1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE PERIOD ENDED JUNE 30, 2000 COMMISSION FILE NUMBER: 1-8303
----------
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
----------
DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
1,424,789 shares of Common Stock, $.10 par value per share, were
outstanding at July 31, 2000.
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2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
-------- ------------------------------ ----
1 Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.................................................. 3
Consolidated Statements of Operations for the
Six Months Ended June 30, 2000 and 1999................................ 5
Consolidated Statements of Operations for the
Three Months Ended June 30, 2000 and 1999.............................. 7
Consolidated Statement of Changes
in Stockholders' Equity for the
Six Months Ended June 30, 2000......................................... 9
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999................................ 10
Notes to Consolidated Financial Statements................................. 11
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 19
3 Quantitative and Qualitative Disclosures about Market Risk..................... 25
PART II - OTHER INFORMATION
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page............................... 26
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP ........................ $ 7,915 $ 8,232
Receivables and other assets
Related parties ........................ 266 1,698
Other .................................. 187 229
-------- --------
8,368 10,159
ENERGY
Investment in Hallwood Energy ............. 5,865 4,927
-------- --------
Total asset management assets .......... 14,233 15,086
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories ............................... 16,681 18,782
Receivables ............................... 13,282 12,630
Property, plant and equipment, net ........ 9,346 8,997
Other ..................................... 2,099 867
-------- --------
41,408 41,276
HOTELS
Properties, net ........................... 30,676 31,509
Receivables and other assets .............. 2,396 2,026
-------- --------
33,072 33,535
-------- --------
Total operating subsidiaries assets .... 74,480 74,811
OTHER
Deferred tax asset, net ................... 7,051 7,221
Restricted cash ........................... 1,804 1,883
Other ..................................... 1,589 1,791
Cash and cash equivalents ................. 1,013 926
-------- --------
Total other assets ..................... 11,457 11,821
-------- --------
TOTAL .................................. $100,170 $101,718
======== ========
See accompanying notes to consolidated financial statements.
Page 3
4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
ASSET MANAGEMENT
REAL ESTATE
Accounts payable and accrued expenses ................................... $ 581 $ 707
ENERGY
Accounts payable and accrued expenses ................................... -- 465
--------- ---------
Total asset management liabilities ................................... 581 1,172
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable ........................................................... 12,932 11,545
Accounts payable and accrued expenses ................................... 6,588 8,506
--------- ---------
19,520 20,051
HOTELS
Loans payable ........................................................... 31,453 31,918
Accounts payable and accrued expenses ................................... 2,166 2,021
--------- ---------
33,619 33,939
--------- ---------
Total operating subsidiaries liabilities ............................. 53,139 53,990
OTHER
Senior Secured Term Loan ................................................ 16,569 18,000
10% Collateralized Subordinated Debentures .............................. 6,747 6,768
Interest and other accrued expenses ..................................... 3,744 3,730
Convertible loan from stockholder ....................................... 1,500 --
--------- ---------
Total other liabilities .............................................. 28,560 28,498
--------- ---------
TOTAL LIABILITIES .................................................... 82,280 83,660
REDEEMABLE PREFERRED STOCK
Series B, 250,000 shares issued and outstanding ......................... 1,000 1,000
STOCKHOLDERS' EQUITY
Preferred stock, 250,000 shares issued and outstanding as Series B ...... -- --
Common stock, issued 2,396,149 shares at both dates;
outstanding 1,424,789 shares at both dates ........................... 240 240
Additional paid-in capital .............................................. 54,368 54,743
Accumulated deficit ..................................................... (22,800) (23,007)
Treasury stock, 971,360 shares at both dates; at cost ................... (14,918) (14,918)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ........................................... 16,890 17,058
--------- ---------
TOTAL ................................................................ $ 100,170 $ 101,718
========= =========
See accompanying notes to consolidated financial statements.
Page 4
5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
-------- --------
ASSET MANAGEMENT
REAL ESTATE
Fees
Related parties .................................. $ 2,859 $ 4,073
Other ............................................ 172 534
Equity income from investments in HRP ............... 349 762
-------- --------
3,380 5,369
Administrative expenses ............................. 759 1,172
Depreciation and amortization ....................... 336 336
-------- --------
1,095 1,508
-------- --------
Income from real estate operations ............... 2,285 3,861
ENERGY
Equity income from investment in Hallwood Energy .... 1,337 (1)
Gas revenues ........................................ -- 1,677
Oil revenues ........................................ -- 603
Other income ........................................ -- 235
-------- --------
1,337 2,514
Depreciation, depletion and amortization ............ -- 849
Operating expenses .................................. -- 796
Administrative expenses ............................. -- 537
Interest expense .................................... -- 217
-------- --------
-- 2,399
-------- --------
Income from energy operations .................... 1,337 115
-------- --------
Income from asset management operations .......... 3,622 3,976
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales ............................................... 39,306 44,269
Cost of sales ....................................... 33,148 38,023
Administrative and selling expenses ................. 4,776 4,688
Interest expense .................................... 582 465
-------- --------
38,506 43,176
-------- --------
Income from textile products operations .......... 800 1,093
See accompanying notes to consolidated financial statements.
Page 5
6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
OPERATING SUBSIDIARIES (CONTINUED) 2000 1999
-------- --------
HOTELS
Sales .................................................... $ 9,978 $ 12,196
Operating expenses ....................................... 8,548 9,780
Depreciation and amortization ............................ 1,465 1,413
Interest expense ......................................... 1,381 1,238
-------- --------
11,394 12,431
-------- --------
Loss from hotel operations ............................ (1,416) (235)
-------- --------
Income (loss) from operating subsidiaries ............. (616) 858
OTHER
Interest on short-term investments and other income ...... 64 10
Fee income from related parties .......................... -- 241
-------- --------
64 251
Interest expense ......................................... 1,547 595
Administrative expenses .................................. 951 1,244
-------- --------
2,498 1,839
-------- --------
Other loss, net ....................................... (2,434) (1,588)
-------- --------
Income before income taxes ............................... 572 3,246
Income taxes ............................................. 315 127
-------- --------
NET INCOME ...................................................... 257 3,119
Preferred stock dividends ................................ 50 50
-------- --------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS ..................... $ 207 $ 3,069
======== ========
PER COMMON SHARE
Basic
Net income ............................................... $ 0.15 $ 1.63
======== ========
Assuming Dilution
Net income ............................................... $ 0.14 $ 1.61
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ....................................................... 1,425 1,883
======== ========
Assuming Dilution ........................................... 1,434 1,912
======== ========
See accompanying notes to consolidated financial statements.
