1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------- -----------------
FOR THE PERIOD ENDED SEPTEMBER 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 October 31, 2000.
================================================================================
2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
-------- ------------------------------ ----
1 Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999................................................ 3
Consolidated Statements of Operations for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited)............ 5
Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999 (Unaudited)........... 7
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 2000 (Unaudited)..................... 9
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited)............ 10
Notes to Consolidated Financial Statements (Unaudited).................. 11
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 21
3 Quantitative and Qualitative Disclosures about Market Risk................. 26
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page........................... 27
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP ........................ $ 7,904 $ 8,232
Receivables and other assets
Related parties ........................ 259 1,698
Other .................................. 141 229
-------- --------
8,304 10,159
ENERGY
Investment in Hallwood Energy ............. 7,070 4,927
-------- --------
Total asset management assets .......... 15,374 15,086
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories ............................... 17,317 18,782
Receivables ............................... 12,324 12,630
Property, plant and equipment, net ........ 9,788 8,997
Other ..................................... 2,114 867
-------- --------
41,543 41,276
HOTELS
Properties, net ........................... 30,209 31,509
Receivables and other assets .............. 1,887 2,026
-------- --------
32,096 33,535
-------- --------
Total operating subsidiaries assets .... 73,639 74,811
OTHER
Deferred tax asset, net ................... 7,051 7,221
Restricted cash ........................... 1,673 1,883
Other ..................................... 1,610 1,791
Cash and cash equivalents ................. 1,344 926
-------- --------
Total other assets ..................... 11,678 11,821
-------- --------
TOTAL .................................. $100,691 $101,718
======== ========
See accompanying notes to consolidated financial statements.
Page 3
4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSET MANAGEMENT
REAL ESTATE
Accounts payable and accrued expenses ................................. $ 481 $ 707
ENERGY
Accounts payable and accrued expenses ................................. -- 465
--------- ---------
Total asset management liabilities ................................. 481 1,172
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable ......................................................... 11,678 11,545
Accounts payable and accrued expenses ................................. 8,707 8,506
--------- ---------
20,385 20,051
HOTELS
Loans payable ......................................................... 31,263 31,918
Accounts payable and accrued expenses ................................. 2,602 2,021
--------- ---------
33,865 33,939
--------- ---------
Total operating subsidiaries liabilities ........................... 54,250 53,990
OTHER
Senior Secured Term Loan .............................................. 15,849 18,000
10% Collateralized Subordinated Debentures ............................ 6,736 6,768
Interest and other accrued expenses ................................... 3,569 3,730
Convertible loans from stockholder .................................... 2,500 --
--------- ---------
Total other liabilities ............................................ 28,654 28,498
--------- ---------
TOTAL LIABILITIES .................................................. 83,385 83,660
REDEEMABLE PREFERRED STOCK
Series B, 250,000 shares issued and outstanding at both dates ......... 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 ............................................ 54,417 54,743
Accumulated deficit ................................................... (23,433) (23,007)
Treasury stock, 971,360 shares at both dates; at cost ................. (14,918) (14,918)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ......................................... 16,306 17,058
--------- ---------
TOTAL .............................................................. $ 100,691 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
------- -------
ASSET MANAGEMENT
REAL ESTATE
Fees
Related parties .................................. $ 4,079 $ 5,884
Other ............................................ 382 867
Equity income from investments in HRP ............... 516 1,001
------- -------
4,977 7,752
Administrative expenses ............................. 1,215 1,724
Depreciation and amortization ....................... 504 504
------- -------
1,719 2,228
------- -------
Income from real estate operations ............... 3,258 5,524
ENERGY
Equity income from investment in Hallwood Energy .... 2,493 190
Gas revenues ........................................ -- 1,677
Oil revenues ........................................ -- 603
Other income ........................................ -- 235
------- -------
2,493 2,705
Depreciation, depletion and amortization ............ -- 849
Operating expenses .................................. -- 796
Administrative expenses ............................. -- 537
Interest expense .................................... -- 249
------- -------
-- 2,431
------- -------
Income from energy operations .................... 2,493 274
------- -------
Income from asset management operations .......... 5,751 5,798
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales ............................................... 55,732 63,172
Cost of sales ....................................... 47,352 54,028
Administrative, selling and other expenses .......... 7,196 6,987
Interest expense .................................... 869 690
------- -------
55,417 61,705
------- -------
Income from textile products operations .......... 315 1,467
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)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
OPERATING SUBSIDIARIES (CONTINUED) 2000 1999
-------- --------
HOTELS
Sales .................................................. $ 14,338 $ 17,295
Operating expenses ..................................... 12,604 14,745
Depreciation and amortization .......................... 2,198 2,105
Interest expense ....................................... 2,055 1,869
-------- --------
16,857 18,719
-------- --------
Loss from hotel operations .......................... (2,519) (1,424)
-------- --------
Income (loss) from operating subsidiaries ........... (2,204) 43
OTHER
Interest on short-term investments and other income .... 77 94
