<PAGE> 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 MARCH 31, 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 April 30, 2000.
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<PAGE> 2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
-------- ------------------------------ ----
<S> <C> <C>
1 Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999.................................................. 3-4
Consolidated Statements of Income for the
Three Months Ended March 31, 2000 and 1999............................. 5-6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999............................. 7
Notes to Consolidated Financial Statements................................. 8-15
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 16-20
3 Quantitative and Qualitative Disclosures about Market Risk..................... 21
PART II - OTHER INFORMATION
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page............................... 22-23
</TABLE>
Page 2
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP ........................ $ 8,338 $ 8,232
Receivables and other assets
Related parties ........................ 1,768 1,698
Other .................................. 133 229
------------ ------------
10,239 10,159
ENERGY
Investment in Hallwood Energy ............. 5,294 4,927
------------ ------------
Total asset management assets .......... 15,533 15,086
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories ............................... 18,839 18,782
Receivables ............................... 14,479 12,630
Property, plant and equipment, net ........ 9,367 8,997
Other ..................................... 1,865 867
------------ ------------
44,550 41,276
HOTELS
Properties, net ........................... 31,093 31,509
Receivables and other assets .............. 2,360 2,026
------------ ------------
33,453 33,535
------------ ------------
Total operating subsidiaries assets .... 78,003 74,811
OTHER
Deferred tax asset, net ................... 7,051 7,221
Restricted cash ........................... 1,704 1,883
Other ..................................... 1,675 1,791
Cash and cash equivalents ................. 1,066 926
------------ ------------
Total other assets ..................... 11,496 11,821
------------ ------------
TOTAL .................................. $ 105,032 $ 101,718
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Accounts payable and accrued expenses ............................... $ 596 $ 707
ENERGY
Accounts payable and accrued expenses ............................... -- 465
------------ ------------
Total asset management liabilities ............................... 596 1,172
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable ....................................................... 12,347 11,545
Accounts payable and accrued expenses ............................... 10,347 8,506
------------ ------------
22,694 20,051
HOTELS
Loans payable ....................................................... 31,701 31,918
Accounts payable and accrued expenses ............................... 2,288 2,021
------------ ------------
33,989 33,939
------------ ------------
Total operating subsidiaries liabilities ......................... 56,683 53,990
OTHER
Senior Secured Term Loan ............................................ 17,296 18,000
10% Collateralized Subordinated Debentures .......................... 6,758 6,768
Interest and other accrued expenses ................................. 3,814 3,730
Convertible loan from shareholder ................................... 1,500 --
------------ ------------
Total other liabilities .......................................... 29,368 28,498
------------ ------------
TOTAL LIABILITIES ................................................ 86,647 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 .......................................... 54,743 54,743
Accumulated deficit ................................................. (22,680) (23,007)
Treasury stock, 971,360 shares at both dates; at cost ............... (14,918) (14,918)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ....................................... 17,385 17,058
------------ ------------
TOTAL ............................................................ $ 105,032 $ 101,718
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees
Related parties .................................. $ 1,398 $ 1,028
Other ............................................ 106 236
Equity income from investments in HRP ............... 274 388
---------- ----------
1,778 1,652
Administrative expenses ............................. 364 518
Depreciation and amortization ....................... 168 168
---------- ----------
532 686
---------- ----------
Income from real estate operations ............... 1,246 966
ENERGY
Equity income from investment in Hallwood Energy .... 682 --
Gas revenues ........................................ -- 894
Oil revenues ........................................ -- 318
Other income ........................................ -- 95
---------- ----------
682 1,307
Operating expenses .................................. -- 527
Depreciation, depletion and amortization ............ -- 511
Administrative expenses ............................. -- 335
Interest ............................................ -- 121
---------- ----------
-- 1,494
---------- ----------
Income (loss) from energy operations ............. 682 (187)
---------- ----------
Income from asset management operations .......... 1,928 779
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales ............................................... 20,024 21,858
Cost of sales ....................................... 16,844 19,008
Administrative and selling expenses ................. 2,370 2,299
Interest ............................................ 262 222
---------- ----------
19,476 21,529
---------- ----------
Income from textile products operations .......... 548 329
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
OPERATING SUBSIDIARIES (CONTINUED) 2000 1999
---------- ----------
<S> <C> <C>
HOTELS
Sales ................................................. $ 5,032 $ 6,455
Operating expenses .................................... 4,254 5,037
Depreciation and amortization ......................... 725 724
Interest .............................................. 712 610
---------- ----------
5,691 6,371
---------- ----------
Income (loss) from hotel operations ................ (659) 84
---------- ----------
Income (loss) from operating subsidiaries .......... (111) 413
OTHER
Interest on short-term investments and other income ... 7 6
Fee income from related parties ....................... -- 137
---------- ----------
7 143
Interest .............................................. 778 296
Administrative expenses ............................... 469 523
---------- ----------
1,247 819
---------- ----------
Other loss, net .................................... (1,240) (676)
---------- ----------
Income before income taxes ............................ 577 516
Income taxes .......................................... 250 11
---------- ----------
NET INCOME ................................................... $ 327 $ 505
========== ==========
PER COMMON SHARE
Basic
Net income ............................................ $ 0.23 $ 0.27
========== ==========
Assuming Dilution
Net income ............................................ $ 0.23 $ 0.26
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic .................................................... 1,425 1,883
========== ==========
Assuming Dilution ........................................ 1,437 1,910
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 327 $ 505
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization ............................. 1,202 1,719
Equity in net income of Hallwood Energy .............................. (682) --
Equity in net income of HRP .......................................... (274) (388)
Decrease in deferred tax asset ....................................... 170 --
Preferred dividends from Hallwood Energy ............................. 11 --
Amortization of deferred gain from debenture exchanges ............... (10) (109)
Undistributed income from HEP ........................................ -- (546)
Distributions from HEP ............................................... -- 511
Net change in textile products assets and liabilities ................ 71 (3,575)
Net change in other assets and liabilities ........................... 48 30
Net change in energy assets and liabilities .......................... -- 128
---------- ----------
Net cash provided by (used in) operating activities ............... 863 (1,725)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for textile products business acquisition ...................... (1,479) --
Investments in textile products property and equipment .................. (334) (531)
Purchase of minority shares in HEC ...................................... (465) --
Capital expenditures for hotels ......................................... (308) (296)
Proceeds from sale of Hallwood Energy preferred stock ................... 303 --
Net change in restricted cash for investing activities .................. 179 (138)
Investments in energy property and equipment ............................ -- (4)
---------- ----------
Net cash used in investing activities ............................. (2,104) (969)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable ......................... 2,302 3,500
Repayment of bank borrowings and loans payable .......................... (921) (532)
---------- ----------
Net cash provided by financing activities ........................ 1,381 2,968
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................... 140 274
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............................. 926 769
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................... $ 1,066 $ 1,043
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE> 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. 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.