Page 6
7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
------------------------
2000 1999
-------- --------
ASSET MANAGEMENT
REAL ESTATE
Fees
Related parties .................................. $ 1,460 $ 3,044
Other ............................................ 65 299
Equity income from investments in HRP ............... 76 373
-------- --------
1,601 3,716
Administrative expenses ............................. 394 654
Depreciation and amortization ....................... 168 168
-------- --------
562 822
-------- --------
Income from real estate operations ............... 1,039 2,894
ENERGY
Equity income from investment in Hallwood Energy .... 655 (1)
Gas revenues ........................................ -- 783
Oil revenues ........................................ -- 285
Other income ........................................ -- 140
-------- --------
655 1,207
Depreciation, depletion and amortization ............ -- 338
Operating expenses .................................. -- 269
Administrative expenses ............................. -- 202
Interest expense .................................... -- 96
-------- --------
-- 905
-------- --------
Income from energy operations .................... 655 302
-------- --------
Income from asset management operations .......... 1,694 3,196
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales ............................................... 19,283 22,411
Cost of sales ....................................... 16,304 19,015
Administrative and selling expenses ................. 2,406 2,389
Interest expense .................................... 320 243
-------- --------
19,030 21,647
-------- --------
Income from textile products operations .......... 253 764
See accompanying notes to consolidated financial statements.
Page 7
8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-----------------------
OPERATING SUBSIDIARIES (CONTINUED) 2000 1999
------- -------
HOTELS
Sales .................................................... $ 4,946 $ 5,741
Operating expenses ....................................... 4,294 4,743
Depreciation and amortization ............................ 739 689
Interest expense ......................................... 670 627
------- -------
5,703 6,059
------- -------
Loss from hotel operations ............................ (757) (318)
------- -------
Income (loss) from operating subsidiaries ............. (504) 446
OTHER
Interest on short-term investments and other income ...... 55 5
Fee income from related parties .......................... -- 104
------- -------
55 109
Interest expense ......................................... 769 300
Administrative expenses .................................. 481 721
------- -------
1,250 1,021
------- -------
Other loss, net ....................................... (1,195) (912)
------- -------
Income before income taxes ............................... (5) 2,730
Income taxes ............................................. 65 116
------- -------
NET INCOME (LOSS) ............................................... (70) 2,614
Preferred stock dividends ................................ 50 50
------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS .............. $ (120) $ 2,564
======= =======
PER COMMON SHARE
Basic
Net income (loss) ........................................ $ (0.08) $ 1.36
======= =======
Assuming Dilution
Net income (loss) ........................................ $ (0.08) $ 1.34
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ....................................................... 1,425 1,883
======= =======
Assuming Dilution ........................................... 1,430 1,913
======= =======
See accompanying notes to consolidated financial statements.
Page 8
9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
-------------------- PAID-IN ACCUMULATED --------------------- STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT SHARES COST EQUITY
-------- --------- ---------- ----------- -------- -------- -------------
BALANCE, JANUARY 1, 2000 .................. 2,396 $ 240 $ 54,743 $(23,007) 971 $(14,918) $ 17,058
Net income ............................ 257 257
Preferred stock dividends ............. (50) (50)
Proportionate share of stockholders'
equity transactions from equity
investments ........................ (375) (375)
-------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2000 .................... 2,396 $ 240 $ 54,368 $(22,800) 971 $(14,918) $ 16,890
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 257 $ 3,119
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization ...................... 2,431 3,214
Equity in net income of Hallwood Energy ....................... (1,337) 1
Equity in net income of HRP ................................... (349) (762)
Decrease in deferred tax asset ................................ 170 --
Amortization of deferred gain from debenture exchanges ........ (21) (217)
Preferred dividends from Hallwood Energy ...................... 11 --
Undistributed income from HEP ................................. -- (484)
Distributions from HEP ........................................ -- 545
Net change in textile products assets and liabilities ......... (591) (3,085)
Net change in other assets and liabilities .................... 1,376 (592)
Net change in energy assets and liabilities ................... -- (399)
------- -------
Net cash provided by operating activities .................. 1,947 1,340
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for textile products business acquisition ............... (1,479) --
Investments in textile products property and equipment ........... (623) (964)
Capital expenditures for hotels .................................. (616) (683)
Purchase of minority shares in HEC ............................... (465) --
Proceeds from sale of Hallwood Energy preferred stock ............ 303 --
Net change in restricted cash for investing activities ........... 79 (280)
Investment in HEP by general partner ............................. -- (50)
Investments in energy property and equipment ..................... -- (8)
------- -------
Net cash used in investing activities ...................... (2,801) (1,985)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable .................. 2,887 2,600
Repayment of bank borrowings and loans payable ................... (1,896) (1,060)
Payment of preferred stock dividends ............................. (50) (50)
------- -------
Net cash provided by financing activities ................. 941 1,490
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 87 845
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................... 926 769
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................. $ 1,013 $ 1,614
======= =======
See accompanying notes to consolidated financial statements.
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING POLICIES
Interim Consolidated Financial Statements. The consolidated financial
statements of The Hallwood Group Incorporated (the "Company") have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and disclosures required by accounting
principles generally accepted in the United States of America, although, in
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. These financial statements should be read
in conjunction with the audited consolidated financial statements and
related disclosures thereto included in Form 10-K for the year ended
December 31, 1999.
Comprehensive Income. The Company had no items of other comprehensive
income in the periods presented.
New Accounting Pronouncements. Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") was issued in June 1998, and a related
pronouncement, Statement of Financial Accounting Standards No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment to FASB Statement No. 133" was issued in June
2000. The original effective date for periods beginning after June 15, 1999
has been extended one year to June 15, 2000, accordingly the Company will
be required to adopt SFAS No. 133 on January 1, 2001. The Company is not
planning on early adoption, and has not had an opportunity to evaluate the
impact of the provisions on its consolidated financial statements relating
to future adoption.
The Company is currently evaluating Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements." At present, the Company
does not believe it will have a significant impact on its consolidated
financial statements, although management has not yet completed its review.