Fee income from related parties ........................ -- 241
-------- --------
77 335
Interest expense ....................................... 2,327 893
Administrative expenses ................................ 1,340 1,813
-------- --------
3,667 2,706
-------- --------
Other loss, net ..................................... (3,590) (2,371)
-------- --------
Income (loss) before income taxes ...................... (43) 3,470
Income taxes ........................................... 333 220
-------- --------
NET INCOME (LOSS) ............................................. (376) 3,250
Preferred stock dividends .............................. 50 50
-------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS ............ $ (426) $ 3,200
======== ========
PER COMMON SHARE
Basic
Net income (loss) ...................................... $ (0.30) $ 1.70
======== ========
Assuming Dilution
Net income (loss) ...................................... $ (0.30) $ 1.67
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ..................................................... 1,425 1,883
======== ========
Assuming Dilution ......................................... 1,425 1,911
======== ========
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
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
ASSET MANAGEMENT
REAL ESTATE
Fees
Related parties ................................... $ 1,220 $ 1,811
Other ............................................. 210 333
Equity income from investments in HRP ................ 167 239
-------- --------
1,597 2,383
Administrative expenses .............................. 456 552
Depreciation and amortization ........................ 168 168
-------- --------
624 720
-------- --------
Income from real estate operations ................ 973 1,663
ENERGY
Equity income from investment in Hallwood Energy ..... 1,156 191
Interest expense ..................................... -- 32
-------- --------
Income from energy operations ..................... 1,156 159
-------- --------
Income from asset management operations ........... 2,129 1,822
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales ................................................ 16,426 18,903
Cost of sales ........................................ 14,204 16,005
Administrative, selling and other expenses ........... 2,420 2,299
Interest expense ..................................... 287 225
-------- --------
16,911 18,529
-------- --------
Income (loss) from textile products operations .... (485) 374
HOTELS
Sales ................................................ 4,360 5,099
Operating expenses ................................... 4,056 4,965
Depreciation and amortization ........................ 733 692
Interest expense ..................................... 674 631
-------- --------
5,463 6,288
-------- --------
Loss from hotel operations ........................ (1,103) (1,189)
-------- --------
Loss from operating subsidiaries .................. (1,588) (815)
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
SEPTEMBER 30,
--------------------
2000 1999
------- -------
OTHER
Interest on short-term investments and other income .... $ 13 $ 84
Interest expense ....................................... 780 298
Administrative expenses ................................ 389 569
------- -------
1,169 867
------- -------
Other loss, net ..................................... (1,156) (783)
------- -------
Income (loss) before income taxes ...................... (615) 224
Income taxes ........................................... 18 93
------- -------
NET INCOME (LOSS) ............................................. $ (633) $ 131
======= =======
PER COMMON SHARE
Basic
Net income (loss) ...................................... $ (0.44) $ 0.07
======= =======
Assuming Dilution
Net income (loss) ...................................... $ (0.44) $ 0.07
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ..................................................... 1,425 1,883
======= =======
Assuming Dilution ......................................... 1,425 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 loss................................ (376) (376)
Preferred stock dividends............... (50) (50)
Proportionate share of stockholders'
equity transactions from equity
investments.......................... (326) (326)
----- ---- ------- -------- --- -------- -------
BALANCE, SEPTEMBER 30, 2000................. 2,396 $240 $54,417 $(23,433) 971 $(14,918) $16,306
===== ==== ======= ======== === ======== =======
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ..................................................... $ (376) $ 3,250
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization ........................... 3,658 4,362
Equity in net income of Hallwood Energy ............................ (2,493) (190)
Equity in net income of HRP ........................................ (516) (1,001)
Decrease in deferred tax asset ..................................... 170 --
Amortization of deferred gain from debenture exchanges ............. (32) (327)
Preferred dividends from Hallwood Energy ........................... 11 11
Undistributed income from HEP ...................................... -- (484)
Distributions from HEP ............................................. -- 545
Net change in textile products assets and liabilities .............. 1,808 (2,443)
Net change in other assets and liabilities ......................... 2,066 (1,095)
Net change in energy assets and liabilities ........................ -- (481)
------- -------
Net cash provided by operating activities ....................... 4,296 2,147
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for textile products business acquisition .................... (1,479) --
Investments in textile products property and equipment ................ (1,351) (1,139)
Capital expenditures for hotels ....................................... (873) (826)
Purchase of minority shares in HEC .................................... (465) --
Proceeds from sale of Hallwood Energy preferred stock ................. 303 --
Net change in restricted cash for investing activities ................ 210 (310)
Investment in HEP by general partner .................................. -- (50)
Investments in energy property and equipment .......................... -- (8)
------- -------
Net cash used in investing activities ........................... (3,655) (2,333)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable ....................... 4,500 1,500
Repayment of bank borrowings and loans payable ........................ (4,673) (1,579)
Payment of preferred stock dividends .................................. (50) (50)
------- -------
Net cash used in financing activities ........................... (223) (129)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 418 (315)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 926 769
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 1,344 $ 454
======= =======
See accompanying notes to consolidated financial statements.