2. INVESTMENTS IN REAL ESTATE AFFILIATE (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 AMOUNT AT INCOME FROM INVESTMENTS
---------------------- WHICH CARRIED AT FOR THE THREE MONTHS ENDED
COST OR -------------------------- MARCH 31,
NUMBER OF ASCRIBED MARCH 31, DECEMBER 31, ---------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 2000 1999 2000 1999
- ------------------------- --------- -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
HALLWOOD REALTY PARTNERS, L.P.
- General partner interest ............. -- $ 8,650 $ 3,092 $ 3,243 $ 18 $ 14
- Limited partner interest ............. 330,432 4,302 5,246 4,989 256 374
-------- --------- ------------ ------------ ------------
Totals .............................. $ 12,952 $ 8,338 $ 8,232 $ 274 $ 388
======== ========= ============ ============ ============
</TABLE>
At March 31, 2000, Hallwood Realty, LLC ("Hallwood Realty") and HWG,
LLC, wholly owned subsidiaries of the Company, owned a 1% general
partner interest and a 20% 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 March 31, 2000, resulted in a $1,051,000 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
three months ended March 31, 2000 and 1999 such amortization was
$168,000 in each period.
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 March 31, 2000 were $48.00 and
$15.87, respectively. The general partner interest is not publicly
traded.
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
3. INVESTMENTS IN ENERGY AFFILIATE (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 AMOUNT AT INCOME FROM INVESTMENTS
---------------------- WHICH CARRIED AT FOR THE THREE MONTHS ENDED
COST OR -------------------------- MARCH 31,
NUMBER OF ASCRIBED MARCH 31, DECEMBER 31, ---------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 2000 1999 2000 1999
- ------------------------- --------- -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
HALLWOOD ENERGY CORPORATION
- Common stock.................. 1,440,000 $ 4,318 $ 5,294 $ 4,624 $ 671 $ --
- Preferred stock............... -- -- 303 11 --
-------- --------- ------------ ------------ ------------
Totals....................... $ 4,318 $ 5,294 $ 4,927 $ 682 $ --
======== ========= ============ ============ ============
</TABLE>
At March 31, 2000, the Company owned a 14% 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 March 31, 2000 were $4.37 and $3.67,
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 February 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.
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, which has a carrying value of $3,175,000 at March 31, 2000, is
estimated as the present value of expected payments to be made. This amount
is reported as other accrued expenses. Interest on the
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
contingent obligation has been imputed at 12.75% and amounted to $103,000
for the quarter ended March 31, 2000.
5. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Textile Products
Revolving credit facility, prime + .25% or
Libor + 2.25%, due December 2002 ............................. $ 11,347 $ 11,545
Acquisition credit facility, prime + .25% or
Libor + 2.50%, due December 2002 ............................. 1,000 --
Equipment credit facility, prime + .25% or
Libor + 2.50%, due December 2002 ............................. -- --
------------ ------------
12,347 11,545
Hotels
Term loan, 7.50% fixed, due October 2008 ......................... 16,925 16,968
Term loan, 7.86% fixed, due January 2008 ......................... 6,560 6,577
Term loan, 8.20% fixed, due November 2007 ........................ 5,122 5,142
Capital leases, 12.18% fixed, due December 2004 .................. 1,982 2,085
Term loan, Libor + 7.5%, due October 2005 ........................ 1,112 1,146
------------ ------------
31,701 31,918
Other
Senior Secured Term Loan, 10.25% fixed, due December 2004 ........ 17,296 18,000
Convertible loan from shareholder, 10% fixed, due March 2005 ..... 1,500 --
------------ ------------
18,796 18,000
------------ ------------
Total ........................................................ $ 62,844 $ 61,463
============ ============
</TABLE>
Further information regarding loans payable is provided below:
Textile Products
Revolving credit facility. The Company's Brookwood subsidiary had a
revolving credit facility in an amount of up to $17,500,000, as amended,
(the "Former Credit Agreement"). Borrowings under the Former Credit
Agreement were collateralized by accounts receivable, inventory imported
under trade letters of credit, certain finished goods inventory, the
machinery and equipment of Brookwood's subsidiaries and all of the issued
and outstanding capital stock of Brookwood and its subsidiaries.
