIBITS PURSUANT TO ITEM 601 OF REGULATION S-K:
Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded
from the exhibits filed pursuant to this report instruments defining
the rights of holders of long-term debt of the Company where the total
amount of the securities authorized under each such instrument does
not exceed 10% of the total assets of the Company. The Company hereby
agrees to furnish a copy of any such instruments to the Commission
upon request.
(D) FINANCIAL STATEMENTS EXCLUDED FROM THE ANNUAL REPORT TO SHAREHOLDERS
BY RULE 14A-3(B):
No financial statements are excluded from the annual report to the
Company's shareholders by Rule 14a-3(b).
132
134
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Dated: March 30, 1994 SHOWBIZ PIZZA TIME, INC.
By: /s/ RICHARD M. FRANK
Richard M. Frank
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/ RICHARD M. FRANK Chairman of the Board, March 30, 1994
Richard M. Frank Chief Executive Officer,
and Director (Principal
Executive Officer)
/s/ MICHAEL H. MAGUSIAK Executive Vice President, March 30, 1994
Michael H. Magusiak Treasurer, and Director
(Principal Financial Officer
and Principal Accounting
Officer)
/s/ CHARLES A. CROCCO, JR. Director March 30, 1994
Charles A. Crocco, Jr.
/s/ ANTHONY J. GUMBINER Director March 30, 1994
Anthony J. Gumbiner
/s/ ROBERT L. LYNCH Director March 30, 1994
Robert L. Lynch
/s/ J. THOMAS TALBOT Director March 30, 1994
J. Thomas Talbot
/s/ BRIAN M. TROUP Director March 30, 1994
Brian M. Troup
133
135
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- - ----------- ----------- --------
3(a) --- Restated Articles of Incorporation of the Company, . . . . . . . . . . 50
as amended to date.
3(b) --- Bylaws of the Company, as amended to date . . . . . . . . . . . . . . . 99
4(e) --- Third Amended and Restated Revolving Credit Note in the amount . . . . 116
of $25,000,000 dated November 19, 1992 from the Company to The
First National Bank of Boston.
10(e)(1) -- Second Amended and Restated Revolving Credit Agreement dated . . . . . 120
November 19, 1992 between The First National Bank of Boston
and the Company.
10(e)(2) --- Second Amended and Restated ShowBiz Security Agreement. . . . . . . . . 184
dated November 19, 1992 between The First National Bank
of Boston and the Company.
10(e)(3) --- Second Amended and Restated Monterey Security Agreement . . . . . . . . 199
dated November 19, 1992 between The First National Bank
of Boston and BHC Acquisition Corporation ("BAC").
10(e)(4) --- Second Amended and Restated Guaranty Agreement dated . . . . . . . . . 214
November 19, 1992 between The First National Bank of
Boston and BAC.
10(e)(5) --- Second Amended and Restated Stock Pledge Agreement dated . . . . . . . 224
November 19, 1992 between The First National Bank of Boston
and the Company.
22 --- List of subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . 238
24 --- Independent Auditors' Consent. . . . . . . . . . . . . . . . . . . . . 240
134
136
================================================================================
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
July 1, 1994.
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_____________ to _______________.
Commission File Number 0-15782
SHOWBIZ PIZZA TIME, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0905805
(State or other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification No.)
P.O. Box 152077
4441 West Airport Freeway
Irving, Texas 75015
(Address of principal executive offices,
including zip code)
(214) 258-8507
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No ( )
At July 1, 1994, an aggregate of 12,264,001 shares of the registrant's
Common Stock, par value of $.10 each (being the registrant's only class of
common stock), were outstanding.
- - --------------------------------------------------------------------------------
================================================================================
135
137
This Page Intentionally Left Blank
136
138
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY:
PAGE
----
Consolidated balance sheets as of July 1, 1994 (unaudited)
and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of earnings for the three months ended July 1, 1994
and July 2, 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated statements of earnings for the six months ended July 1, 1994
and July 2, 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statement of shareholders' equity for the six months ended
July 1, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the six months ended July 1, 1994
and July 2, 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
137
139
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JULY 1, 1994 AND DECEMBER 31, 1993
(THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JULY 1, DECEMBER 31,
1994 1993
------- ------------
(unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 3,598 $ 4,511
Accounts receivable, including receivables from related parties
of $400 and $309, respectively . . . . . . . . . . . . . . . . . . . 3,883 3,694
Current portion of notes receivable, including receivables from
related parties of $326 and $368, respectively . . . . . . . . . . . 459 521
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,115 2,909
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,611 2,771
Current portion of deferred tax asset . . . . . . . . . . . . . . . . . 5,276 6,013
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 18,942 20,419
--------- ---------
Investments in related parties . . . . . . . . . . . . . . . . . . . . . . 689 237
--------- ---------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 128,753 133,007
--------- ---------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,463 29,479
--------- ---------
Other assets:
Notes receivable, less current portion, including receivables from
related parties of $6,859 and $1,676, respectively . . . . . . . . . 7,231 2,886
Deferred charges, less amortization . . . . . . . . . . . . . . . . . . 3,693 4,357
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,942 3,264
--------- ---------
14,866 10,507
--------- ---------
$ 190,713 $ 193,649
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . $ 53 $ 51
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 25,614 24,762
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 25,667 24,813
--------- ---------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 30,230 26,846
--------- ---------
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,753 2,424
--------- ---------
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,358 1,120
--------- ---------
Redeemable preferred stock, $60 par value, redeemable for $2,976 in 2005 . 1,850 1,799
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 30,000,000 shares; 14,336,785
and 14,282,520 shares issued, respectively . . . . . . . . . . . . 1,434 1,428
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 157,071 157,226
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,180 4,677
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . (8,567) (9,934)
Less treasury shares of 2,072,784 and 1,045,984 respectively, at cost . (30,263) (16,750)
--------- ---------
128,855 136,647
--------- ---------
$ 190,713 $ 193,649
========= =========
See notes to consolidated financial statements.