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 has evaluated Staff Accounting Bulletin No. 101 " Revenue
Recognition in Financial Statements" and does not believe its adoption will
have a significant impact on its consolidated financial statements.
2. INVESTMENTS IN REAL ESTATE AFFILIATE (DOLLAR AMOUNTS IN THOUSANDS)
AS OF SEPTEMBER 30, 2000 AMOUNT AT INCOME FROM INVESTMENTS
------------------------ WHICH CARRIED AT FOR THE NINE MONTHS ENDED
COST OR --------------------------- SEPTEMBER 30,
NUMBER OF ASCRIBED SEPTEMBER 30, DECEMBER 31, -------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 2000 1999 2000 1999
- ------------------------- --------- -------- ------------- ------------ --------- --------
HALLWOOD REALTY PARTNERS, L.P.
- - General partner interest..... -- $ 8,650 $2,725 $3,243 $ 35 $ 43
- - Limited partner interest..... 330,432 4,302 5,179 4,989 481 958
------- ------ ------ ---- ------
Totals..................... $12,952 $7,904 $8,232 $516 $1,001
======= ====== ====== ==== ======
At September 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 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 Company also
records non-cash adjustments for the elimination of intercompany
profits with a corresponding adjustment to equity income, and its
pro-rata share of HRP's capital transactions with corresponding
adjustments to additional paid-in capital The cumulative amount of such
non-cash adjustments from the original date of investment through
September 30, 2000, resulted in a $1,474,000 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
nine months ended September 30, 2000 and 1999 such amortization was
$504,000 in each period.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2000 were $42.50 and
$15.67, respectively. The general partner interest is not publicly
traded.
3. INVESTMENTS IN ENERGY AFFILIATE (DOLLAR AMOUNTS IN THOUSANDS)
AS OF SEPTEMBER 30, 2000 AMOUNT AT INCOME FROM INVESTMENTS
------------------------ WHICH CARRIED AT FOR THE NINE MONTHS ENDED
COST OR --------------------------- SEPTEMBER 30,
NUMBER OF ASCRIBED SEPTEMBER 30, DECEMBER 31, -------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 2000 1999 2000 1999
- ------------------------- --------- -------- ------------- ------------ --------- --------
HALLWOOD ENERGY CORPORATION
- - Common stock................. 1,440,000 $4,318 $7,070 $4,624 $2,482 $179
- - Preferred stock.............. -- -- 303 11 11
------ ------ ------ ------ ----
Totals..................... $4,318 $7,070 $4,927 $2,493 $190
====== ====== ====== ====== ====
At September 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), 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 and its pro-rata share of
any capital transactions. The cumulative effect of such adjustments from
the original date of investment through September 30, 2000, resulted in
a $36,000 decrease in the carrying value of the investment.