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 March 31, 2000, Brookwood had an additional
$4,077,000 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 (9.25% at March 31, 2000) or Libor plus
Page 10
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
2.25%. 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.
Acquisition credit facility. The Key Credit Agreement also provides for
a $2,000,000 acquisition revolving credit line. Brookwood borrowed
$1,000,000 under this line during the quarter ended March 31, 2000. This
facility bears interest at Brookwood's option of one-quarter percent over
prime (9.50% at March 31, 2000) or Libor plus 2.50%.
Equipment credit facility. The Key Credit Agreement also provides for a
$2,000,000 equipment revolving credit line. There are no borrowings under
this facility.
The outstanding balance of the combined Key Bank credit facilities at
March 31, 2000 was $12,347,000.
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 March 31, 1999 was $16,925,000.
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% (13.15% at March 31, 2000); (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 March 31, 2000 was $1,112,000.
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 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 March 31, 2000 was $6,560,000.
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 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
March 31, 2000 was $5,122,000.
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 March 31, 2000 was $1,982,000.
Page 11
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 2000 was
$17,296,000.
Convertible loan from shareholder. In March 2000, the Company entered
into a new $1,500,000 loan with an entity associated with its chairman and
principal shareholder, 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 a conversion price equal to $10.13 per
share, which was 115% of the market price on the date the note was approved
by the Company's independent board members.
Covenant Compliance. Management believes the Company is in compliance
with its loan covenants.
6. DEBENTURES
10% Collateralized Subordinated Debentures. In June 1998, the Company
announced a commission-free exchange offer to all holders of 7% Debentures
(discussed below). 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 will be
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 a junior lien on the capital stock of
the Brookwood, Hallwood Hotels, Inc. and Brock Suite Hotels, Inc.
subsidiaries.
Page 12
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Balance sheet amounts for the 10% Debentures are detailed below (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
DESCRIPTION 2000 1999
----------- ------------ ------------
<S> <C> <C>
10% Debentures (face amount) ............. $ 6,468 $ 6,468
Unamortized gain from exchange, net of
accumulated amortization .............. 290 300
------------ ------------
Totals ............................. $ 6,758 $ 6,768
============ ============
</TABLE>
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.
Page 13
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
7. INCOME TAXES
The following is a summary of the income tax expense (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Federal
Deferred .................. $ 170 $ --
Current ................... 22 5
--------------- ---------------
Sub-total .............. 192 5
State ........................ 58 6
--------------- ---------------
Total .................. $ 250 $ 11
=============== ===============
</TABLE>
The amount of the deferred tax asset (net of valuation allowance) was
$7,051,000 at March 31, 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.
8. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
DESCRIPTION 2000 1999
----------- ------------ ------------
<S> <C> <C>
Supplemental disclosures of cash payments:
Interest paid ................................ $ 1,536 $ 1,351
Income taxes paid ............................ 102 43
</TABLE>
Page 14
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
9. COMPUTATION OF EARNINGS PER SHARE
The following table reconciles the Company's net income to net income
available to common stockholders, and the number of equivalent common
shares from unexercised stock options used in the calculation of net income
for the basic and assumed dilution methods (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
DESCRIPTION 2000 1999
----------- ---------- ----------
<S> <C> <C>
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Net income, as reported .................................... $ 327 $ 505
Less: Dividends on preferred stock ......................... -- --
---------- ----------
Net income available to common stockholders ............ $ 327 $ 505
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ...................................................... 1,425 1,883
Assumed issuance of shares from stock options exercised .... 54 82
Assumed repurchase of shares from stock options proceeds ... (42) (55)
---------- ----------
Assuming dilution ...................................... 1,437 1,910
========== ==========
</TABLE>
The impact of the convertible loan from shareholder was anti-dilutive
for the quarter ended March 31, 2000.
10. SEGMENT AND RELATED INFORMATION
The following represents the Company's reportable segment position for
the three months ended March 31, 2000 and 1999, respectively (in
thousands):
<TABLE>
<CAPTION>
REAL TEXTILE
ESTATE ENERGY PRODUCTS HOTELS OTHER CONSOLIDATED
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Total revenue from external sources ......... $ 1,778 $ 682 $ 20,024 $ 5,032 $ 7 $ 27,523
========== ========== ========== ========== ========== ==========
Operating income (loss)................... $ 1,246 $ 682 $ 548 $ (659) $ -- $ 1,817
========== ========== ========== ========== ==========
Unallocable expenses, net................. $ (1,240) (1,240)
========== ----------
Income before income taxes................ $ 577
==========
THREE MONTHS ENDED MARCH 31, 1999
Total revenue from external sources....... $ 1,652 $ 1,307 $ 21,858 $ 6,455 $ 143 $ 31,415
========== ========== ========== ========== ========== ==========
Operating income (loss)................... $ 966 $ (187) $ 329 $ 84 $ -- $ 1,192
========== ========== ========== ========== ==========
Unallocable expenses, net................. $ (676) (676)
========== ----------
Income before income taxes................ $ 516
==========
</TABLE>
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 15
<PAGE> 16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $327,000 for the first quarter ended
March 31, 2000, compared to net income of $505,000 in the 1999 period.
Total revenue for the 2000 first quarter was $27,523,000, compared to
$31,415,000 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 $1,504,000 for the quarter ended March 31, 2000
increased by $240,000, or 19%, from $1,264,000 in 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 increase was due primarily to higher
fees from property management and construction services in the 2000 first
quarter.