138
140
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 1, 1994 JULY 2, 1993
-------------- --------------
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . $ 45,421 $ 46,735
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . 17,487 16,849
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . 1,087 1,026
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . 24 59
--------- ----------
64,019 64,669
--------- ----------
Costs and expenses:
Costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 33,161 33,127
Selling, general and administrative expenses, including related
party expenses of $32 in both periods . . . . . . . . . . . . . 12,225 10,488
Depreciation and amortization . . . . . . . . . . . . . . . . . . 6,148 5,767
(Gain) loss on property transactions . . . . . . . . . . . . . . . (3,504) 114
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 13,460 12,211
--------- ----------
61,490 61,707
--------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,529 2,962
--------- ----------
Other income (expenses):
Interest income, including related party income of $130 and $45,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 156 74
Interest expense, including related party expense of $23
in 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . (430) (169)
--------- ----------
(274) (95)
--------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 2,255 2,867
--------- ----------
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . 198 216
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . 809 852
--------- ----------
1,007 1,068
--------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,248 $ 1,799
========= ==========
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .10 $ .13
========= ==========
Weighted average shares outstanding . . . . . . . . . . . . . . . 11,989 13,664
========= ==========
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .10 $ .13
========= ==========
Weighted average shares outstanding . . . . . . . . . . . . . . . 11,989 13,666
========= ==========
See notes to consolidated financial statements.
139
141
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 1, 1994 JULY 2, 1993
-------------- --------------
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . $ 100,567 $ 99,525
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . 37,391 36,020
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . 2,320 2,291
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . 111 214
--------- ----------
140,389 138,050
--------- ----------
Costs and expenses:
Costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 71,154 68,273
Selling, general and administrative expenses, including related
party expenses of $63 in both periods . . . . . . . . . . . . . 24,315 21,105
Depreciation and amortization . . . . . . . . . . . . . . . . . . 12,432 11,171
(Gain) loss on property transactions . . . . . . . . . . . . . . (3,494) 115
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 27,709 23,570
--------- ----------
132,116 124,234
--------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 8,273 13,816
--------- ----------
Other income (expenses):
Interest income, including related party income of $177 and $95,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 255 140
Interest expense, including related party expense of $47
in 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . (792) (348)
--------- ----------
(537) (208)
--------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 7,736 13,608
--------- ----------
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . 696 967
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . 2,367 4,259
--------- ----------
3,063 5,226
--------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,673 $ 8,382
========= ==========
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .37 $ .60
========= ==========
Weighted average shares outstanding . . . . . . . . . . . . . . . 12,280 13,668
========= ==========
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .37 $ .60
========= ==========
Weighted average shares outstanding . . . . . . . . . . . . . . . 12,280 13,674
========= ==========
See notes to consolidated financial statements.
140
142
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
Common Treasury
Stock Capital in Deferred Stock
------------------ Excess of Retained Compen- ---------------
Shares Par Value Par Value Earnings sation Shares Cost
-------- --------- --------- -------- ----------- ------ ------
Balances, December 31, 1993 . . . . . . . 14,283 $ 1,428 $ 157,226 $ 4,677 $ (9,934) 1,046 $(16,750)
Net income . . . . . . . . . . . . . . 4,673
Redeemable preferred stock accretion (51)
Redeemable preferred stock dividends,
$2.40 per share . . . . . . . . . . . (119)
Stock options exercised . . . . . . . . 54 6 232
Tax expense from the exercise of stock
options and stock grants . . . . . . (387)
Treasury stock acquired . . . . . . . . 1,027 (13,513)
Amortization of deferred compensation . 1,367
------- ------- --------- -------- -------- ------ --------
Balances, July 1, 1994 . . . . . . . . . 14,337 $ 1,434 $ 157,071 $ 9,180 $ (8,567) 2,073 $(30,263)
======= ======= ========= ======== ======== ====== ========
See notes to consolidated financial statements.
141
143
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 1, 1994 JULY 2, 1993
-------------- ------------
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,673 $ 8,382
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 12,432 11,171
Deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . 2,367 4,259
(Gain) loss on property transactions . . . . . . . . . . . . . . (3,494) 115
Compensation expense under stock grant plan . . . . . . . . . . . . 1,367 1,379
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 (20)
Net change in receivables, inventory, prepaids, payables and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 617 767
-------- --------
Cash provided by operations . . . . . . . . . . . . . . . . 18,309 26,053
-------- --------
Investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . (15,365) (19,770)
Proceeds from disposition of property and equipment . . . . . . . . 6,725
Additions to notes receivable . . . . . . . . . . . . . . . . . . . (1,109) (143)
Payments received on notes receivable . . . . . . . . . . . . . . . 1,476 600
Change in investments, deferred charges and other assets . . . . . (1,097) (1,168)
-------- --------
Cash used in investing activities . . . . . . . . . . . . (9,370) (20,481)
-------- --------
Financing activities:
Payments on line of credit . . . . . . . . . . . . . . . . . . . . (4,360) (8,550)
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . 7,910 1,550
Reduction of debt and capital lease obligations . . . . . . . . . (21) (14)
Exercise of stock options and warrants . . . . . . . . . . . . . . 238 560
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . (13,513) (103)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . (119) (119)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 58
-------- --------
Cash used in financing activities . . . . . . . . . . . . . (9,852) (6,618)
-------- --------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . (913) (1,046)
Cash and cash equivalents, beginning of period . . . . . . . . . . . 4,511 3,462
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . $ 3,598 $ 2,416
======== ========
See notes to consolidated financial statements.