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 September 30, 2000 were $9.94 and $4.91,
respectively
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
4. INVENTORIES
Inventories for the textile products business segment consist of the
following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Raw materials .................. $ 4,275 $ 6,044
Work in progress ............... 3,426 3,391
Finished goods ................. 9,985 9,775
-------- --------
17,686 19,210
Less: obsolescence reserve .... (369) (428)
-------- --------
Total .................... $ 17,317 $ 18,782
======== ========
5. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Textile Products
Revolving credit facility, prime + .25% or
Libor + 2.50%, due December 2002 ......................... $ 9,678 $11,545
Acquisition credit facility, prime + .50% or
Libor + 2.75%, due December 2002 ......................... 1,000 --
Equipment credit facility, prime + .25% or
Libor + 2.75%, due December 2002 ........................ 1,000 --
------- -------
11,678 11,545
Hotels
Term loan, 7.50% fixed, due October 2008 ..................... 16,807 16,968
Term loan, 7.86% fixed, due January 2008 ..................... 6,504 6,577
Term loan, 8.20% fixed, due November 2007 .................... 5,093 5,142
Capital leases, 12.18% fixed, due December 2004 .............. 1,819 2,085
Term loan, Libor + 7.5%, due October 2005 .................... 1,040 1,146
------- -------
31,263 31,918
Other
Senior Secured Term Loan, 10.25% fixed, due December 2004 .... 15,849 18,000
Convertible loans from stockholder, 10% fixed,
due March 2005 and September 2005 ........................ 2,500 --
------- -------
18,349 18,000
------- -------
Total .................................................... $61,290 $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 as defined in the agreement. As of September 30,
2000, Brookwood had an additional $3,063,000 of borrowing base
availability. Borrowings are collateralized by
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
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 September 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.
At June 30, 2000, Brookwood was not in compliance with a coverage ratio
covenant contained in the Key Credit Agreement and subsequently obtained a
waiver of the violation. The waiver provides for an increase of 0.50% in
interest rates on the revolving credit facility and the acquisition credit
facility, effective October 23, 2000, restrictions on payments to the
parent company and certain other restrictive provisions. At September 30,
2000, Brookwood was not in compliance with the same coverage ratio
covenant, but expects to obtain a waiver in due course. Cash dividends and
tax sharing payments to the parent company are contingent upon Brookwood's
compliance with the covenants contained in the loan agreement.
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 nine months ended September 30, 2000. This facility
bears interest at one-half percent over the prime rate (10.00% at September
30, 2000).
Equipment credit facility. The Key Credit Agreement provides for a
$2,000,000 equipment credit line. Brookwood borrowed $1,000,000 under this
line during the nine months ended September 30, 2000. The facility bears
interest at Libor plus 2.75% (9.37% at September 30,
2000.)
The outstanding balance of the combined Key Bank credit facilities at
September 30, 2000 was $11,678,000.
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. 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 September 30, 2000 was $16,807,000.
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% (14.12% at September 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 thirty-day notice to lender. The outstanding balance at September 30,
2000 was $1,040,000.
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.
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 September
30, 2000 was $6,504,000.
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. 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 September 30, 2000 was
$5,093,000.
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
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 Company has pledged
30,035 HRP limited partner units as additional collateral to secure the
leases. The combined monthly lease payment is $46,570 and the effective
interest rate is 12.18%. The outstanding balance at September 30, 2000 was
$1,819,000.
Other. The Company's three GuestHouse Suites Plus hotels have been
experiencing cash flow difficulties, due to weaker occupancy and average
daily rates following recent renovations. Management has directed its
efforts to increasing the cash flows through improved marketing programs
and stringent cost reductions. Additionally, the Company has contacted the
two lenders and landlord to discuss each hotel's cash flow position. The
October and November 2000 mortgage payments on the Greenville and Tulsa
hotels and the lease rent payment on the Huntsville hotel have not been
made, and discussions continue with the parties regarding loan or lease
modifications. Payments on the three capital leases are current.
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 September 30, 2000 was
$15,849,000.
At June 30, 2000, the Company was not in compliance with a coverage
ratio covenant contained in the Senior Secured Term Loan. Management
obtained a waiver as part of a formal loan amendment, which incorporates
certain modifications to the covenant calculation. The Company was in
compliance with all loan covenants at September 30, 2000.
Convertible loans from stockholder. In March 2000 and September 2000,
the Company entered into loan agreements with an entity associated with its
chairman and principal stockholder, Anthony J. Gumbiner, in the amount of
$1,500,000 and $1,000,000, respectively. Significant terms include: (i)
term of five years; (ii) fixed interest rate of 10%; (iii) interest and
principal payments deferred until maturity; (iv) unsecured; and (v)
convertible into common stock of the Company at $10.13 per share (March
loan) and $6.47 per share (September loan), which were 115% of the market
price on the date each loan was approved by the Company's independent board
members.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
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 are listed on The New York Stock Exchange. 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.