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 first quarter, the Company reported income of
$274,000 compared to $388,000 in the period a year ago. The decrease
resulted principally from a reduced limited partner ownership percentage
(20% in 2000, compared to 25% in 1999).
Expenses. Administrative expenses of $364,000 decreased by $154,000, or
30%, in the 2000 first quarter, compared to $518,000 in the prior-year
quarter. The decline was primarily attributable to the payments of
commissions to third party brokers associated with fee income.
Amortization expense of $168,000 in both the 2000 and 1999 quarters
relate to Hallwood Realty'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 and preferred
dividends received as a single 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 in the 2000 first quarter from investments in
Hallwood Energy of $682,000 represents the Company's pro rata share (14%)
of income available to common stockholders, preferred dividends on its
common stock and amortization of negative goodwill. Hallwood Energy's
income increased significantly in the
Page 16
<PAGE> 17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2000 first quarter, 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 first quarter was $894,000, with production of
478,000 mcf, and an average gas price to $1.87 per mcf. Oil revenue for the
1999 first quarter was $318,000, with production of 28,000 barrels, and an
average price of $11.36 per barrel.
Other income of $95,000 in the 1999 first quarter 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 first quarter operating expenses were $527,000;
depreciation, depletion and amortization was $511,000; administrative
expenses were $335,000; and interest expense was $121,000. No comparative
amounts were recorded in the 2000 first quarter due to the change in
accounting method.
OPERATING SUBSIDIARIES
The Company's operating subsidiaries division consists of textile
products and hotels business segments.
TEXTILE PRODUCTS
Revenue. Sales of $20,024,000 decreased $1,834,000, or 8%, in the 2000
first quarter, compared to $21,858,000 in the 1999 quarter. 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 $16,844,000 decreased $2,164,000, or 11%, in
the 2000 first quarter, from $19,008,000 in the 1999 quarter. The decrease
in cost of sales was principally the result of the decreased sales. The
higher gross profit margin for the 2000 first quarter (15.9% versus 13.0%)
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.
Administrative and selling expenses of $2,370,000 increased by
$71,000, or 3%, in the 2000 first quarter from $2,299,000 for the
comparable 1999 period.
Interest expense of $262,000 increased by $40,000, or 18%, for the 2000
first quarter from $222,000 in 1999 due to higher interest rates.
HOTELS
Revenue. Sales of $5,032,000 in the 2000 first quarter decreased by
$1,423,000, or 22%, from the year-ago amount of $6,455,000. The decrease
was 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 a $3.0 million renovation substantially completed by the end of 1999,
partially offset by increased 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 5.5% and average
occupancy level decreased 23% in the 2000 first quarter compared to the
prior-year quarter.
Page 17
<PAGE> 18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Expenses. Operating expenses of $4,254,000 for the 2000 first quarter
were down $783,000, or 16%, from $5,037,000 in 1999. The decrease is
primarily attributable to reduced operating expenses for the December 1999
disposition of the Enclave Suites and the three GuestHouse properties.
Depreciation and amortization expense increased by $1,000 to $725,000
for the 2000 first quarter from $724,000 in the prior-year period. The
increase was due to additional depreciation from capital leases less
amounts attributable to the Enclave Suites.
Interest expense increased by $102,000 to $712,000 for the 2000 first
quarter from $610,000 in 1999, principally due to the interest expense
associated with capital leases at the three GuestHouse properties. The
leases commenced on January 1, 2000.
OTHER
Revenue. Interest on short-term investments and other income increased
by $1,000 to $7,000 for the 2000 first quarter from $6,000 in 1999.
The Company received no fee income in the 2000 first quarter, compared
to $137,000 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 in the amount of $778,000 for the 2000 first
quarter increased by $482,000 from the prior year amount of $296,000. The
increase was 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 $469,000 for the 2000 first quarter
decreased by $54,000, from the prior-year amount of $523,000, due 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 $250,000 for the 2000 first quarter and
$11,000 in the 1999 quarter. The 2000 quarter included a $170,000 federal
deferred charge, a $22,000 federal current charge and $58,000 for state
taxes. The 1999 quarter included a $5,000 federal current charge and $6,000
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 March 31, 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.
Page 18
<PAGE> 19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management believes that the Company has certain tax planning
strategies available, which include the potential sale of 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 19
<PAGE> 20
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 March 31, 2000
totaled $1,066,000.
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 with Key Bank,
which is collateralized by accounts receivable, certain inventory and
equipment. At March 31, 2000, Brookwood had $4,077,000 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 April 2000, the Company received a
$400,000 cash dividend and a tax sharing payment of $100,000.
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.
The Company completed the renovations of its three GuestHouse Suites Plus
hotels in May 2000 at a cost of approximately $3,000,000, funded by capital
leases and capital reserves.
Management believes that it will have sufficient funds for operations
and to satisfy its current obligations.
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 20
<PAGE> 21
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 three months ended March 31, 2000.
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 March 31, 2000, the Company's total
outstanding loans and debentures payable of $69,312,000 were comprised of
$55,853,000 of fixed rate debt and $13,459,000 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 $1,386,000, assuming that
outstanding debt remained at current levels.
Real Estate. 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. As of March 31, 2000, HRP had a
single "pay fixed/receive variable" interest rate swap agreement with
highly rated counterparties in which the interest payments are calculated
on a notional amount. Management does not consider the portion attributable
to the Company to be significant on this derivative instrument.
Energy. The Company does not directly have any derivative financial
instruments in place as of March 31, 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.