142
144
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 1, 1994 AND JULY 2, 1993
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying financial statements for
the periods ended July 1, 1994 and July 2, 1993 reflect all adjustments
(consisting only of normal recurring adjustments except as referred to in Note
6) necessary to present fairly the Company's financial condition, results of
operations and cash flows.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The unaudited consolidated
financial statements referred to above should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K
filed with the Securities and Exchange Commission for the year ended December
31, 1993. Results of operations for the periods ended July 1, 1994 and July 2,
1993 are not necessarily indicative of the results for the year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings per common and common equivalent share were computed based on
the weighted average number of common and common equivalent shares outstanding
during the period. Net income available per common share has been adjusted for
the items indicated below, and earnings per common and common equivalent share
were computed as follows (thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 1, JULY 2, JULY 1, JULY 2,
1994 1993 1994 1993
---------- ---------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . $ 1,248 $ 1,799 $ 4,673 $ 8,382
Accretion of redeemable preferred stock . . . . . (26) (26) (51) (52)
Redeemable preferred stock dividends . . . . . . (59) (59) (119) (119)
---------- ---------- -------- --------
Adjusted income applicable to common and
common equivalent shares . . . . . . . . . . . $ 1,163 $ 1,714 $ 4,503 $ 8,211
========== ========== ======== ========
Primary:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . 11,887 12,782 12,169 12,772
Common stock equivalents:
Stock purchase warrants . . . . . . . . . 800 804
Stock purchase options . . . . . . . . . . 102 82 111 92
---------- ---------- -------- --------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . 11,989 13,664 12,280 13,668
========== ========== ======== ========
Earnings per common and common
equivalent share . . . . . . . . . . . . . $ .10 $ .13 $ .37 $ .60
========== ========== ======== ========
Fully diluted:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . 11,887 12,782 12,169 12,772
Common stock equivalents:
Stock purchase warrants . . . . . . . . . 799 804
Stock purchase options . . . . . . . . . . 102 85 111 98
---------- ---------- -------- --------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . 11,989 13,666 12,280 13,674
========== ========== ======== ========
Earnings per common and common
equivalent share . . . . . . . . . . . . $ .10 $ .13 $ .37 $ .60
========== ========== ======== ========
143
145
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 1, 1994 AND JULY 2, 1993
(UNAUDITED)
3. INCOME TAXES:
Income taxes have been provided at the expected annual federal tax rate
during the year (35% for 1994) plus an estimated provision for state income
taxes and state franchise taxes.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 1, 1994 JULY 2, 1993
------------ ------------
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 736 $ 307
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,053 1,165
Supplemental schedule of noncash investing and
financing activities:
Notes received in connection with the disposition
of property and equipment . . . . . . . . . . . . . . . . . 4,650
Investment received in connection with the disposition
of property and equipment . . . . . . . . . . . . . . . . . 438
5. LONG-TERM DEBT:
The Company's revolving loan agreement was amended effective July 1994
to provide to Company with a credit line of up to $32 million which declines by
$100,000 each month beginning on January 31, 1995 and is due on January 31,
1996. Interst is provided at a rate equal to prime, 7.25% at July 1, 1994, plus
.5% or, at the Company's option, up to the 60 day London Interbank Offered Rate
("LIBOR"), 4.5% at July 1, 1994, plus .75% to 1.50% subject to compliance with
certain financial ratio tests. A 1/5% annual commitment fee is payable on any
unused credit line. Under the terms of the revolving loan agreement, the
Company is prohibited from paying dividends on its common stock and purchasing
additional treasury stock. The Company must also achieve certain profitability
levels.
6. SIGNIFICANT TRANSACTIONS:
Effective May 5, 1994, the Company sold substantially all of the assets
of its Monterey's Tex-Mex Cafe restaurants for an aggregate purchase price
consisting of approximately $6.7 million in cash, $4.7 million in subordinated
promissory notes and the retention of a 12 1/2% equity interest in the
acquiring company. Due to the Company's substantial equity interest, the
acquiring company is a related party subsequent to the transaction. Revenues
from the Company's Monterey's Tex-Mex Cafe restaurants were $1.5 million in the
second quarter of 1994 and $6.2 million in the first six months of 1994.
Operating income was $5.6 million in the second quarter of 1994 and $5.9
million in the first six months of 1994. Operating income includes a gain of
$5.5 million from the sale.
The Company provided for a loss of approximately $1.9 million in the second
quarter of 1994 as a result of the Company's decision to close one Chuck E.
Cheese's restaurant and the decline in fair value of the fixed assets of eight
Chuck E. Cheese's restaurants. The decline in fair value of the eight
restaurants is due to the Company's decision not to renew the leases as a
result of the deterioration of site characteristics.
144
146
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Second Quarter 1994 Compared to Second Quarter 1993
Revenues for the second quarter of 1994 decreased 1.0% to $64.0 million
from $64.7 million in the second quarter of 1993 due to the sale of the
Company's Monterey's Tex-Mex Cafe restaurants effective May 5, 1994. Revenue
generated by the Company's Chuck E. Cheese's restaurants increased to $62.5
million in the second quarter of 1994 from $59.8 million in 1993 due to the net
addition of six Company restaurants in the first six months of 1994 and 33
Company restaurants in 1993. Comparable store sales from the Company's Chuck
E. Cheese's restaurants for the quarter ended July 1, 1994 declined by 4.5%
from the comparable period of the prior year. Revenues from the Company's
Monterey's Tex-Mex Cafe restaurants were $1.5 million in the second quarter of
1994 compared to $4.9 million in the second quarter of 1993.
Operating income decreased to $2.5 million in the second quarter of 1994
from $3.0 million in the second quarter of 1993. Included in operating income
is a gain of $5.5 million related to the sale of the Company's Monterey's
Tex-Mex Cafe restaurants and a $1.9 million loss associated with the valuation
of fixed assets used in certain Chuck E. Cheese's restaurants. The decline in
operating income is primarily due to the decline in comparable store sales and
operating margins in the Company's Chuck E. Cheese's restaurants. A material
portion of operating costs are fixed resulting in an erosion of operating
margins at lower sales levels.
A summary of the results of operations of the Company as a percentage of
revenues for the two quarters is shown below.
THREE MONTHS ENDED
------------------------------
JULY 1, 1994 JULY 2, 1993
------------ ------------
Revenue . . . . . . . . . . . . . . . . . 100.0% 100.0%
----- -----
Costs and expenses:
Costs of sales . . . . . . . . . . . . 51.8 51.2
Selling, general and administrative . . 19.1 16.2
Depreciation and amortization . . . . . 9.6 8.9
(Gain) loss on property
transactions . . . . . . . . . . . . (5.5) .2
Other operating expenses . . . . . . . 21.0 18.9
----- -----
96.0 95.4
----- -----
Operating income . . . . . . . . . . . . 4.0% 4.6%
===== =====
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased by
4.6% to $62.5 million in the second quarter of 1994 from $59.8 million in the
second quarter of 1993 primarily due to new restaurant development which
occurred throughout 1993 and the first six months of 1994. Comparable store
sales of such restaurants which were open during all of the second quarters of
both 1994 and 1993 declined by 4.5% between the two periods. Menu prices were
not increased between the two periods.