2. INVESTMENTS IN REAL ESTATE AFFILIATE (DOLLAR AMOUNTS IN THOUSANDS)
AS OF JUNE 30, 2000 AMOUNT AT INCOME FROM INVESTMENTS
------------------------ WHICH CARRIED AT FOR THE SIX MONTHS ENDED
COST OR -------------------------- JUNE 30,
NUMBER OF ASCRIBED JUNE 30, DECEMBER 31, ------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 2000 1999 2000 1999
------------------------- --------- -------- -------- ------------ -------- --------
HALLWOOD REALTY PARTNERS, L.P. ....
- - General partner interest ........ -- $ 8,650 $ 2,894 $ 3,243 $ 26 $ 29
- - Limited partner interest ........ 330,432 4,302 5,021 4,989 323 733
-------- -------- -------- -------- --------
Totals ......................... $ 12,952 $ 7,915 $ 8,232 $ 349 $ 762
======== ======== ======== ======== ========
At June 30, 2000, Hallwood Realty, LLC ("Hallwood Realty") and HWG, LLC,
wholly owned subsidiaries of the Company, owned a 1% general partner
interest and a 21% limited partner interest in its Hallwood Realty
Partners, L.P. ("HRP") affiliate, respectively. The Company accounts for
its investment in HRP using the equity method of accounting. In addition to
recording its share of HRP's net income, the Company also records non-cash
adjustments for the elimination of intercompany profits with a
corresponding adjustment to equity income, its pro-rata share of HRP's
capital transactions with corresponding adjustments to additional paid-in
capital and amortization of the amount that the Company's share of the
underlying equity in net assets of HRP exceeded its investment, on the
straight-line basis over 19 years. The cumulative amount of such
adjustments from the original date of investment through June 30, 2000,
resulted in a $1,489,000 decrease in the carrying value of the HRP
investment.
The carrying value of the Company's general partner interest of HRP
includes the value of intangible rights to provide asset management and
property management services. The Company amortizes that portion of the
general partner interest ascribed to the management rights. For the six
months ended June 30, 2000 and 1999 such amortization was $336,000 in each
period.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
The Company has pledged 300,397 HRP limited partner units to
collateralize the Senior Secured Term Loan and 30,035 units to secure
hotel capital leases.
The quoted market price and the Company's carrying value per limited
partner unit (AMEX symbol HRY) at June 30, 2000 were $34.25 and $15.20,
respectively. The general partner interest is not publicly traded.
3. INVESTMENTS IN ENERGY AFFILIATE (DOLLAR AMOUNTS IN THOUSANDS)
AS OF JUNE 30, 2000 AMOUNT AT INCOME (LOSS) FROM INVESTMENTS
--------------------------- WHICH CARRIED AT FOR THE SIX MONTHS ENDED
COST OR ----------------------------- JUNE 30,
NUMBER OF ASCRIBED JUNE 30, DECEMBER 31, ------------------------------
DESCRIPTION OF INVESTMENT SHARES VALUE 2000 1999 2000 1999
------------------------- --------- ---------- ---------- ------------ ---------- ----------
HALLWOOD ENERGY CORPORATION
- - Common stock .................... 1,440,000 $ 4,318 $ 5,865 $ 4,624 $ 1,326 $ (1)
- - Preferred stock ................. -- -- 303 11 --
---------- ---------- ---------- ---------- ----------
Totals ......................... $ 4,318 $ 5,865 $ 4,927 $ 1,337 $ (1)
========== ========== ========== ========== ==========
At June 30, 2000, the Company owned a 15% common stock interest in
Hallwood Energy Corporation ("Hallwood Energy"). The Company accounts
for its investment in Hallwood Energy using the equity method of
accounting, as the Company exercises significant influence over Hallwood
Energy's operational and financial policies. In addition to recording
its share of Hallwood Energy's net income available to common
stockholders, the Company also records its preferred dividends (prior to
the sale of its preferred stock), its pro-rata share of any capital
transactions and amortization of the amount that the Company's share of
the underlying equity in net assets of Hallwood Energy exceeded its
investment, at a rate which approximates the depletion rate of Hallwood
Energy's reserves.
The Company acquired its common and preferred stock ownership interests
in Hallwood Energy in June 1999, in connection with the consolidation of
its energy interests with those of its former affiliates, Hallwood
Energy Partners, L.P. ("HEP") and Hallwood Consolidated Resources
Corporation, into the newly-formed Hallwood Energy. Prior to the
consolidation, the Company and its energy subsidiaries accounted for
their ownership of HEP using the proportionate consolidation method of
accounting, whereby the entities recorded their proportional share of
HEP's revenues and expenses, current assets, current liabilities,
noncurrent assets, long-term obligations and fixed assets.
In February 2000, the Company sold all of its preferred stock to
Hallwood Energy at its carrying value of $303,000.
The quoted market price and the Company's carrying value per common
share (NASDAQ symbol HECO) at June 30, 2000 were $8.19 and $4.07,
respectively
4. LITIGATION, CONTINGENCIES AND COMMITMENTS
Reference is made to Notes 9 and 18 to the consolidated financial
statements contained in Form 10-K for the year ended December 31, 1999.
Beginning in 1997, the Company and its HRP affiliate have been involved
in two lawsuits that were brought by Gotham Partners, L.P. Trial is
currently scheduled for January 2001.
In December 1999, the Company deposited $900,000 into an escrow account
to secure the maximum amount which could be payable by the Company in a
lawsuit brought by a former promissory note holder. The litigation is in
the discovery phase and a trial date has not yet been scheduled.
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
In December 1999 the Company distributed certain assets and incurred a
contingent obligation, under the agreement to separate the interests of its
former president and director (the "Separation Agreement"). The contingent
obligation, in the amount of $3,152,000 at June 30, 2000 is the present
value of the remaining payments under the Separation Agreement and is
included in other accrued expenses. Interest on the contingent obligation
has been imputed at 12.75% and amounted to $205,000 for the six months
ended June 30, 2000.
5. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
Textile Products
Revolving credit facility, prime + .25% or
Libor + 2.50%, due December 2002 ............................. $11,932 $11,545
Acquisition credit facility, prime + .50% or
Libor + 2.50%, due December 2002 ............................. 1,000 --
Equipment credit facility, prime + .25% or
Libor + 2.75%, due December 2002 ............................ -- --
------- -------
12,932 11,545
Hotels
Term loan, 7.50% fixed, due October 2008 ......................... 16,844 16,968
Term loan, 7.86% fixed, due January 2008 ......................... 6,526 6,577
Term loan, 8.20% fixed, due November 2007 ........................ 5,103 5,142
Capital leases, 12.18% fixed, due December 2004 .................. 1,902 2,085
Term loan, Libor + 7.5%, due October 2005 ........................ 1,078 1,146
------- -------
31,453 31,918
Other
Senior Secured Term Loan, 10.25% fixed, due December 2004 ........ 16,569 18,000
Convertible loan from stockholder, 10% fixed, due March 2005 ..... 1,500 --
------- -------
18,069 18,000
------- -------
Total ........................................................ $62,454 $61,463
======= =======
Further information regarding loans payable is provided below:
Textile Products
Revolving credit facility. In December 1999 the Former Credit Agreement
was replaced by a new revolving credit facility in an amount up to
$17,000,000 with Key Bank National Association ("Key Credit Agreement").
Availability for direct borrowings and letter of credit obligations under
the Key Credit Agreement are limited to the lesser of the facility amount
or the borrowing base so defined in the agreement. As of June 30, 2000,
Brookwood had an additional $1,884,000 of borrowing base availability.
Borrowings are collateralized by accounts receivable, inventory imported
under trade letters of credit, certain finished goods inventory, machinery
and equipment and all of the issued and outstanding capital stock of
Brookwood and its subsidiaries. The revolving credit facility bears
interest at Brookwood's option of one-quarter percent over prime (9.75% at
June 30, 2000) or Libor plus 2.50%. The revolving credit agreement contains
covenants, which include maintenance of certain financial ratios,
restrictions on dividends and repayment of debt or cash transfers to the
parent company.
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
At June 30, 2000, Brookwood was not in compliance with a coverage ratio
covenant contained in the Key Credit Agreement. Management has contacted
the lender regarding the technical violation and believes that a waiver
will be obtained.
Acquisition credit facility. The Key Credit Agreement provides for a
$2,000,000 acquisition credit line. Brookwood borrowed $1,000,000 under
this line during the six months ended June 30, 2000, to acquire the assets
of a company in a related industry for $1,450,000 in cash plus contingent
payments based upon earnings. This facility bears interest at one-half
percent over the prime rate (10.00% at June 30, 2000).
Equipment credit facility. The Key Credit Agreement provides for a
$2,000,000 equipment credit line. There are no borrowings under this
facility.
The outstanding balance of the combined Key Bank credit facilities at
June 30, 2000 was $12,932,000.
Hotels
Term loans. In September 1998, the Company's Hallwood Hotels - OKC,
Inc. subsidiary entered into a mortgage loan for $17,250,000,
collateralized by the Embassy Suites hotel located in Oklahoma City,
Oklahoma, to acquire the hotel, which was formerly held as a leasehold
interest. Significant terms include: (i) fixed interest rate of 7.5%; (ii)
monthly loan payments of $127,476, based upon a 25-year amortization
schedule, with a maturity date of October 2008; (iii) prepayment permitted
after November 2000, subject to yield maintenance provisions; and (iv)
various other financial and non-financial covenants. The outstanding
balance at June 30, 2000 was $16,844,000.
Concurrently, the Company's Hallwood Hotels - OKC-Mezz, Inc. subsidiary
entered into a mezzanine loan for $1,300,000 related to the purchase of the
Embassy Suites hotel. Significant terms include: (i) interest rate of Libor
plus 7.5% (14.14% at June 30, 2000), subject to an interest rate agreement
which caps the interest rate at 15%; (ii) maturity date of October 2005;
and (iii) prepayment permitted at any time without penalty, upon 30-day
notice to lender. The outstanding balance at June 30, 2000 was $1,078,000.
Term loan. In December 1997, the Company's Brock Suite Greenville, Inc.
subsidiary entered into a $6,750,000 mortgage loan, collateralized by the
GuestHouse Suites Plus hotel located in Greenville, South Carolina, which
replaced the former term loan. Significant terms include: (i) fixed
interest rate of 7.86%; (ii) monthly loan payments of $51,473, based upon
25-year amortization schedule, with a maturity date of January 2008; (iii)
prepayment permitted after December 1999, subject to yield maintenance
provisions; and (iv) various other financial and non-financial covenants.
The outstanding balance at June 30, 2000 was $6,526,000.
Term loan. In October 1997, the Company's Brock Suite Tulsa, Inc.
subsidiary entered into a new $5,280,000 mortgage loan collateralized by
the GuestHouse Suites Plus hotel in Tulsa, Oklahoma, which replaced the
former term loan. Significant terms include: (i) fixed interest rate of
8.20%; (ii) monthly loan payments of $41,454, based upon 25-year
amortization schedule, with a maturity date of November 2007; (iii)
prepayment permitted after October 2001, subject to yield maintenance
provisions; and (iv) various other financial and non-financial covenants.
The outstanding balance at June 30, 2000 was $5,103,000.
Capital leases. During 1999, the Company's Brock Suite Hotels
subsidiaries entered into three separate five-year capital leasing
agreements for furniture, fixtures and building improvements at a cost of
$2,085,000 for the three GuestHouse Suites Plus properties. The lease terms
commenced January 2000 and expire in December 2004. The combined monthly
lease payment is $46,570 and the effective interest rate is 12.18%. The
outstanding balance at June 30, 2000 was $1,902,000.
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
Other
Senior secured term loan. In December 1999, the Company and its HWG,
LLC subsidiary entered into an $18,000,000 credit agreement with First Bank
Texas, N.A. and other financial institutions (the "Senior Secured Term
Loan"). Proceeds were used to repay the 7% Debentures, the energy term loan
and provide working capital. The Senior Secured Term Loan bears interest at
a fixed rate of 10.25%, matures in December 2004, is fully amortizing and
requires a monthly payment of $385,000. Collateral is comprised of (i)
300,397 HRP limited partner units; (ii) 1,440,000 shares of Hallwood Energy
common stock; (iii) a senior lien on the capital stock of the Hallwood
Hotels, Inc. subsidiary; and (iv) a senior lien on the capital stock of the
Brock Suite Hotels, Inc. subsidiary. The Senior Secured Term Loan contains
various financial and non-financial covenants, including the maintenance of
certain financial ratios, and restrictions on certain new indebtedness and
the payment of dividends. The outstanding balance at June 30, 2000 was
$16,569,000.