Page 21
<PAGE> 22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
<S> <C> <C>
1 Legal Proceedings
Reference is made to Note 3 to the Company's consolidated financial
statements of this Form 10-Q.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders None
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits
* (i) 10.15 - Amendment to Financial Consulting Agreement, dated as of January 1,
2000, between the Company and HSC Financial Corporation,
filed herewith. Page 25-26
(ii) 10.16 - Convertible Unsecured Promissory Note in the amount of $1,500,000,
dated as of March 16, 2000, between Hallwood Investment Company
and Hallwood Investments Limited, filed herewith. Page 27-34
(iii) 27 - Financial Data Schedule Page 35
(b) Reports on Form 8-K None
</TABLE>
- ------------------------------------
* Constitutes a compensation plan or agreement for executive
officers.
Page 22
<PAGE> 23
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: May 12, 2000 By: /s/ Melvin J. Melle
---------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 23
<PAGE> 24
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.15 Amendment to Financial Consulting Agreement, dated as of January 1, 2000, between
the Company and HSC Financial Corporation.
10.16 Convertible Unsecured Promissory Note in the amount of $1,500,000, dated as of
March 16, 2000, between Hallwood Investment Company and Hallwood Investments
Limited.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.15
AMENDMENT TO
FINANCIAL CONSULTING AGREEMENT
THIS AMENDMENT TO FINANCIAL CONSULTING AGREEMENT (this "Amendment"), is
made and entered into as of January 1, 2000 and amends that certain Financial
Consulting Agreement, dated as of December 31, 1996 (the "Agreement"), by and
between THE HALLWOOD GROUP INCORPORATED, a Delaware corporation ("Hallwood
Group") and HSC FINANCIAL CORPORATION, a Liberian corporation (the
"Consultant").
RECITALS
WHEREAS, the parties to the Agreement desire to amend the Agreement;
and
WHEREAS, Section 9(h) of the Agreement provides that the parties may
amend the Agreement.
NOW, THEREFORE, In consideration of the mutual undertakings and
agreements contained in this Amendment and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
AGREEMENT
1. Amendment. Section 6(A) of the Agreement is hereby amended in its
entirety as follows:
"A. As compensation for the Consultant's services, Hallwood Group
agrees to pay to the Consultant an annual fee of Four Hundred Ninety Five
Thousand Dollars ($495,000), payable in monthly installments of Forty One
Thousand Two Hundred Fifty Dollars ($41,250) on the first day of each month."
2. Continuation of Agreement. The Agreement shall continue in full
force and effect, as amended by this Amendment.
3. Counterparts. This Amendment may be executed in multiple
counterparts, all of which shall be deemed originals, but all of which together
shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Amendment as of the date first above written.
HALLWOOD GROUP:
Address: THE HALLWOOD GROUP INCORPORATED
3710 Rawlins
Suite 1500
Dallas, Texas 75219 By: /s/ MELVIN J. MELLE
--------------------------------------
Name: Melvin J. Melle
--------------------------------------
Title: Vice President
--------------------------------------
CONSULTANT:
Address: HSC FINANCIAL CORPORATION
24, Avenue Princesse Grace
Monte-Carlo MC 98000
Principality of Monaco By: /s/ ANTHONY J. GUMBINER
--------------------------------------
Name: Anthony J. Gumbiner
--------------------------------------
Title: President
--------------------------------------
2
<PAGE> 1
EXHIBIT 10.16
CONVERTIBLE UNSECURED
PROMISSORY NOTE
$1,500,000.00 March 16, 2000
FOR VALUE RECEIVED, the undersigned, HALLWOOD INVESTMENT COMPANY, a
Cayman Islands corporation ("Maker"), promises to pay to the order of HALLWOOD
INVESTMENTS LIMITED ("Payee"), a British Virgin Islands company, at HSBC
Republic Bank, for further credit to Monaco Branch, Account Number 50802, in
immediately available funds and in lawful money of the United States of America,
the principal amount of ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($1,500,000.00) ("Total Principal Amount"), together with interest on such Total
Principal Amount from the date hereof at a rate per annum of Ten Percent
(10.00%), simple interest. The Payee and any person or entity to whom this Note
has properly been assigned, transferred or negotiated are sometimes referred to
herein as the "holder."
1. Maturity Date. The entire unpaid principal balance of this Note, and
all accrued and unpaid interest on the unpaid principal balance of this Note,
shall be due and payable in full in a single payment on March 16, 2005. Subject
to Section 10 below, this Note may be prepaid in whole or in part without the
consent of the Payee (a) at any time prior to the first anniversary date with no
notice, and (b) at any time after the first anniversary date hereof on thirty
(30) days' notice. However, the outstanding principal and accrued interest of
this Note may be converted at any time prior to the end of the "Conversion
Period" (as hereinafter defined).
2. Payments and Application of Payments. All payments of the
indebtedness evidenced by this Note shall be applied to such indebtedness in
such order and manner as the holder of this Note may from time to time determine
in its sole discretion. All payments and prepayments of principal of or interest
on this Note shall be made in lawful money of the United States of America in
immediately available funds, at the address of Payee indicated above, or such
other place as the holder of this Note shall designate in writing to Maker. Any
portion of the principal of this Note that is repaid or prepaid may not be
reborrowed. If any payment of principal of or interest on this Note shall become
due on a day which is not a Business Day (as hereinafter defined) such payment
shall be made on the next succeeding Business Day and any such extension of time
shall be included in computing interest in connection with such payment. As used
herein, the term "Business Day" shall mean any day except a Saturday, Sunday or
other date on which national banks in Dallas, Texas are authorized by law to
close. The books and records of the holder shall be prima facia evidence of all
outstanding principal of and accrued and unpaid interest on this Note.