Management believes that several factors may have contributed to the
comparable store sales decline including increased competition and to a lesser
extent, a decrease in the number of restaurants remodeled since 1992 and the
impact of newly opened restaurants on comparable store sales of existing
restaurants in certain markets. Some of the factors impacting comparable store
sales are believed to be negatively impacting sales volumes of newer
restaurants opened since 1990. During the second quarter of 1994, the average
sales volume of the 70 new Chuck E. Cheese's restaurants opened in 1991 through
1993 was 3.3% lower than the average sales volume of existing restaurants
during the same period.
145
147
Revenues from the Company's Monterey's Tex-Mex Cafe restaurants were
$1.5 million in the second quarter of 1994 compared to $4.9 million in the
second quarter of 1993 due to the sale of substantially all of the assets of
the Monterey's Tex-Mex Cafe restaurants on May 5, 1994.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 96.0% in the
second quarter of 1994 from 95.4% in the second quarter of 1993.
Cost of sales increased as a percentage of revenues to 51.8% in the
second quarter of 1994 from 51.2% in the comparable period of 1993. Cost of
food, beverage, prize and merchandise items for Chuck E. Cheese's restaurants
as a percentage of restaurant sales increased to 18.5% in the second quarter of
1994 from 18.3% in the second quarter of 1993 primarily due to an increase in
costs relating to the enhancement of certain prize and merchandise items.
Labor expenses for Chuck E. Cheese's restaurants as a percentage of restaurant
sales increased to 30.3% during the second quarter of 1994 from 29.5% in the
second quarter of 1993 primarily due to the decline in the comparable store
sales.
Selling, general and administrative expenses as a percentage of revenues
increased to 19.1% in the second quarter of 1994 from 16.2% in the comparable
period of 1993 primarily due to increased advertising expense as a percentage
of revenues. Corporate overhead costs were impacted by an increase of
approximately $384,000 as a result of increasing the number of operational
regional and district managers to provide a more concentrated focus on guest
satisfaction.
Depreciation and amortization expenses as a percentage of revenues
increased to 9.6% in the second quarter of 1994 from 8.9% in the second quarter
of 1993 primarily due to higher depreciation and amortization expense of new
restaurants relative to older restaurants and the decline in comparable store
sales.
Other operating expenses increased as a percentage of revenues to 21.0%
in the second quarter of 1994 from 18.9% in the second quarter of 1993
primarily due to increased rent and utility costs as a percentage of revenues
and the decline in comparable store sales.
The Company had a net gain on property transactions of $3.5 million in
the second quarter of 1994 compared to a loss on property transactions of
$114,000 in the second quarter of 1993. In the second quarter of 1994, the
Company recognized a gain of $5.5 million from the sale of substantially all
of the assets of its Monterey's Tex-Mex Cafe restaurants on May 5, 1994. The
gain was partially offset by a loss of approximately $1.9 million in the
second quarter of 1994. The loss was a result of the Company's decision to close
one Chuck E. Cheese's restaurant and the decline in fair value of the fixed
assets of eight Chuck E. Cheese's restaurants due to the Company's decision not
to renew the leases as a result of the deterioration of site characteristics.
The Company will consider possible relocation of some of the restaurants. The
Company provided for an additional loss on property transactions of
approximately $100,000 in the second quarter of 1994 compared to $114,000 in
the second quarter of 1993 due to the replacement of certain assets in
conjunction with the enhancement of facilities and entertainment packages of
restaurants.
Operating Income
As a result of the changes in revenues and expenses discussed above, the
Company had operating income of $2.5 million in the second quarter of 1994
compared to $3.0 million in the second quarter of 1993. Included in operating
income are the operations of Monterey's Tex-Mex Cafe restaurants through May 5,
1994. Operating income in the second quarter of 1994 for Monterey's Tex-Mex
Cafe restaurants was $5.6 million, including a gain on property transactions of
$5.5 million, compared to operating income of $260,000 in the second quarter of
1993.
146
148
Net Income
Interest expense increased to $430,000 in the second quarter of 1994
from $169,000 in the second quarter of 1993 due primarily to an increase in
long-term debt of $24 million since the second quarter of 1993 primarily to
fund the Company's repurchase of its common stock. The Company's net income
decreased to $1.2 million in the second quarter of 1994 from $1.8 million in
the second quarter of 1993 due to the changes in revenues and expenses
discussed above. The Company's primary and fully diluted earnings per share
decreased to $.10 per share in the second quarter of 1994 from $.13 per share
in the second quarter of 1993.
First Six Months of 1994 Compared to First Six Months of 1993
Revenues increased 1.7% to $140.4 million in the first six months of
1994 from $138.1 million in the comparable period of 1993. Revenue generated
by the Company's Chuck E. Cheese's restaurants increased by 4.4% to $134.2
million in the first six months of 1994 from $128.5 million in the first six
months of 1993 due to the net addition of six Company restaurants in the first
six months of 1994 and 33 Company restaurants in 1993. Comparable store sales
from the Company's Chuck E. Cheese's restaurants declined 7.0% between the
periods. Revenues from the Company's Monterey's Tex-Mex Cafe restaurants
declined to $6.2 million in the first six months of 1994 from $9.6 million in
the first six months of 1993 due to the sale of substantially all of the assets
of the Company's Monterey's Tex-Mex Cafe restaurants on May 5, 1994.
Operating income decreased to $8.3 million in the first six months of
1994 from $13.8 million in the first six months of 1993. Included in operating
income is a gain of $5.5 million related to the sale of the Company's
Monterey's Tex-Mex Cafe restaurants and a $1.9 million loss associated with the
valuation of fixed assets used in certain Chuck E. Cheese's restaurants. The
decline in operating income is primarily due to the decline in comparable store
sales and operating margins in the Company's Chuck E. Cheese's restaurants. A
material portion of operating costs are fixed resulting in an erosion of
operating margins at lower sales levels.
A summary of the results of operations of the Company as a percentage of
revenues for the six month periods is shown below.