Balance sheet amounts for the 10% Debentures are detailed below (in
thousands):
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 2000 1999
----------- ------------- ------------
10% Debentures (face amount) .............. $6,468 $6,468
Unamortized gain from exchange, net of
accumulated amortization ............... 268 300
------ ------
Totals .............................. $6,736 $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.
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
8. INCOME TAXES
The following is a summary of the income tax expense (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
Federal
Deferred ........ $ -- $ -- $170 $ --
Current ......... 11 3 38 28
---- ---- ---- ----
Sub-total .... 11 3 208 28
State .............. 7 90 125 192
---- ---- ---- ----
Total ........ $ 18 $ 93 $333 $220
==== ==== ==== ====
The amount of the deferred tax asset (net of valuation allowance) was
$7,051,000 at September 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 assets 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.
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
9. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 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 ................................................... 35 --
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 ............................. -- (602)
-------- --------
-- $ 5,700
======== ========
Supplemental disclosures of cash payments:
Interest paid ......................................................... $ 4,571 $ 3,926
Income taxes paid ..................................................... 321 838
10. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
DESCRIPTION 2000 1999 2000 1999
----------- ------- ------- ------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
Net income (loss), as reported ........................ $ (633) $ 131 $ (376) $ 3,250
Preferred stock dividends ............................. -- -- (50) (50)
------- ------- ------- -------
Net income (loss) available to common stockholders .... $ (633) $ 131 $ (426) $ 3,200
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ................................................. 1,425 1,883 1,425 1,883
Assumed issuance of shares from stock options
exercised .......................................... -- 82 54 82
Assumed repurchase of shares from stock options
proceeds ........................................... -- (52) (50) (54)
Anti-dilutive stock options ........................... -- -- (4) --
------- ------- ------- -------
Assuming dilution ..................................... 1,425 1,913 1,425 1,911
======= ======= ======= =======
The impact of the convertible loans from shareholder were anti-dilutive
for the three and nine month periods ended September 30, 2000.
Page 18
19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
11. 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. in the Delaware
Court of Chancery. The first suit sought access to certain books and
records of HRP and was subsequently settled. The second action alleges
claims of breach of fiduciary duties, breach of HRP's partnership
agreement, and fraud in connection with certain transactions involving
HRP's limited partnership units in the mid 1990's. The Company is alleged
to have aided and abetted the alleged breaches. In June 2000, after
completing fact discovery, all parties moved for summary judgment on
several issues. In September and October 2000, the Delaware court issued
three separate written opinions resolving the summary judgment motions. In
the opinions, the court ruled that trial would be required as to all
issues, except that (i) Gotham was found to have standing to pursue its
derivative claims; (ii) defendants were entitled to judgment dismissing the
fraud claim; (iii) the general partner was entitled to judgment dismissing
the breach of fiduciary duty claims brought against it; and (iv) the
general partner's outside directors were entitled to judgement dismissing
all claims brought against them. The action will now proceed to trial,
which is currently scheduled for January 2001. Management believes that the
claims are without merit and intend to defend against the claims
vigorously, but cannot predict the outcome of the claims or any possible
effect an adverse outcome might have.
In February 2000, HRP filed a lawsuit in the United States District
Court for the Southern District of New York styled Hallwood Realty
Partners, L.P. v. Gotham Partners, L.P., et al (Civ. No. 00 CV 115)
alleging violations of the Securities Exchange Act of 1934 by certain
purchasers of HRP's limited partnership units, including Gotham Partners,
L.P., Gotham Partners, III L.P., Private Management Group, Inc., Interstate
Properties, Steven Roth and EFO Realty, Inc., by virtue of those
purchasers' misrepresentations and/or omissions in connection with filings
required under the Securities Exchange Act of 1934. HRP seeks various forms
of relief, including declaratory judgments, divestiture, corrective
disclosures, a "cooling-off" period and damages, including costs and
disbursements. In March 2000, all defendants filed motions to dismiss for
failure to state a claim and failure to plead fraud with sufficient
particularity. In May 2000, these motions were denied in their entirety,
allowing the case to proceed. Defendant Private Management Group, Inc. also
filed a motion to dismiss for lack of proper jurisdiction, or in the
alternative, to transfer. This motion was denied in July 2000. In October
2000, HRP filed a motion for leave to file an amended complaint (a) to add
as defendants Gotham Holdings II, L.L.C., Hallwood Investors, L.P., Liberty
Realty Partners, L.P. and EFO/Liberty, Inc., as discovery has revealed that
each of the proposed additional defendants is an actual or beneficial owner
of HRP units, (b) to remove EFO Realty, Inc. as a defendant, and (c) to
make certain minor corrections and clarifications to HRP's original
allegations, all consistent with discovery to date. No party opposed the
motion. Discovery has been proceeding and is set to be completed by
December 2000.