3. Commercial Loan. Maker agrees that no proceeds of this Note shall be
used for personal, family or household purposes, and that all proceeds hereunder
shall be used solely for general corporate purposes.
4. Representations by Maker. In connection with this Note, Maker hereby
represents and warrants to Payee as follows:
<PAGE> 2
a. The execution, delivery, and performance of this Note by Maker have
been duly authorized by all necessary corporate action by Maker;
b. This Note constitutes the legal, valid and binding obligation of
Maker, enforceable against Maker in accordance with its terms, except as limited
by bankruptcy, insolvency or similar laws of general application relating to the
enforcement of creditors' rights and except to the extent specific remedies may
generally be limited by equitable principles;
c. The execution, delivery and performance of this Note by Maker, and
the consummation of the transactions contemplated hereby, do not (i) conflict
with, result in a violation of, or constitute a default under (A) any provision
of Maker's organizational documents, or any agreement or other instrument
binding upon Maker, or (B) any law, governmental regulation, court decree or
order applicable to Maker, or (ii) require the consent, approval or
authorization of any third party;
d. Maker has entered into that certain Capital Contribution Agreement
("Contribution Agreement") of even date herewith between Maker and The Hallwood
Group Incorporated ("Hallwood Group"), a Delaware corporation and corporate
parent of Maker, a copy of which has been presented to Payee, providing for
Maker's right to acquire sufficient shares of the $.10 par value common stock
(the "Hallwood Stock") of Hallwood Group to enable Maker to satisfy its
obligations under Section 6 hereof; and
e. The Contribution Agreement has been duly authorized, executed and
delivered by all parties thereto and constitutes the legal, valid and binding
obligation of Maker and Hallwood Group, enforceable against such parties in
accordance with its terms, except as limited by bankruptcy, insolvency or
similar laws of general application relating to the enforcement of creditors'
rights and except to the extent specific remedies may generally be limited by
equitable principles.
5. Covenants by Maker. Until this Note is fully paid and satisfied,
Maker will furnish to the holder such information respecting the business,
properties, condition or operations, financial or otherwise, of Maker as Payee
may from time to time reasonably request.
6. Convertibility. The amounts of principal and interest due under this
Note shall be convertible into shares of Hallwood Stock as provided herein.
(a) At any time prior to the payment of all amounts of principal and
interest due under this Note (the "Conversion Period"), the holder may
elect to convert all or a portion of the outstanding principal and
accrued interest hereunder into the number of fully paid and
nonassessable shares of Hallwood Stock which results from dividing the
"Conversion Amount" by the "Conversion Price." As used herein, (i)
"Conversion Amount" means the aggregate amount of outstanding principal
and accrued interest hereunder which is designated by Payee for
conversion; and (ii) "Conversion Price" means $10.13; provided,
however, if after the date hereof, the outstanding shares of Hallwood
Stock should be
2
<PAGE> 3
subdivided, combined or consolidated, by stock split, stock dividend,
combination or like event, into a greater or lesser number of shares,
the Conversion Price in effect immediately prior to such event shall,
concurrently with the effectiveness thereof, be proportionately
adjusted.
(b) In order to exercise the conversion right granted herein, the
holder must notify Maker in writing of its election to convert the
Conversion Amount prior to the expiration of the Conversion Period.
Such notice (a "Conversion Notice") shall be in the form of ANNEX A
attached hereto and delivered in accordance with the terms of Section
15 below. If the holder has properly exercised its conversion right,
then the conversion shall be deemed to be effective immediately upon
delivery of the Conversion Notice, and, thereafter, the holder shall
have the right only to receive certificates evidencing the number of
shares of Hallwood Stock to which the holder is entitled and the cash
payment for any fractional shares. Maker shall deliver to the holder at
a closing (a "Closing") to be held in the offices or Maker (or such
other place as Maker and the holder agree) one or more stock
certificates evidencing the number of fully paid and nonassessable
shares of Hallwood Stock to which the holder is entitled as determined
in accordance with this Note. The date of the Closing shall be twenty
(20) days after the delivery of the Conversion Notice to Maker, or if
the twentieth (20th) day is not a Business Day, on the next Business
Day. Such stock certificates shall be duly endorsed in favor of the
holder or accompanied by duly executed and valid stock powers enabling
the holder to have such shares registered in the holder's name in the
stock transfer records of Hallwood Group.
(c) Against receipt of such share certificates, the holder shall
deliver this Note to Maker for cancellation or reissuance in a reduced
principal amount, as appropriate. If the Note has matured, whether by
acceleration or otherwise, and the Conversion Amount represents less
than all of the outstanding principal and accrued interest with respect
to this Note, Maker shall also pay any amounts thereof remaining to the
holder in cash or other current funds acceptable to the holder. If the
Note has not matured and the Conversion Amount represents less than all
of the outstanding principal and accrued interest with respect to this
Note, Maker shall also issue to the holder a new promissory note in the
same form and tenor as this Note in a principal amount equal to the
amount of outstanding principal not being converted into shares of
Hallwood Stock. Any accrued interest not then being converted shall
remain outstanding and no interest shall accrue thereon. Maker shall
not be obligated to issue any fractional shares of Hallwood Stock to
the holder under this Note. Any such Conversion Amount which would
otherwise represent a fractional share of Hallwood Stock shall be paid
to the holder in cash or other current funds acceptable to the holder.