SIX MONTHS ENDED
------------------------------
JULY 1, 1994 JULY 2, 1993
------------ ------------
Revenue . . . . . . . . . . . . . . . . . 100.0% 100.0%
----- -----
Costs and expenses:
Costs of sales . . . . . . . . . . . . 50.7 49.4
Selling, general and administrative . . 17.3 15.3
Depreciation and amortization . . . . . 8.9 8.1
(Gain) loss on property
transactions . . . . . . . . . . . . (2.5) .1
Other operating expenses . . . . . . . 19.7 17.1
----- -----
94.1 90.0
----- -----
Operating income . . . . . . . . . . . . 5.9% 10.0%
===== =====
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased by
4.4% to $134.2 million in the first six months of 1994 from $128.5 million in
the first six months of 1993 primarily due to new restaurant development which
occurred throughout 1993 and the first six months of 1994. Comparable store
sales of such restaurants which were open during all of the first six months of
both 1994 and 1993 declined by 7.0% between the two periods. Menu prices were
increased approximately .2% between the two periods.
147
149
Management believes that several factors may have contributed to the
comparable store sales decline including increased competition and to a lesser
extent, a decrease in the number of restaurants remodeled since 1992; the
impact of newly opened restaurants on comparable store sales of existing
restaurants in certain markets; and an ineffective advertising campaign that
was replaced with a new advertising campaign effective February 1994. Some
of the factors impacting comparable store sales are believed to be negatively
impacting sales volumes of newer restaurants opened since 1990. During the
first six months of 1994, the average sales volume of the 70 new Chuck E.
Cheese's restaurants opened in 1991 through 1993 was 1.3% lower than the
average sales volume of existing restaurants during the same period.
Revenues from Monterey's Tex-Mex Cafe restaurants were $6.2 million in
the first six months of 1994 compared to $9.6 million in the first six months
of 1993 due to the sale of substantially all of the assets of the Company's
Monterey's Tex-Mex Cafe restaurants on May 5, 1994.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 94.1% in the
first six months of 1994 from 90.0% in the first six months of 1993.
Cost of sales increased as a percentage of revenues to 50.7% in the
first six months of 1994 from 49.4% in the comparable period of 1993. Cost of
food, beverage, prize and merchandise items for Chuck E. Cheese's restaurants
as a percentage of restaurant sales increased to 18.3% in the first six months
of 1994 from 17.8% in the first six months of 1993 primarily due to an increase
in cheese costs and in costs relating to the enhancement of certain prize and
merchandise items. Labor expenses for Chuck E. Cheese's restaurants as a
percentage of restaurant sales increased to 29.1% during the first six months
of 1994 from 28.3% in the first six months of 1993 primarily due to the
decline in the comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
increased to 17.3% in the first six months of 1994 from 15.3% in the comparable
period of 1993 primarily due to increased advertising expense as a percentage
of revenues. Corporate overhead costs were impacted by an increase of
approximately $700,000 as a result of increasing the number of operational
regional and district managers to provide a more concentrated focus on guest
satisfaction.
Depreciation and amortization expenses as a percentage of revenues
increased to 8.9% in the first six months of 1994 from 8.1% in the comparable
period of 1993 primarily due to higher depreciation and amortization expense of
new restaurants relative to older restaurants and the decline in comparable
store sales.
Other operating expenses increased as a percentage of revenues to 19.7%
in the first six months of 1994 from 17.1% in the first six months of 1993
primarily due to increased rent, insurance and utility costs as a percentage of
revenues and the decline in comparable store sales.
The Company had a net gain on property transactions of $3.5 million in
the first six months of 1994 compared to a loss on property transactions of
$115,000 the first six months of 1993. In the first six months of 1994, the
Company recognized a gain of $5.5 million from the sale of substantially all of
the assets of its Monterey's Tex-Mex Cafe restaurants on May 5, 1994. The gain
was partially offset by a loss of approximately $1.9 million in the first six
months of 1994. The loss was a result of the Company's decision to close one
Chuck E. Cheese's restaurant and the decline in fair value of the fixed assets
of eight Chuck E. Cheese's restaurants due to the the Company's decision not
to renew the leases as a result of the deterioration of site characteristics.
The Company will consider possible relocation of some of the restaurants. The
Company provided for an additional loss on property transactions of
approximately $100,000 compared to $115,000 in the first six months of 1993 due
to the replacement of certain assets in conjunction with the enhancement of
facilities and entertainment packages of restaurants.
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150
Operating Income
As a result of the changes in revenues and expenses discussed above,
operating income declined to $8.3 million in the first six months of 1994 from
$13.8 million in the first six months of 1993. Included in operating income
are the operations of Monterey's Tex-Mex Cafe restaurants through May 5, 1994.
Operating income in the first six months of 1994 for Monterey's Tex-Mex Cafe
restaurants was $5.9 million, including a gain on property transactions of 5.5
million, compared to $485,000 in the first six months of 1993.
Net Income
Interest expense increased to $792,000 in the first six months of 1994
from $348,000 in the first six months of 1993 due primarily to an increase in
long-term debt of $24 million since the second quarter of 1993 primarily to
fund the Company's repurchase of its common stock. The Company's net income
decreased to $4.7 million in the first six months of 1994 from $8.4 million in
the first six months of 1993 due to the changes in revenues and expenses
discussed above. The Company's primary and fully diluted earnings per share
decreased to $.37 per share in the first six months of 1994 from $.60 per share
in the first six months of 1993.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations decreased to $18.3 million in the first six
months of 1994 from $26.1 million in the comparable period of 1993. The
Company's primary requirements for cash relate to planned capital expenditures
and debt service.
During the first six months of 1994, the Company made approximately
$15.4 million in capital expenditures related to the opening of seven new Chuck
E. Cheese's restaurants and the enhancement of facilities and entertainment
packages of ten restaurants. The Company plans to make additional capital
expenditures of approximately $14 million during the remainder of 1994
primarily related to the construction of approximately six new Chuck E.
Cheese's restaurants and the enhancement of existing facility and entertainment
packages at a total of 30 Chuck E. Cheese's restaurants. In the event certain
site characteristics considered essential for the success of a restaurant
deteriorate, the Company will consider relocating the restaurant to a more
desirable site or closing the restaurant.
The Company previously announced that it planned to repurchase shares of
the Company's common stock at an aggregate purchase price of up to $30 million.
As of July 1, 1994, the Company had repurchased shares of its common stock in
the open market for an aggregate purchase price of approximately $24.8 million.
The Company has purchased treasury shares up to the limit permitted under its
revolving loan agreement and intends to use its future cash flow for new store
development and the enhancement of existing facility and entertainment
packages. The Company expects that it will satisfy its capital expenditure and
debt service requirements from cash provided by operations and funds available
under its revolving loan agreement.
The Company's revolving loan agreement was amended effective July 1994 to
provide the Company with a credit line of up to $32 million which declines by
$100,000 each month beginning on January 31, 1995 and is due on January 31,
1996. Available borrowings under the credit line are reduced by outstanding
letters of credit which totaled $1.5 million at July 1, 1994. The revolving loan
agreement previously provided for borrowings up to $50 million through 1997.
The interest rate payable under the revised loan agreement was increased by 50
basis points over prior levels. The Company is required to comply with certain
financial ratio tests during the term of the revolving loan agreement.
149
151
The Company believes that the success of its facility and entertainment
enhancement program in addition to new restaurant development will continue to
be significant factors in its ability to generate increased revenues over the
foreseeable future. The Company plans to open approximately 25 new Chuck E.
Cheese's restaurants in 1994 and 1995, with approximately 13 of such
restaurants to be opened in 1994. If the decline in comparable store sales of
the Company's Chuck E. Cheese's restaurants experienced in 1993 and the first
six months of 1994 continue to be experienced over the longer term, an adverse
impact on the Company's operating margins and results of operations could
continue.
The Company is implementing several strategies designed to strengthen
the sales vitality of its existing unit base in what management believes will
become an increasingly competitive market. The Company has appointed a new
advertising agency; accelerated its commitment of capital to existing stores;
increased the number of its operational regional and district managers to
provide a more concentrated focus on guest satisfaction; and is limiting its
1994 new unit development to approximately 13 new stores in order to ensure
that new unit growth and the sales vitality of the Company's existing unit base
are both given equal priority. The Company believes that certain operating
costs will increase as a result of implementing these strategies designed to
strengthen existing unit sales.
The Company is involved in a number of lawsuits. The Company presently
believes that it will continue to incur expense to defend against and resolve
such litigation, and anticipates that it will satisfy such expense with cash
flow from operations.
The Company believes it will realize substantial benefit from
utilization of approximately $73 million in net operating loss carryforwards to
reduce its federal income tax liability. Such net operating loss carryforwards
expire from years 1999 through 2002. Although the use of such carryforwards
could, under certain circumstances, be limited, the Company is presently
unaware of the occurrence of any event which would result in the imposition of
such limitation. The Company has adopted an amendment to its Restated Articles
of Incorporation which is intended to prevent changes in ownership of its
common stock that would cause such limitation. In addition, the Company has
investment tax credit, job tax credit and alternative minimum tax credit
carryforwards of approximately $7 million expiring from years 1997 through
2008. Tax credit carryforwards can be utilized by the Company only after all
net operating loss carryforwards have been realized. If the Company's results
of operations continue to decline, a portion of the net operating loss and tax
credit carryforwards could expire prior to utilization resulting in a charge
against income.
150
152
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In December 1991, the Company, The Hallwood Group Incorporated
("Hallwood"), Integra-A Hotel and Restaurant Company ("Integra"), and their
individual directors were named defendants in two separate but related lawsuits
brought in the 14th and 134th District Courts of Dallas County, Texas. In
April 1993, the Company and its two directors who are also employees of the
Company, were dismissed as defendants in the lawsuit brought in the 134th
District Court by an Integra common stockholder. Integra owned approximately
90% of the outstanding Common Stock of the Company prior to Integra's
distribution of such Common Stock in December 1988 (the "1988 Distribution") to
its shareholders of record. The plaintiffs in the remaining lawsuit constitute
certain holders of warrants, options and preferred stock of Integra who seek to
serve as representatives of proposed classes of other holders of such
securities. The plaintiffs allege that the Company has (i) violated Texas
statutes related to securities fraud and the fraudulent transfer of assets,
(ii) committed common law fraud, and (iii) breached fiduciary and other duties
to the plaintiffs. As amended, this suit seeks rescission of the 1988
Distribution, actual damages in excess of $184 million, and punitive damages in
excess of $500 million. In May 1993, further action in this case was abated by
order of the Court pending the resolution of disciplinary proceedings in
process against the plaintiffs' counsel in a separate court action in Dallas
County, Texas. The Company believes that the claims made against it in this
suit are without merit and intends to vigorously defend against such claims.
In July 1992, Integra sought protection from its creditors under Chapter
11 of the Federal Bankruptcy Code in the United States Bankruptcy Court
("Bankruptcy Court") in Denver, Colorado (the "Integra Bankruptcy"). Integra,
its Bankruptcy Court-appointed Unsecured Creditors Committee, Hallwood and
other parties including certain of the Company's officers and directors and the
individual plaintiffs in the lawsuit discussed above, are parties to either one
or both Settlement Agreements (the "Settlement Agreements") in conjunction with
a modified plan of reorganization of Integra approved by the Bankruptcy Court
in February 1994. One of the Settlement Agreements provides for the creation
of a trust to which certain claims of Integra are to be transferred. The trust
will retain the right to investigate, compromise or adjudicate the claims
transferred from Integra against defendants other than the parties released
under the Settlement Agreements. The Company and many of its shareholders are
not parties to the Settlement Agreements.
In April 1993, the Company, Hallwood and certain directors of the
Company individually were named as defendants in a lawsuit brought in the 68th
District Court of Dallas County, Texas, by Hermitage Hotel, Ltd., L.P. claiming
to be an unsecured creditor of Integra and seeking to serve as a representative
of a class of all unsecured creditors of Integra. In November 1993, the Court
entered an order closing the lawsuit in light of the pending Integra
bankruptcy. In May 1994, Hermitage Hotel, Ltd., L.P. filed a new lawsuit
against the same defendants in the 101st District Court of Dallas County,
Texas. No longer filed as a class action, the new lawsuit seeks recovery on
behalf of plaintiff under theories of successor liability, tortious
interference with contract, fraud, negligent misrepresentation and breach of
contract. The plaintiff is seeking approximately $10.2 million in actual
damages, $30 million in exemplary damages, attorneys fees and court costs.
The Company believes this lawsuit is without merit and intends to vigorously
defend this lawsuit.