At June 30, 2000, the Company was not in compliance with a coverage
ratio covenant contained in the Senior Secured Term Loan. Management has
contacted the lender regarding the technical violation and believes that a
waiver will be obtained.
Convertible loan from stockholder. In March 2000, the Company entered
into a new $1,500,000 loan with an entity associated with its chairman and
principal stockholder, Anthony J. Gumbiner. Significant terms include: (i)
fixed interest rate of 10%; (ii) interest and principal payments deferred
until maturity date of March 2005; (iii) unsecured; and (iv) convertible
into common stock of the Company at $10.13 per share, which was 115% of the
market price on the date the loan was approved by the Company's independent
board members.
6. DEBENTURES
10% Collateralized Subordinated Debentures. In June 1998, the Company
announced a commission-free exchange offer to all holders of 7% Debentures.
The Company offered to exchange a new issue of 10% Collateralized
Subordinated Debentures ("10% Debentures"), due July 31, 2005, for its 7%
Debentures, in the ratio of $100 principal amount of 10% Debentures for
each $100 principal amount of 7% Debentures tendered. The 7%
debentureholders tendered $6,467,830, or 31%, of the outstanding principal
amount.
The 10% Debentures were listed on The New York Stock Exchange and
commenced trading in August 1998. For accounting purposes, a pro-rata
portion of the unamortized gain attributable to the 7% Debentures, in the
amount of $353,000, was allocated to the 10% Debentures, and is being
amortized over the term of the 10% Debentures using the effective interest
method. As a result, the effective interest rate for financial reporting is
8.9%.
The 10% Debentures are secured by junior liens on the capital stock of
the Brookwood, Hallwood Hotels, Inc. and Brock Suite Hotels, Inc.
subsidiaries.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
Balance sheet amounts for the 10% Debentures are detailed below (in
thousands):
JUNE 30, DECEMBER 31,
DESCRIPTION 2000 1999
----------- -------- ------------
10% Debentures (face amount) ................ $6,468 $6,468
Unamortized gain from exchange, net of
accumulated amortization ................. 279 300
------ ------
Totals ................................ $6,747 $6,768
====== ======
Redemption of 7% Debentures. On December 22, 1999, the Company
announced the full redemption (the "Redemption") of its outstanding 7%
Debentures in the amount of $14,088,000 on January 21, 2000 (the
"Redemption Date.") The redemption price was 100% of the face amount plus
accrued and unpaid interest to the Redemption Date. Funding for the
Redemption was provided by proceeds from the new Senior Secured Term Loan.
In accordance with the terms of the indenture, the funds were irrevocably
transferred to the trustee on December 21, 1999, and the obligation was
effectively extinguished and collateral released. The Redemption was
actually completed by the trustee on January 21, 2000 on which date the 7%
Debentures were retired and canceled. The Company recognized an
extraordinary gain from debt extinguishment in December 1999 of $240,000
from the Redemption, representing the remaining balance of the unrecognized
gain at that time.
7. STOCKHOLDERS' EQUITY
On May 19, 2000 the Board of Directors granted the 70,800 available
options to purchase common stock under the 1995 Stock Option Plan at the
market price on the date of grant.
8. LISTING OF COMMON SHARES ON AMERICAN STOCK EXCHANGE
On June 22, 2000 the Company announced that the American Stock Exchange
had approved the listing application for its common shares under the
trading symbol HWG and has been trading on the American Stock Exchange
since that date. HWG is the same symbol that was previously assigned to the
Company's common shares by the New York Stock Exchange.
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
9. INCOME TAXES
The following is a summary of the income tax expense (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
Federal
Deferred ............. $ -- $ -- $170 $ --
Current .............. 5 20 27 25
---- ---- ---- ----
Sub-total ......... 5 20 197 25
State ................... 60 96 118 102
---- ---- ---- ----
Total ............. $ 65 $116 $315 $127
==== ==== ==== ====
The amount of the deferred tax asset (net of valuation allowance) was
$7,051,000 at June 30, 2000. The deferred tax asset arises principally from
the anticipated utilization of the Company's NOLs and tax credits from the
implementation of various tax planning strategies, which include the
potential sale of certain real estate investments, energy investments and
hotel properties, that could be implemented, if necessary, to supplement
income from operations to fully realize the net recorded tax benefits
before their expiration.
State tax expense is an estimate based upon taxable income allocated to
those states in which the Company does business, at their respective tax
rates.
10. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
-------------------------
DESCRIPTION 2000 1999
----------- -------- ---------
Supplemental schedule of non cash investing and financing activities:
Proportionate share of stockholders' equity/partners' capital
transactions from equity investments
HRP ................................................................ $ 291 $ --
Hallwood Energy .................................................... 84 --
Conversion of energy investment to equity method from proportional
consolidation method at consummation of energy consolidation
Oil and gas properties ............................................. $ -- $ 10,809
Current assets of HEP .............................................. -- 3,267
Noncurrent assets of HEP ........................................... -- 1,194
Receivables and other assets ....................................... -- 64
Long-term obligations of HEP ....................................... -- (6,872)
Current liabilities of HEP ......................................... -- (2,160)
Accounts payable and accrued expenses .............................. -- (684)
-------- --------
$ -- $ 5,618
======== ========
Supplemental disclosures of cash payments:
Interest paid .......................................................... $ 3,273 $ 1,351
Income taxes paid ...................................................... 185 43
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
11. COMPUTATION OF EARNINGS PER SHARE
The following table reconciles the Company's net income (loss) to net
income (loss) available to common stockholders, and the number of
equivalent common shares from unexercised stock options used in the
calculation of net income (loss) for the basic and assumed dilution methods
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
DESCRIPTION 2000 1999 2000 1999
----------- ------- ------- ------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
Net income (loss), as reported .......................... $ (70) $ 2,614 $ 257 $ 3,119
Less: Preferred stock dividends ......................... (50) (50) (50) (50)
------- ------- ------- -------
Net income (loss) available to common stockholders ... $ (120) $ 2,564 $ 207 $ 3,069
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ................................................... 1,425 1,883 1,425 1,883
Assumed issuance of shares from stock options
exercised ............................................ 54 82 54 82
Assumed repurchase of shares from stock options
proceeds ............................................. (49) (52) (45) (53)
------- ------- ------- -------
Assuming dilution .................................... 1,430 1,913 1,434 1,912
======= ======= ======= =======
The impact of the convertible loan from shareholder was anti-dilutive
for the three and six month periods ended June 30, 2000.