(d) Each certificate evidencing shares of Hallwood Stock issued
pursuant to this Note shall bear customary securities legends in a form
approved by counsel to Hallwood Group.
7. Events of Default. Each of the following shall constitute an "Event
of Default" under this Note:
3
<PAGE> 4
(a) The failure, refusal or neglect of Maker to pay when due any part
of the principal of, or interest on, this Note after such payment has become due
and payable; or
(b) Any representation contained herein made by Maker is false or
misleading in any material respect; or
(c) Maker fails to perform any covenant or agreement contained herein
within fifteen (15) after having received written notice of such failure from
Payee; or
(d) If either of Maker or "Guarantor" (as hereinafter defined) (i)
becomes insolvent, or makes a transfer in fraud of creditors, or makes an
assignment for the benefit of creditors, or admits in writing its inability to
pay its debts as they become due; (ii) generally is not paying its debts as such
debts become due; (iii) has a receiver or custodian appointed for, or a receiver
or custodian takes possession of, all or substantially all of its assets, either
in a proceeding brought by it or in a proceeding brought against it, and such
appointment is not discharged or such possession is not terminated within thirty
(30) days after the effective date thereof, or if it consents or acquiesces in
such appointment or possession; (iv) files a petition for relief under the
United States Bankruptcy Code or any other present or future federal or state
insolvency, bankruptcy or similar laws (all of the foregoing hereinafter
collectively called "Applicable Bankruptcy Law") or an involuntary petition for
relief is filed against it under any Applicable Bankruptcy Law and such
involuntary petition is not dismissed within thirty (30) days after the filing
thereof, or an order for relief naming it is entered under any Applicable
Bankruptcy Law, or any composition, rearrangement, extension, reorganization or
other relief of debtors now or hereafter existing is requested or consented to
by it; (v) fails to have discharged within a period of thirty (30) days any
attachment, sequestration or similar writ levied upon any of its property; or
(vi) fails to pay within thirty (30) days any final money judgment against it.
Nothing contained in this Note shall be construed to limit the events
of default enumerated hereinabove and all such events of default shall be
cumulative.
8. Remedies. Maker agrees that upon the occurrence of any Event of
Default, the holder of this Note may, at its option, without further notice or
demand, (i) declare the outstanding principal balance of and accrued but unpaid
interest on this Note at once due and payable, (ii) pursue any and all other
rights, remedies and recourses available to the holder hereof, including, but
not limited to, any such rights, remedies or recourses, at law or in equity, or
(iii) pursue any combination of the foregoing.
9. Guaranty. The obligations of Maker under this Note are guaranteed by
Hallwood Group pursuant to that certain Guaranty Agreement of even date
herewith. Hallwood Group is sometimes referred to herein as the "Guarantor" in
its capacity as such.
10. Compliance with Credit Agreement. Maker and Payee acknowledge that
Hallwood Group is a party to that certain Credit Agreement (the "Credit
Agreement") dated December 21, 1999
4
<PAGE> 5
among, HWG LLP, Hallwood Group, First Bank Texas, N.A. and certain other
lenders. Maker and Payee intend that each such party comply with all covenants
and undertakings contained in the Credit Agreement which may be applicable to
them and specifically agree that no holder of this Note shall be paid any cash
payment by Maker or Guarantor in violation of the terms of the Credit Agreement.
This Section 10 shall not prohibit any holder from receiving Hallwood Stock upon
any conversion of outstanding principal and accrued interest as contemplated by
Section 6 of this Note.
11. No Waiver. The failure to exercise the option to accelerate the
maturity of this Note or any other right, remedy or recourse available to the
holder hereof upon the occurrence of an Event of Default hereunder shall not
constitute a waiver of the right of the holder of this Note to exercise the same
at that time or at any subsequent time with respect to such uncured Event of
Default or any other Event of Default. The rights, remedies and recourses of the
holder hereof, as provided in this Note, shall be cumulative and concurrent and
may be pursued separately, successively or together as often as occasion
therefor shall arise, at the sole discretion of the holder hereof. The
acceptance by the holder hereof of any payment under this Note which is less
than the payment in full of all amounts due and payable at the time of such
payment shall not (a) constitute a waiver of or impair, reduce, release or
extinguish any right, remedy or recourse of the holder hereof, or nullify any
prior exercise of any such right, remedy or recourse, or (b) impair, reduce,
release or extinguish the obligations of any party liable under this Note as
originally provided herein.
12. Compliance with Applicable Usury Laws. This Note is intended to be
performed in accordance with, and only to the extent permitted by, all
applicable usury laws. If any provision hereof or the application thereof to any
person or circumstance shall, for any reason and to any extent, be invalid or
unenforceable, neither the application of such provision to any other person or
circumstance nor the remainder of the instrument in which such provision is
contained shall be affected thereby and shall be enforced to the greatest extent
permitted by law. It is expressly stipulated and agreed to be the intent of the
holder hereof to at all times comply with the usury and other applicable laws
now or hereafter governing the interest payable on the indebtedness evidenced by
this Note. If the applicable law is ever revised, repealed or judicially
interpreted so as to render usurious any amount called for under this Note, or
contracted for, charged, taken, reserved or received with respect to the
indebtedness evidenced by this Note, or if the holder's exercise of the option
to accelerate the maturity of this Note, or if any prepayment by Maker results
in Maker having paid any interest in excess of that permitted by law, then it is
the express intent of Maker and Payee that all excess amounts theretofore
collected by the holder be credited on the principal balance of this Note (or,
if this Note has been paid in full, refunded to Maker), and the provisions of
this Note immediately be deemed reformed and the amounts thereafter collectable
hereunder reduced, without the necessity of the execution of any new document,
so as to comply with the then applicable law, but so as to permit the recovery
of the fullest amount otherwise called for hereunder or thereunder. All sums
paid, or agreed to be paid, by Maker for the use, forbearance, detention,
taking, charging, receiving or reserving of the indebtedness of Maker to the
holder under this Note shall, to the maximum extent permitted by applicable law,
be amortized, prorated, allocated and spread throughout the full term of such
indebtedness until payment in full so that the rate or amount of interest on
account of such indebtedness does not exceed the usury ceiling from time to time
in effect
5
<PAGE> 6
and applicable to such indebtedness for so long as such indebtedness is
outstanding. It is not the intention of Payee to accelerate the maturity of any
interest that has not accrued at the time of such acceleration or to collect
unearned interest at the time of such acceleration.