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.
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 $3,129,000 at September 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 $307,000 for the nine
months ended September 30, 2000.
Page 19
20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
In February 2000, the Company, through a wholly owned subsidiary,
acquired the assets of a company in a textile products-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.
12. SEGMENT AND RELATED INFORMATION
The following represents the Company's reportable segment position for
the nine months ended September 30, 2000 and 1999, respectively (in
thousands):
REAL TEXTILE CONSOL-
ESTATE ENERGY PRODUCTS HOTELS OTHER IDATED
------- ------ -------- ------ ------- --------
NINE MONTHS ENDED SEPTEMBER 30, 2000
Total revenue from external sources ...... $ 4,977 $ 2,493 $ 55,732 $ 14,338 $ 77 $ 77,617
======== ======== ======== ======== ======== ========
Operating income (loss) .................. $ 3,258 $ 2,493 $ 315 $ (2,519) -- $ 3,547
======== ======== ======== ======== ========
Unallocable expenses, net ................ $ (3,590) (3,590)
======== --------
Loss before income taxes ................. $ (43)
========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Total revenue from external sources ...... $ 7,752 $ 2,705 $ 63,172 $ 17,295 $ 335 $ 91,259
======== ======== ======== ======== ======== ========
Operating income (loss) .................. $ 5,524 $ 274 $ 1,467 $ (1,424) -- $ 5,841
======== ======== ======== ======== ========
Unallocable expenses, net ................ $ (2,371) (2,371)
======== --------
Income before income taxes ............... $ 3,470
========
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.
13. 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 20
21
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 $633,000 for the third quarter ended
September 30, 2000, compared to net income of $131,000 in the 1999 period.
Total revenue for the quarter was $23,552,000, compared to $26,660,000 in
the prior-year period. For the nine month period, the Company reported a
net loss of $376,000, compared to net income of $3,250,000 in the 1999
period. Total revenue was $77,617,000, compared to $91,259,000 in the
prior-year period.
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 $1,430,000 for the quarter ended September 30,
2000 decreased by $714,000, or 33%, from $2,144,000 in the prior-year
period. Fee income of $4,461,000 for the nine months decreased by
$2,290,000, or 34%, from $6,751,000 for the prior-year 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 decreases for the third quarter and nine
month periods were due primarily to leasing commissions and other fees
earned in 1999 from the development and 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 third quarter, the Company reported income of
$167,000, compared to $239,000 in the period a year ago. For the nine
months, income was $516,000, compared to $1,001,000 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 $456,000 decreased by $96,000, or
17%, in the 2000 third quarter, compared to $552,000 in the prior-year
quarter. For the nine months, the decrease was $509,000 to $1,215,000, from
$1,724,000 in 1999. The declines were primarily attributable to the
payments of commissions to third-party brokers in 1999 associated with
leasing commission income.
Amortization expense of $168,000 for the third quarter and $504,000 for
the nine 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 line item - Equity income
from investment in Hallwood Energy. Comparisons between 2000 and 1999 are
generally not meaningful, due to the change in method of accounting.
Page 21
22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The equity income from investment in Hallwood Energy for the 2000 third
quarter was $1,156,000, compared to $191,000 in the 1999 third quarter.
Equity income for the 2000 nine month period was $2,493,000, compared to
$190,000 in the 1999 period. 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% at September 30, 1999 to 15% at
September 30, 2000. Hallwood Energy's income increased significantly in the
2000 third quarter and nine 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 nine month period was $1,677,000. Production
for the 1999 period was 855,000 mcf, and the average gas price was $1.96
per mcf. Oil revenue for the 1999 nine month period was $603,000, with
production of 46,000 barrels, and the average price was $13.11 per barrel.
No comparable 2000 information is recorded due to the completion of the
energy consolidation in June 1999.
Other income of $235,000 in the 1999 nine month period, 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 nine month period, depreciation, depletion and
amortization expense was $849,000; operating expenses were $796,000;
administrative expenses were $537,000; and interest expense was $249,000.
No comparative amounts were recorded in the 2000 third quarter or nine
month periods, due to the completion of the energy consolidation in June
1999 and subsequent utilization of equity accounting.