12. SEGMENT AND RELATED INFORMATION
The following represents the Company's reportable segment position for
the six months ended June 30, 2000 and 1999, respectively (in thousands):
REAL TEXTILE CONSOL
ESTATE ENERGY PRODUCTS HOTELS OTHER -IDATED
------- ------- -------- -------- ------- -------
SIX MONTHS ENDED JUNE 30, 2000
Total revenue from external sources .... $ 3,380 $ 1,337 $39,306 $ 9,978 $ 64 $54,065
======= ======= ======= ======== ======= =======
Operating income (loss) ................ $ 2,285 $ 1,337 $ 800 $ (1,416) $ -- $3,006
======= ======= ======= ======== =======
Unallocable expenses, net .............. $(2,434) (2,434)
======= -------
Income before income taxes ............. $ 572
=======
SIX MONTHS ENDED JUNE 30, 1999
Total revenue from external sources .... $ 5,369 $ 2,514 $44,269 $ 12,196 $ 251 $64,599
======= ======= ======= ======== ======= =======
Operating income (loss) ................ $ 3,861 $ 115 $ 1,093 $ (235) $ -- $ 4,834
======= ======= ======= ======== =======
Unallocable expenses, net .............. $(1,588) (1,588)
======= -------
Income before income taxes ............. $ 3,246
=======
No differences have occurred in the basis or methodologies used in the
preparation of this interim segment information from those used in the
December 31, 1999 annual report. The total assets for the Company's
operating segments have not materially changed since the December 31, 1999
annual report.
Page 18
19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported a net loss of $70,000 for the second quarter ended
June 30, 2000, compared to net income of $2,614,000 in the 1999 period.
Total revenue for the 2000 second quarter was $26,540,000, compared to
$33,184,000 in the prior-year period. Net income and revenue for the six
months was $257,000 and $54,065,000, compared to $3,119,000 and $64,599,000
in 1999, respectively.
Following is an analysis of the results of operations by asset
management and operating subsidiaries divisions and by the real estate,
energy, textile products and hotels business segments.
ASSET MANAGEMENT DIVISION
The Company's asset management division consists of real estate and
energy business segments.
REAL ESTATE
Revenue. Fee income of $1,525,000 for the quarter ended June 30, 2000
decreased by $1,818,000, or 54%, from $3,343,000 in the prior-year period.
Fee income of $3,031,000 for the six months decreased by $1,576,000, or 34%,
from $4,607,000 for the similar period. Fees are derived from the Company's
asset management, property management, leasing and construction supervision
services provided to its Hallwood Realty Partners, L.P. affiliate, a real
estate master limited partnership ("HRP"), and various third parties. The
decrease was due primarily to a $1,400,000 leasing commission earned in the
second quarter of 1999 in connection with the leasing of a commercial
building owned by HRP.
The equity income from investments in HRP represents the Company's
recognition of its pro rata share of net income reported by HRP, adjusted
for the elimination of intercompany income and amortization of negative
goodwill. For the 2000 second quarter, the Company reported income of
$76,000 compared to $373,000 in the period a year ago. For the six months,
income was $349,000, compared to $762,000 in 1999. The decrease resulted
principally from a reduced limited partner ownership percentage (21% in
2000, compared to 25% in 1999) and reduced earnings reported by HRP.
Expenses. Administrative expenses of $394,000 decreased by $260,000, or
40%, in the 2000 second quarter, compared to $654,000 in the prior-year
quarter. For the six months the decrease was $413,000 to $759,000, from
$1,172,000 in 1999. The decline was primarily attributable to the payments
of commissions to third party brokers associated with fee income.
Amortization expense of $168,000 for the second quarter, and $336,000
for the six months in both the 2000 and 1999 periods, relate to the
Company's general partner investment in HRP to the extent allocated to
management rights.
ENERGY
Revenue. Prior to the June 1999 energy consolidation discussed in Note
3, the Company and its energy subsidiaries accounted for their ownership of
HEP using the proportionate consolidation method of accounting, whereby the
entities recorded their proportional share of HEP's revenues and expenses.
Following the energy consolidation, the Company accounts for its investment
in Hallwood Energy using the equity method of accounting, as the Company
exercises significant influence over Hallwood Energy's operational and
financial policies. Accordingly, the revenue and expense items of the energy
segment reflect proportionally consolidated amounts through June 8, 1999.
Thereafter, the Company records its pro-rata share of Hallwood Energy's net
income available to common stockholders, preferred dividends and
amortization of negative goodwill as a single
Page 19
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
line item - equity income from investments in Hallwood Energy. Comparisons
between 2000 and 1999 are generally not meaningful, due to the change in
method of accounting.
The equity income from investment in Hallwood Energy for the 2000 second
quarter was $655,000, compared to an equity loss of $1,000 in the 1999
second quarter (June 9 through June 30, 1999 only). Equity income for the
2000 six month period was $1,337,000, which included $11,000 of preferred
dividends. The increase was due to higher income reported by Hallwood
Energy, partially offset by a decline in the Company's common stock
ownership in Hallwood Energy from 18% to 15% at June 30, 2000. Hallwood
Energy's income increased significantly in the 2000 second quarter and six
month periods, compared to 1999, as a result of higher oil and gas prices
and savings associated with the disposition of certain non-strategic
properties and the completion of the energy consolidation in June 1999.
Gas revenue for the 1999 second quarter and six month periods were
$783,000 and $1,677,000, respectively. Production for the 1999 six months
was 855,000 mcf, and the average gas price was $1.96 per mcf. Oil revenue
for the 1999 second quarter and six month periods were $285,000 and
$603,000, respectively, with production of 46,000 barrels, and the average
price was $13.11 per barrel. No comparable 2000 information is available due
to the energy consolidation in June 1999.
Other income of $140,000 and $235,000 in the 1999 second quarter and six
month periods, respectively, consists primarily of acquisition fee and
interest income, as well as a share of HEP's interest income, facilities
income from two gathering systems in New Mexico, pipeline revenue, equity in
income of affiliates and miscellaneous income or expense.
Expenses. For the 1999 second quarter and six month periods,
depreciation, depletion and amortization expense was $338,000 and $849,000;
operating expenses were $269,000 and $796,000; administrative expenses were
$202,000 and $537,000; and interest expense was $96,000 and $217,000,
respectively. No comparative amounts were recorded in the 2000 second
quarter or six month periods due to energy consolidation in June 1999.