In June 1993, the Company was named as a nominal defendant in a
shareholders' derivative action in the 68th Judicial District Court in Dallas
County, Texas in which three of the Company's executive officers, four of the
Company's outside directors and Hallwood were named defendants. The plaintiffs
in this lawsuit have alleged the individual defendants (i) breached their
fiduciary duties to stockholders, (ii) committed constructive fraud and (iii)
unjustly enriched themselves as a result of alleged violations of federal
securities laws and illegal insider trading between July 13, 1992 and June 11,
1993. The Company does not believe that this action will result in any
significant damages to the Company.
151
153
In July, 1993, the Company was named a defendant in a lawsuit brought in
the Circuit Court for Davidson County, Nashville, Tennessee by Third National
Bank in Nashville, as Trustee pursuant to a municipal bond issuance of $6.4
million made in 1980, for which Integra executed a guaranty. The plaintiff
alleged that Integra's guaranty of the municipal bond issuance was binding on
successors of Integra and that the Company is the legal successor to Integra.
The plaintiff sought to recover a judgment against the Company in the full
amount of its claim against Integra, which is unspecified, as well as
attorneys' fees and costs. In April 1994, the Court dismissed the plaintiff's
complaint for failure to state a claim upon which relief can be granted.
Plaintiff has filed a notice of appeal. The Company believes the allegations
made in this suit to be without merit and will offer a vigorous defense in this
lawsuit.
In January 1994, the Company was named a defendant in a lawsuit brought
in the Supreme Court of the State of New York, County of Queens, by Big Six
Towers, Inc., in its purported capacity as a landlord to the Company with
regard to a restaurant/entertainment center location in Queens County, New York
which the Company had contracted to lease from the plaintiff. The plaintiff
has alleged that the Company has breached the lease and is seeking total
damages in excess of $4.0 million against the Company. The Company believes it
validly terminated the lease in question pursuant to an agreement with the
plaintiff and believes the allegations made in this suit to be without merit
and therefore intends to vigorously defend this lawsuit.
Certain other pending legal proceedings exist against the Company which
the Company believes are not material in amount or have arisen in the ordinary
course of its business.
Item 2. Changes in Securities.
None to report during quarter for which this report is filed.
Item 3. Defaults Upon Senior Securities.
None to report during quarter for which this report is filed.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 2, 1994, at the Company's annual meeting of shareholders, the
Company's shareholders re-elected J. Thomas Talbot (10,314,172 shares in favor
and 207,901 shares against) and Brian M. Troup (10,312,925 shares in favor and
209,148 shares against) as Class III Directors. Richard M. Frank, Michael H.
Magusiak, Anthony J. Gumbiner, Charles A. Crocco, Jr. and Robert L. Lynch also
continue to serve as Directors. No other matters were voted upon by the
shareholders at such meeting.
Item 5. Other Information.
On July 27, 1994, a Chuck E. Cheese's restaurant owned an operated by a
franchisee of the Company opened for business in Santiago, Chile under a
development agreement which calls for six such stores to be opened by that
franchisee in Chile during the next ten years.
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154
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
10 (a) Second Amendment to Secomd Amendended and Restated
Revolving Credit Agreement dated as of July 1, 1994 by
and between The First National Bank of Boston and the
Company.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the quarter for which this
report is filed.
153
155
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOWBIZ PIZZA TIME, INC.
Dated: August 15, 1994 By: /s/Michael H. Magusiak
Michael H. Magusiak
President and Chief
Financial Officer
(Principal Financial Officer)
154
156
INDEX TO EXHIBITS
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
--------- ------------- ------------
3.1 Restated Certificate of Incorporation of the Company
is incorporated herein by reference to Exhibit 3.2 of
Atlantic Metropolitan Corporation's Registration
Statement on Form S-14, Registration No. 2-89505.
3.2 Amendment to Restated Certificate of Incorporation of
the Company, with respect to conversion of 7%
Participating Convertible Preferred Stock and reverse
split of Common Stock, is incorporated herein by
reference to Exhibit 3.2 to the Company's Form 10-K
for the fiscal year ended July 31, 1986, File No.
1-8303.
3.3 Amendment to Restated Certificate of Incorporation of
the Company, with respect to limiting the personal
liability of directors of the Company or any
stockholder thereof, is incorporated herein by
reference to Exhibit 3.3 to the Company's Form 10-K
for the fiscal year ended July 31, 1987, File No.
1-8303.
3.4 Restated Bylaws of the Company, as currently in
effect, including all amendments thereto, is
incorporated herein by reference to Exhibit 3.4 to
the Company's Form 10- K for the fiscal year ended
July 31, 1992, File No. 1-8303.
4.1 Indenture Agreement, dated as of April 14, 1983,
among Atlantic Metropolitan Corporation, Atlantic
Metropolitan (U.K.) plc and The Law Debenture Trust
Corporation plc, as Trustee, relating to the 12%
Convertible Notes due July 31, 1997 of Anglo
Metropolitan (U.K.) plc is incorporated herein by
reference to Exhibit 4.4 to Atlantic Metropolitan
Corporation's Form 10-K for the fiscal year ended
July 31, 1983, File No. 1-8303.
4.2 Indenture Agreement, and related Pledge Agreement,
dated as of March 2, 1993, among Norwest Bank
Minnesota, National Association, Trustee, and the
Company, regarding 7% Collateralized Subordinated
Debentures due July 31, 2000, is incorporated herein
by reference to Exhibit 4.2 to the Company's Form
10-Q for the fiscal quarter ended January 31, 1993,
File No. 1-8303.
4.3 Indenture, dated as of May 1, 1989, between the
Company and The Bank of New York, as Trustee, is
incorporated herein by reference to Exhibit T3C to
the Company's Application for Qualification of
Indenture on Form T-3, Registration No. 22-19326.
10.2 Consulting Agreement with Robert L. Lynch is
incorporated herein by reference to Exhibit 10.2 to
Umet Properties Corporation's Registration Statement
on Form S-11, File No. 2-73345.
10.3 Amendment to Consulting Agreement with Robert L.
Lynch, effective October 1, 1982, is incorporated
herein by reference to Exhibit 10.4 to Umet
Properties Corporation's Form 10-K for the fiscal
year ended November 30, 1982, File No. 1-8384.
157
10.5 Amended and Restated Agreement, dated March 30, 1990,
between the Company and Stanwick Management Company,
Inc. (subsequently merged into its parent, Stanwick
Holdings, Inc.) concerning the allocation of costs
and expenses incurred in connection with the
operation and management of their common offices is
incorporated herein by reference to Exhibit 10.30 to
the Company's Form 10-Q for the fiscal quarter ended
April 30, 1990, File No. 1-8303.
10.6 Amended 1985 Stock Option Plan is incorporated herein
by reference to Exhibit 10.9 to the Company's Form
10-K for the fiscal year ended July 31, 1987, File
No. 1-8303.
10.9 Employment Agreement, dated January 1, 1994, between
the Company and Melvin John Melle, filed herewith.
10.11 Agreement, dated December 18, 1987, between the
Company, Grainger Trust plc, Atlantic Metropolitan
(U.K.) plc and Alan George Crisp, relating to the
sale by the Company of Atlantic Metropolitan (U.K.)
plc is incorporated herein by reference to Exhibit
2.1 to the Company's Form 8-K dated January 6, 1988,
File No. 1-8303.
10.12 Second Amended and Restated Revolving Credit
Agreement, dated as of November 26, 1991, by and
among the Company, The First National Bank of Boston
("FNBB") and the other banks which are parties
thereto, incorporated herein by reference to Exhibit
10.12 to the Company's Form 10-K dated July 31, 1992,
File No. 1-8303.
10.13 Second Amended and Restated Hallwood Note, dated as
of November 26, 1991, executed by the Company in
favor of FNBB, as agent, incorporated herein by
reference to Exhibit 10.13 to the Company's Form 10-K
dated July 31, 1992, File No. 1-8303.
10.14 Second Amended and Restated Security and Pledge
Agreement, dated as of November 26, 1991, executed by
the Company in favor of FNBB, as agent, incorporated
herein by reference to Exhibit 10.14 to the Company's
Form 10-K dated July 31, 1992, File No. 1-8303.
10.15 Amendment and Release Agreement, dated as of June 25,
1992, by and among the Company, FNBB and the other
banks which are parties thereto, incorporated herein
by reference to Exhibit 10.15 to the Company's Form
10-K dated July 31, 1992, File No. 1-8303.
10.16 Second Amendment Agreement, dated as of October 30,
1992, by and among the Company, FNBB and the other
banks which are parties thereto, incorporated herein
by reference to Exhibit 10.16 to the Company's Form
10-K dated July 31, 1992, File No. 1-8303.
10.31 Tax Sharing Agreement, dated as of March 15, 1989,
between the Company and Brookwood Companies
Incorporated is incorporated herein by reference to
Exhibit 10.25 to the Company's Form 10-K for the
fiscal year ended July 31, 1989, File No. 1-8303.
158
10.33 Amended Tax-Favored Savings Plan Agreement of the
Company, effective as of February 1, 1992,
incorporated by reference to Exhibit 10.33 to the
Company's Form 10-K for the fiscal year ended July
31, 1992, File No. 1-8303.
10.34 Hallwood Special Bonus Agreement, dated as of August
1, 1993, between the Company and all members of its
control group that now, or hereafter, participate in
the Hallwood Tax Favored Savings Plan and its related
trust, and those employees who, during the plan year
of reference are highly-compensated eligible
employees of the Company, filed herewith.
10.35 Consulting Agreement, dated as of August 1, 1989,
between the Company and Atlantic Management
Associates, Inc. is incorporated by reference to
Exhibit 10.28 to the Company's Form 10-Q for the
fiscal quarter ended January 31, 1990, File No.
1-8303.
10.43 Services Agreement, dated September 29, 1992 between
the Company and Hallwood Securities Limited,
incorporated by reference to Exhibit 10.43 to the
Company's Form 10-K for the fiscal year ended July
31, 1992, File No. 1-8303.
10.47 Consulting Agreement, dated June 2, 1992, between the
Company and Hallwood Monaco S.A.M, incorporated by
reference to Exhibit 10.47 to the Company's Form 10-K
for the fiscal year ended July 31, 1992, File No.
1-8303.
10.54 Amended and Restated Loan Agreement, dated as of
December 23, 1992 between The First National Bank of
Boston and the Company, incorporated by reference to
Exhibit 10.54 to the Company's Form 10-Q for the
quarter ended January 31, 1993, File No. 1-8303.
10.55 Credit Agreement and Guaranty, dated as of December
9, 1992, among Brookwood Companies Incorporated as
Borrower, the Guarantor signatory hereto, the Banks
signatory hereto and The Chase Manhattan Bank, N.A.,
as Agent; and the First Amendment to Credit Agreement
and Guaranty, dated as of March 31, 1993,
incorporated by reference to Exhibit 10.55 to the
Company's Form 10-Q for the quarter ended April 30,
1993, File No. 1- 8303.
10.56 Second Amendment to Credit and Guaranty, dated as of
September 27, 1994, among Brookwood Companies
Incorporated as Borrower, Kenyon Industries, Inc. as
Guarantor and The Chase Manhattan Bank, N.A. as Bank
and as agent for the Banks, filed herewith.
10.57 Client's Agreement and related Pledge Agreement,
dated as of June 7, 1993, between Prudential
Securities Incorporated and the Company incorporated
by reference to Exhibit 10.56 to the Company's Form
10-K for the year ended July 31, 1993, File No.
1-8303.
10.58 WCMA Note and Loan Agreement and Pledge and
Collateral Assignment of Securities Account and
Securities, dated as of April 19, 1994 between the
Company and Merrill Lynch Business Financial
Services, Inc.; and Amendment to Loan Documents,
dated September 8, 1994, filed herewith.
159
10.59 Employment Agreement, dated as of April 1, 1992,
between the Company's Hallwood Monaco SAM subsidiary
and Anthony J. Gumbiner, filed herewith.
10.60 Financial Consulting Agreement, dated as of August 1,
1994, between the Company and Hallwood Financial
Corporation, filed herewith.
10.61 Financial Consulting Agreement, dated as of June 30,
1994, between the Company and Hallwood Petroleum,
Inc., filed herewith.
11. Statement Regarding Computation of Per Share Earnings.
22. Active Subsidiaries of the Registrant as of
September 30, 1994.
27. Financial Data Schedule.