OPERATING SUBSIDIARIES
The Company's operating subsidiaries division consists of textile
products and hotels business segments.
TEXTILE PRODUCTS
Revenue. Sales of $16,426,000 in the 2000 third quarter decreased by
$2,477,000, or 13%, compared to $18,903,000 in the 1999 quarter. The nine
month sales of $55,732,000 decreased by $7,440,000, or 12%, compared to
$63,172,000 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 and revenues from new projects to diversify the Company's
product base.
Expenses. Cost of sales of $14,204,000 in the 2000 third quarter
decreased by $1,801,000, or 11%, from $16,005,000 in 1999. The nine month
cost of sales of $47,352,000 decreased by $6,676,000, or 12%, compared to
$54,028,000 in 1999. The decrease in cost of sales was principally the
result of the decreased sales. The lower gross profit margin for the 2000
third quarter (13.5% versus 15.3%) was due to increased costs for energy
and employee health benefits at the dying and finishing plant. The
increased margin for the nine month periods (15.0% versus 14.5%) resulted
from higher gross profit margins in the distribution businesses. This
increased margin resulted from a sales decrease of low margin business and
increased sales volume of products with higher margins.
Administrative and selling expenses of $2,420,000 increased by
$121,000, or 5%, in the 2000 third quarter from $2,299,000 for the
comparable 1999 period. The nine month amount of $7,196,000 increased by
$209,000, or 3%, from $6,987,000 for the comparable 1999 period. The
increases are due to the administrative and selling expenses associated
with new projects, offset by reduced expenses in the existing distribution
businesses.
Interest expense of $287,000 increased by $62,000, or 28%, in the 2000
third quarter from $225,000 for the comparable 1999 period, and increased
by $179,000 to $869,000 from $690,000 for the nine months, principally due
to higher interest rates. See also Liquidity and Capital Resources.
Page 22
23
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HOTELS
Revenue. Sales of $4,360,000 in the 2000 third quarter decreased by
$739,000, or 14%, from the year-ago amount of $5,099,000. For the nine
months, sales of $14,338,000 decreased by $2,957,000, or 17%, compared to
$17,295,000 for the 1999 period. The decreases for the third quarter and
nine month periods were primarily due to reduced management fees from the
Enclave Suites, 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 nine month period in 2000, average
daily rate decreased 2% and average occupancy decreased 9% compared to
1999.
Expenses. Operating expenses of $4,056,000 for the 2000 third quarter
decreased by $909,000, or 18%, from $4,965,000 in 1999. For the nine
months, operating expenses of $12,604,000 decreased by $2,141,000, or 15%,
compared to $14,745,000 in 1999. The decreases for the third quarter and
nine month periods were primarily attributable to reduced operating
expenses related to the December 1999 disposition of the Enclave Suites and
renovations at the three GuestHouse properties.
Depreciation and amortization expense increased by $41,000 to $733,000
for the 2000 third quarter from $692,000 in the prior-year period. For the
nine months, depreciation and amortization increased by $93,000, or 4%, to
$2,198,000 from $2,105,000 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 $674,000 for the 2000 third
quarter from $631,000 in 1999, and increased by $186,000 for the nine
months to $2,055,000 from $1,869,000 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. See also
Liquidity and Capital Resources.
OTHER
Revenue. Interest on short-term investments and other income decreased
by $71,000 to $13,000 for the 2000 third quarter from $84,000 in 1999. For
the nine months, the amounts decreased by $17,000 to $77,000 from $94,000
in 1999. The decreases were attributable to rental income earned in 1999
from the subleasing of executive office space formerly occupied by an
affiliated entity, partially offset by a gain in 2000 on the sale of a
miscellaneous investment.
The Company received no fee income in the 2000 nine month period,
compared to $241,000 in 1999. The decrease was 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 of $780,000 for the 2000 third quarter
increased by $482,000 from the prior year amount of $298,000. For the nine
months, interest expense of $2,327,000 increased by $1,434,000 from
$893,000 in 1999. The increases were primarily due to refinancing the 7%
Debentures in December 1999 from proceeds of the 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
Separation Agreement
Administrative expenses of $389,000 for the 2000 third quarter
decreased by $180,000, from the prior-year amount of $569,000. For the nine
months, the decrease was $473,000 to $1,340,000 in 2000 from $1,813,000 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.
Page 23
24
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income taxes. Income taxes were $18,000 for the 2000 third quarter,
compared to $93,000 in the 1999 quarter. The 2000 third quarter included an
$11,000 federal current charge and $7,000 for state taxes. The 1999 quarter
included a $3,000 federal current charge and $90,000 for state taxes.