OPERATING SUBSIDIARIES
The Company's operating subsidiaries division consists of textile
products and hotels business segments.
TEXTILE PRODUCTS
Revenue. Sales of $19,283,000 in the 2000 second quarter decreased by
$3,128,000, or 14%, compared to $22,411,000 in the 1999 quarter. The
comparative six month sales decreased by $4,963,000, or 11%, to $39,306,000
from $44,269,000 in the 1999 period. The decrease in distribution sales was
the result of U.S. customers moving production out of the country and was
partially offset by increased revenues at the dying and finishing and
laminating plants.
Expenses. Cost of sales of $16,304,000 in the 2000 second quarter
decreased by $2,711,000, or 14%, from $19,015,000 in 1999. The comparative
six month cost of sales decreased by $4,875,000, or 13%, compared to
$38,023,000 in 1999. The decrease in cost of sales was principally the
result of the decreased sales. The higher gross profit margin for the 2000
second quarter (15.4% versus 15.2%) and the six month periods (15.7% versus
14.1%) resulted from higher gross profit margins in the distribution
businesses. This resulted from a sales decrease of low margin business and
increased volume of lower cost imported fabric.
Page 20
21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Administrative and selling expenses of $2,406,000 increased by $17,000,
or 1%, in the 2000 second quarter from $2,389,000 for the comparable 1999
period. The six month amount of $4,776,000 increased by $88,000, or 2%, from
$4,688,000 for the comparable 1999 period.
Interest expense of $320,000 increased by $77,000, or 32%, in the 2000
second quarter from $243,000 for the comparable 1999 period, and increased
by $117,000 to $582,000 from $465,000 for the six months, due to higher
average borrowings and higher interest rates.
HOTELS
Revenue. Sales of $4,946,000 in the 2000 second quarter decreased by
$795,000, or 14%, from the year-ago amount of $5,741,000. For the six
months, sales of $9,978,000 decreased by $2,218,000, or 18%, compared to
$12,196,000 for the 1999 period. The decreases for the second quarter and
six month periods were primarily due to reduced management fees from the
Enclave Suites, a resort condominium hotel which was distributed in December
1999 as part of the separation agreement with a former officer and
shareholder, and lower occupancy at the Company's three GuestHouse Suites
Plus hotels, as a result of substantial renovations commenced during 1999
and completed by June 2000, partially offset by increased occupancy and
revenues at the Longboat Key Holiday Inn and Suites. The occupancy rates at
the GuestHouse properties are improving as marketing programs are
implemented following completion of the renovations. For the hotel segment,
average daily rate decreased 3% and average occupancy decreased 13% in the
2000 six month period compared to 1999.
Expenses. Operating expenses of $4,294,000 for the 2000 second quarter
were down $449,000, or 9%, from $4,743,000 in 1999. For the six months,
operating expenses of $8,548,000 decreased by $1,232,000, or 13%, compared
to $9,780,000 in 1999. The decreases for the second quarter and six month
periods were primarily attributable to reduced operating expenses related to
the December 1999 disposition of the Enclave Suites and the renovations at
the three GuestHouse properties.
Depreciation and amortization expense increased by $50,000 to $739,000
for the 2000 second quarter from $689,000 in the prior-year period. For the
six months, depreciation and amortization increased by $52,000, or 4%, to
$1,465,000 from $1,413,000 in 1999. The increases were due to additional
depreciation from capital leases less amounts attributable to the Enclave
Suites.
Interest expense increased by $43,000 to $670,000 for the 2000 second
quarter from $627,000 in 1999, and increased by $143,000 for the six months
to $1,381,000 from $1,238,000 in 1999, principally due to the interest
expense associated with capital leases at the three GuestHouse properties.
The five-year leases commenced on January 1, 2000.
OTHER
Revenue. Interest on short-term investments and other income increased
by $50,000 to $55,000 for the 2000 second quarter from $5,000 in 1999. For
the six months, the amounts increased by $54,000 to $64,000 from $10,000 in
1999. The increases were attributable to a gain in the 2000 second quarter
of $50,000 on the sale of a miscellaneous investment.
The Company received no fee income in the 2000 second quarter or six
month periods, compared to $104,000 and $241,000, respectively, in 1999. The
decreases were due to the termination of a consulting contract with the
Company's energy affiliate following the completion of the energy
consolidation in June 1999.
Expenses. Interest expense in the amount of $769,000 for the 2000 second
quarter increased by $469,000 from the prior year amount of $300,000. For
the six months, interest expense increased by $952,000 to
Page 21
22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
$1,547,000 from $595,000 in 1999. The increases were primarily due to
refinancing the 7% Debentures in December 1999 from proceeds of a new $18.0
million senior secured term loan with a fixed interest rate of 10.25% and an
effective interest rate of 12.75%, and interest costs on contingent payments
associated with the December 1999 Separation Agreement.
Administrative expenses of $481,000 for the 2000 second quarter
decreased by $240,000, from the prior-year amount of $721,000. For the six
months, the decrease was $293,000 to $951,000 in 2000 from $1,244,000 in
1999. The declines are primarily attributable to lower consulting and other
professional fees, partially offset by the elimination of certain overhead
reimbursements from the Company's energy affiliate following the completion
of the energy consolidation.
Income taxes. Income taxes were $65,000 for the 2000 second quarter,
compared to $116,000 in the 1999 quarter. The 2000 second quarter included a
$5,000 federal current charge and $60,000 for state taxes. The 1999 quarter
included a $20,000 federal current charge and $96,000 for state taxes.
Income taxes were $315,000 for the 2000 six month period, compared to
$127,000 in 1999. The 2000 six month period included a federal deferred tax
charge of $170,000, a federal current charge of $27,000, and state taxes of
$118,000. The 1999 six month period included a $25,000 federal current
charge and $102,000 for state taxes. The state tax expense is an estimate
based upon taxable income allocated to those states in which the Company
does business at their respective tax rates.
As of June 30, 2000, the Company had approximately $99,000,000 of tax
net operating loss carryforwards ("NOLs") and temporary differences to
reduce future federal income tax liability. Based upon the Company's
expectations and available tax planning strategies, management has
determined that taxable income will more likely than not be sufficient to
utilize approximately $20,738,000 of the NOLs prior to their ultimate
expiration in the year 2010.