13. Attorney's Fees. If this Note is placed in the hands of an attorney
for collection, or is collected in whole or in part by suit or through probate,
bankruptcy or other legal proceedings of any kind, Maker agrees to pay, in
addition to all other sums payable hereunder, all costs and expenses of
collection, including but not limited to reasonable attorneys' fees. Maker
hereby agrees to pay on demand all reasonable fees and expenses of counsel to
the holder incurred by the holder in connection with the preparation,
negotiation and execution of this Note and all related documents.
14. Waiver of Notice, Etc. Maker and any and all endorsers and
guarantors of this Note severally waive presentment for payment, notice of
nonpayment, protest, demand, notice of protest and dishonor, diligence in
enforcement and indulgences of every kind and without further notice hereby
agree to renewals, extensions, exchanges or releases of collateral, taking of
additional collateral, indulgences or partial payments, either before or after
maturity.
15. Notices. All notices given hereunder shall be in writing and shall
be deemed delivered upon (a) actual receipt if personally delivered or sent by
courier service or (b) confirmed receipt of a telecopy to the address or
telecopy number, respectively, of the Maker or Payee as follows:
Maker:
Hallwood Investment Company
c/o Cater Allen Trust Company
Cater Allen House
Commercial Street
St. Helier, Jersey JE 4 5XZ
Channel Islands
Payee:
Hallwood Investments Limited
Le Roccabella
24 Avenue Princesse Grace
Monte Carlo, 98000 Monaco
If either Maker or Payee should change its or his address or if this Note should
be transferred or assigned by Payee to another holder, the Maker, Payee or such
holder, as appropriate, shall notify the other party to this Note of such
party's new address in accordance with the requirements of this Section 15.
6
<PAGE> 7
16. Applicable Law. THIS NOTE HAS BEEN EXECUTED IN CONNECTION WITH THE
CONTRIBUTION AGREEMENT AND RELATED GUARANTY AGREEMENT OF HALLWOOD GROUP, A
CORPORATION WITH ITS PRINCIPAL PLACE OF BUSINESS IN DALLAS, TEXAS, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS,
EXCEPT AS SUCH LAWS ARE PREEMPTED BY APPLICABLE FEDERAL LAWS.
This Note is executed as of the 16th of March, 2000.
MAKER:
HALLWOOD INVESTMENT COMPANY
By: /s/ MELVIN J. MELLE
-----------------------------------
MELVIN J. MELLE
Vice President
7
<PAGE> 8
ANNEX A
Form of Conversion Notice
CONVERSION NOTICE
This Conversion Notice is delivered by the undersigned, the legal and
beneficial holder (the "Holder") of that certain Convertible Unsecured
Promissory Note (the "Note") issued by Hallwood Sub ("Sub") to Anthony Gumbiner,
dated March 16, 2000, to Sub pursuant to the terms and provisions of the Note.
All capitalized terms used herein and not specifically defined shall have the
meanings given them in the Note.
Holder hereby exercises its right to convert $______________ of
outstanding principal and $_________ of accrued interest on the Note into
______________ shares of Hallwood Stock pursuant to Section 6 of the Note. Such
number of shares of Hallwood Stock has been computed by dividing the Conversion
Amount of $_____________ [the sum of the two blanks above] by the Conversion
Price of $___________ [the Conversion Price stated in the Note or such
Conversion Price as adjusted in accordance with the Note].
Check the appropriate box
[ ] Such Conversion Amount represents all of the outstanding principal
and accrued interest on the Note.
[ ] Such Conversion Amount done not represent all of the outstanding
principal and accrued interest on the Note. Holder hereby directs that a new
promissory note in the principal amount of $_____________ [representing the
portion of outstanding principal not being converted into shares of Hallwood
Stock] be issued to Holder along with delivery of the appropriate number of
shares of Hallwood Stock as stated above.
IN WITNESS WHEREOF, this Conversion Notice is executed and delivered
this ___ day of ___________, 200[ ].
HOLDER:
[Name of Holder]
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
8
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,066
<SECURITIES> 13,632
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 18,839
<CURRENT-ASSETS> 0
<PP&E> 62,281
<DEPRECIATION> 21,821
<TOTAL-ASSETS> 105,032
<CURRENT-LIABILITIES> 0
<BONDS> 6,758
240
1,000
<COMMON> 0
<OTHER-SE> 17,145
<TOTAL-LIABILITY-AND-EQUITY> 105,032
<SALES> 0
<TOTAL-REVENUES> 27,523
<CGS> 0
<TOTAL-COSTS> 25,194
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,752
<INCOME-PRETAX> 577
<INCOME-TAX> 250
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