Income taxes were $333,000 for the 2000 nine month period, compared to
$220,000 in 1999. The 2000 nine month period included a federal deferred
tax change of $170,000, a federal current charge of $38,000, and state
taxes of $125,000. The 1999 nine month period included a $28,000 federal
current charge and state taxes $192,000. 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 September 30, 2000, the Company had approximately $99,000,000 of
book 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 $20,650,000 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 24
25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at September 30,
2000 totaled $1,344,000.
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
September 30, 2000, Brookwood had $3,063,000 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 and tax sharing payments of
$350,000. In 2000, the Company received a $400,000 cash dividend and tax
sharing payments of $200,000.
At June 30, 2000, Brookwood was not in compliance with a coverage ratio
covenant contained in the Key Credit Agreement and subsequently obtained a
waiver of the violation, which provides for an increase of 0.50% in
interest rates on two of the three loan facilities, restrictions on
payments to the parent company and certain other restrictive provisions. At
September 30, 2000, Brookwood was not in compliance with the same coverage
ratio covenant, but expects to obtain a waiver in due course. Cash
dividends and tax sharing payments to the parent company are contingent
upon Brookwood's compliance with the covenants contained in the loan
agreement.
In February 2000, the Company, through a wholly owned subsidiary,
acquired the assets of a company in a textile products-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.
Historically, the hotel operations have contributed cash flow to the
Company's working capital. However, the Company's three GuestHouse Suites
Plus hotels have been experiencing cash flow difficulties due to weaker
occupancy and average daily rates following recent renovations. Management
has directed its efforts to increasing the cash flows through improved
marketing programs to increase occupancy levels and stringent cost
reductions. Additionally, the Company has contacted the two lenders and
landlord to discuss each hotel's cash flow position. The October and
November 2000 mortgage payments on the Greenville and Tulsa hotels and the
lease rent payment on the Huntsville hotel have not been made and
discussions continue with the parties regarding loan or lease
modifications. Payments on the three capital leases are current.
At June 30, 2000, the Company was not in compliance with a coverage
ratio covenant contained in the Senior Secured Term Loan. Management
obtained a waiver as part of a formal loan amendment, which incorporates
certain modifications to the covenant calculation. The Company was in
compliance with all loan covenants at September 30, 2000.
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 25
26
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 nine months ended September 30, 2000.
The Company has one interest rate cap agreement as of September 30,
2000, which has a minimal carrying and market value. The Company has no
foreign operations, nor does it 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 September 30, 2000, the Company's total
outstanding loans and debentures payable of $67,758,000 were comprised of
$55,040,000 of fixed rate debt and $14,691,000 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 $1,355,000, assuming that
outstanding debt remained at current levels.
Page 26
27
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item
- ----
1 Legal Proceedings
Reference is made to Note 11 to the Company's consolidated financial
statements of this Form 10-Q.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders None
5 Other Information
None
6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.17 - First Amendment to Credit Agreement, dated as of September 11, 2000
by and among HWG, LLC, The Hallwood Group Incorporated, First Bank
Texas, N.A., as Administrative Agent, and the Financial Institutions,
as Lenders
10.18 - Convertible Unsecured Promissory Note in the amount of $1,000,000, dated
as of September 15, 2000, between Hallwood Investment Company and
Hallwood Investment Limited
10.19 - First Amendment to First Amended and Restated Revolving Credit Loan
and Security Agreement, dated as of October 23, 2000, by and among
Key Bank National Association, Brookwood Companies Incorporated and
certain subsidiaries
27 - Financial Data Schedule
(b) Reports on Form 8-K None
Page 27
28
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: November 14, 2000 By: /s/ Melvin J. Melle
-------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
29
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.17 First Amendment to Credit Agreement, dated as of September 11,
2000 by and among HWG, LLC, The Hallwood Group Incorporated,
First Bank Texas, N.A., as Administrative Agent and the Financial
Institutions, as Lenders
10.18 Convertible Unsecured Promissory Note in the amount of
$1,000,000, dated as of September 15, 2000, between Hallwood
Investment Company and Hallwood Investment Limited
10.19 First Amendment to First Amended and Restated Revolving Credit
Loan and Security Agreement, dated as of October 23, 2000, by and
among Key Bank National Association, Brookwood Companies
Incorporated and certain subsidiaries
27 Financial Data Schedule