Management believes that the Company has certain tax planning strategies
available, which include the potential sale of certain real estate
investments, energy investments and hotel properties, that could be
implemented, if necessary, to supplement income from operations to fully
realize the net recorded tax benefits before their expiration. Management
has considered such strategies in reaching its conclusion that, more likely
than not, taxable income will be sufficient to utilize a portion of the NOLs
before expiration; however, future levels of operating income and taxable
gains are dependent upon general economic conditions and other factors
beyond the Company's control. Accordingly, no assurance can be given that
sufficient taxable income will be generated for utilization of the NOLs.
Management periodically re-evaluates its tax planning strategies based upon
changes in facts and circumstances and, accordingly, considers potential
adjustments to the valuation allowance of the deferred tax asset. Although
the use of such carryforwards could, under certain circumstances, be
limited, the Company is presently unaware of the occurrence of any event
which would result in such limitations.
Page 22
23
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at June 30, 2000
totaled $1,013,000.
The Company's real estate segment generates funds principally from its
property management and leasing activities, without significant additional
capital costs. The Company has pledged 300,397 of its HRP limited
partnership units and the interest in its real estate subsidiaries to
collateralize the Senior Secured Term Loan and 30,035 HRP units to
collateralize hotel capital lease obligations.
Brookwood maintains a revolving line of credit facility, which is
collateralized by accounts receivable, certain inventory and equipment. At
June 30, 2000, Brookwood had $1,884,000 of unused borrowing capacity on its
revolving line of credit. In the year ended December 31, 1999, the Company
received a cash dividend of $400,000 from Brookwood and tax sharing payments
of $350,000. In 2000, the Company received a $400,000 cash dividend and tax
sharing payments of $200,000. Cash dividends are contingent upon Brookwood's
compliance with the covenants contained in its loan agreement
In February 2000, Brookwood acquired the assets of a company in a
related industry. The purchase price was $1,450,000 in cash plus contingent
payments of up to $3,000,000, based on specified levels of earnings over the
next four years. The seller retained a 10% interest in the acquired entity
and a 10% interest was acquired by members of Brookwood's management.
Although major capital expenditures are periodically required under
franchise agreements, cash flow from hotel operations have typically
contributed to the Company's working capital. Sales of hotels are also a
source of liquidity; however, a sale may be impacted by the ability of
prospective purchasers to obtain equity capital or suitable financing. The
Company completed a renovation of the Holiday Inn and Suites hotel in April
1998, partly financed by the owner in the form of higher lease payments.
During the second quarter of 2000 the Company completed the renovations of
all GuestHouse Suites Plus hotels at a cost of approximately $3,000,000,
funded by capital leases and capital reserves.
At June 30, 2000, the Company and its Brookwood subsidiary were not in
compliance with coverage ratio covenants contained in their respective loan
agreements. Management has contacted the lenders regarding the technical
violations and believes that waivers will be obtained.
Management believes that it will have sufficient funds for operations
and to satisfy its current obligations.
Page 23
24
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In the interest of providing stockholders with certain information
regarding the Company's future plans and operations, certain statements set
forth in this Form 10-Q are forward-looking statements. Although any
forward-looking statement expressed by or on behalf of the Company is, to
the knowledge and in the judgment of the officers and directors, expected to
prove true and come to pass, management is not able to predict the future
with absolute certainty. Forward-looking statements involve known and
unknown risks and uncertainties, which may cause the Company's actual
performance and financial results in future periods to differ materially
from any projection, estimate or forecasted result. Among others, these
risks and uncertainties include, the ability to obtain financing or
refinance maturing debt; a potential oversupply of commercial office
buildings, industrial parks and hotels in the markets served; fees for
leasing, construction and acquisition of real estate properties; lease and
rental rates and occupancy levels obtained; the volatility of oil and gas
prices; the ability to continually replace and expand oil and gas reserves;
and the imprecise process of estimating oil and gas reserves and future cash
flows. These risks and uncertainties are difficult or impossible to predict
accurately and many are beyond the control of the Company. Other risks and
uncertainties may be described, from time to time, in the Company's periodic
reports and filings with the Securities and Exchange Commission.
Page 24
25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risks during
the six months ended June 30, 2000.
The Company does not directly have any derivative financial instruments
in place as of June 30, 2000, nor does it have foreign operations. Also, the
Company does not enter into financial instrument transactions for trading or
other speculative purposes. However, the Company's energy division through
its investment in Hallwood Energy has attempted to hedge the exposure
related to its variable debt and its sales of forecasted oil and natural gas
production in amounts, which it believes are prudent based on the prices of
available derivatives and, in the case of production hedges, Hallwood
Energy's deliverable volumes. Hallwood Energy attempts to manage the
exposure to adverse changes in the fair value of its fixed rate debt
agreements by issuing fixed rate debt only when business conditions and
markets are favorable. Management does not consider the portion attributable
to the Company to be significant in relation to these derivative
instruments.
The Company's real estate division through its investment in HRP will
sometimes use derivative financial instruments to achieve a desired mix of
fixed versus floating debt. Management does not consider the portion
attributable to the Company to be significant on any derivative instrument
held by HRP.
The Company is exposed to market risk due to fluctuations in interest
rates. The Company utilizes both fixed rate and variable rate debt to
finance its operations. As of June 30, 2000, the Company's total outstanding
loans and debentures payable of $68,922,000 were comprised of $54,912,000 of
fixed rate debt and $14,010,000 of variable rate debt. There is inherent
rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and the Company's future
financing requirements. A hypothetical increase in interest rates of two
percentage points would cause an annual loss in income and cash flows of
approximately $1,378,000, assuming that outstanding debt remained at current
levels.
Page 25
26
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item
1 Legal Proceedings
Reference is made to Note 3 to the Company's consolidated financial
statements of this Form 10-Q.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 19, 2000,
stockholders voted on one proposal:
(i) To elect one director to hold office for three years and until a
successor is elected and qualified:
Nominee Director Votes For Against
---------------- --------- -------
Anthony J. Gumbiner 1,334,329 52,395
As a result of the above, the nominee director was elected for an
additional three-year term. The continuing directors are Messrs.
Crocco and Talbot.
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule Page 28
(b) Reports on Form 8-K None
Page 26
27
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: August 11, 2000 By: /s/ Melvin J. Melle
---------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
28
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule