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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD - FROM _________________ TO ___________________
COMMISSION FILE NUMBER: 1-10643
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HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2313955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219-4298
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
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<S> <C>
UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS AMERICAN STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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 [ ]
The aggregate market value of units held by nonaffiliates of the registrant as
of March 3, 1998 was approximately $65,332,000.
CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
OUTSTANDING AT MARCH 3, 1998: 1,672,556 UNITS.
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PAGE 1 OF 35
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HALLWOOD REALTY PARTNERS, L.P.
TABLE OF CONTENTS
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Page
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<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of
Security Holders 6
PART II
Item 5. Market for Registrant's units and Related
Security Holder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplemental Information 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 29
PART III
Item 10. Directors and Executive Officers of the
Registrant 30
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K. 34
</TABLE>
PAGE 2 OF 35
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF THE BUSINESS
Hallwood Realty Partners, L.P. ("HRP" or the "Partnership"), a publicly traded
Delaware limited partnership, is engaged in diversified real estate activities,
including the acquisition, ownership and operation of commercial office and
industrial real estate and other real estate related assets. The limited
partners' interests, or units, are traded on the American Stock Exchange under
the symbol "HRY".
As of December 31, 1997, HRP owned twelve real estate properties (the
"Properties") located in six states (see Item 2 - Properties). Seven are
commercial office building properties and five are industrial park properties.
HRP seeks to maximize the value of its real estate by making capital and tenant
improvements, by executing marketing programs to attract and retain tenants,
and by controlling or reducing, where possible, operating expenses.
Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is HRP's general partner and is responsible for asset management
of HRP and its Properties, including the decision making responsibility for
financing, refinancing, acquiring and disposing of properties. In addition, HRC
provides general operating and administrative services to HRP. Hallwood
Commercial Real Estate, Inc. ("HCRE"), another wholly-owned subsidiary of
Hallwood, provides property management services to the Properties.
OCCUPANCY/MAJOR TENANT INFORMATION
In the aggregate, the Properties were 94% occupied at December 31, 1997. Set
forth below are the percentages of square feet represented by scheduled lease
expirations for each calendar year, assuming that none of the tenants exercise
early termination or renewal options:
<TABLE>
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1998 24%
1999 21%
2000 16%
2001 10%
2002 11%
Thereafter 18%
</TABLE>
During 1997 and 1996, two tenants leasing space in the Properties each
contributed more than 10% of the total revenues of the Partnership. Ford Motor
Company and affiliates ("Ford") leases space in Parklane Towers and Fairlane
Commerce Park and contributed approximately 15% and 16% of revenues in 1997 and
1996, respectively. The Centers for Disease Control and Prevention ("CDC"), an
agency of the U.S. Department of Health and Human Services, leases space in
Corporate Square and Executive Park and contributed approximately 10% of the
revenues in 1997 and 1996.
As of December 31, 1997, Ford occupied approximately 248,000 square feet of
office space under 10 separate leases at Parklane Towers and approximately
246,000 square feet of office, technical laboratory and industrial space under
8 separate leases at Fairlane Commerce Park. These leases expire between 1998
and 2002 and most contain renewal options, providing for one to ten year
renewals. As of December 31, 1997, CDC occupied approximately 202,000 square
feet of office space at Executive Park under 3 leases which expire between 1999
and 2003. CDC also occupied approximately 158,000 square feet of office space
at Corporate Square under a lease which expires in 2013.
The remaining tenants are not concentrated in any one industry, nor is HRP
otherwise dependent on any one tenant or group of tenants for 10% or more of
its revenues.
PAGE 3 OF 35
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COMPETITION AND OTHER FACTORS
The Properties are subject to substantial competition from similar properties
in the vicinity in which they are located. In addition, there are numerous
other potential investors seeking to purchase improved real property and many
property holders seeking to dispose of real estate with which HRP will compete,
including companies substantially larger than HRP and with substantially
greater resources. Furthermore, current economic conditions in each property's
respective real estate market are competitive and as such, competition for
tenants will continue to affect rental rates and revenue.
The environmental laws of the federal government and of certain state and local
governments impose liability on current property owners for the cleanup of
hazardous and toxic substances discharged on such property. This liability may
be imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. HRP could be subject to
additional liability in the event that it owns properties having such
environmental problems. Parklane Towers, as well as certain other properties
to a lesser extent, are known to contain asbestos. Removal of asbestos at
Parklane Towers is estimated to cost approximately $1,700,000; however, it is
not required to be removed because it is not friable and HRP has an Operations
and Maintenance Program in place.
HRC and HCRE, on behalf of HRP, monitor compliance with the Americans with
Disabilities Act and are currently not aware of any material non-compliance
issues.
HRP does not directly employ any individuals. All 93 employees rendering
services on behalf of HRP and its Properties are employees of HRC and/or HCRE.
The business of HRP involves only one industry segment.Accordingly, all
information required by Item 101(b) of Regulation S-K is included in the
Consolidated Financial Statements included in Item 8. HRP has no foreign
operations and its business is not seasonal.
ITEM 2. PROPERTIES
At December 31, 1997, HRP owned twelve properties in six states with
approximately 5,162,000 net rentable square feet, of which seven are office
building properties containing 2,608,000 square feet and five are industrial
park properties containing 2,554,000 square feet.
<TABLE>
<CAPTION>
NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
<S> <C>
OFFICE BUILDING PROPERTIES:
Airport Plaza Fee simple interest in a 3-story office building constructed in
San Diego, California 1982 containing 48,853 net rentable square feet of space located
on 2 acres of land. The property was 87% occupied at December 31,
1997.
Bellevue Corporate Plaza Fee simple interest in a 10-story office building constructed in
Bellevue, Washington 1980 containing 234,880 net rentable square feet of space located
on 3.6 acres of land. The property was 99% occupied at December
31, 1997.
Corporate Square Fee simple interest in an 8-building office complex ranging from
Atlanta, Georgia one to seven stories, constructed between 1968 and 1973,
containing an aggregate of 443,117 net rentable square feet of
space located on 32 acres of land. The property was 98% occupied
at December 31, 1997.
</TABLE>
PAGE 4 OF 35
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<TABLE>
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NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
<S> <C>
OFFICE BUILDING PROPERTIES - CONTINUED:
Executive Park Fee simple interest in 26 buildings ranging from one to six
Atlanta, Georgia stories, constructed between 1965 and 1972, containing a total of
908,445 net rentable square feet of space located on 70 acres of
land. The property was 90% occupied at December 31, 1997.
First Maryland Building Fee simple interest in a 22-story office building constructed in
Baltimore, Maryland 1972 containing 344,153 net rentable square feet of office space
on 0.6 acres of land. At December 31, 1997, the property was 94%
occupied.
Montrose Office Center Fee simple interest in a 10-story office building constructed in
Rockville, Maryland 1980 containing 147,658 net rentable square feet of space on 3
acres of land. The property was 99% occupied at December 31,
1997.
Parklane Towers Fee simple interest in twin 15-story office buildings constructed
Dearborn, Michigan in 1973 containing 481,034 net rentable square feet of space on
31.8 acres of land. The property was 88% occupied at December 31,
1997.
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks Fee simple interest in 21 single-story buildings located at four
Sacramento and separate sites containing an aggregate of 452,838 net rentable
Rancho Cordova, California square feet of office/warehouse space on 31 acres of land and
constructed between 1973 and 1981. At December 31, 1997, the
property was 91% occupied.
Fairlane Commerce Park Fee simple interest in a portion of an office/industrial park
Dearborn, Michigan consisting of 12 single-story buildings constructed between 1974
and 1990. The property consists of 417,922 net rentable square
feet of space on 35 acres of land. The property was 88% occupied
at December 31, 1997.
Joy Road Distribution Center Fee simple interest in a 455,500 square foot warehouse situated on
Detroit, Michigan 21 acres and originally constructed in the early 1940's.The
property was 93% occupied at December 31, 1997.
Raintree Industrial Park Fee simple interest in an office/industrial complex constructed
Solon, Ohio between 1971 and 1978 containing 795,065 net rentable square feet
of space in 14 buildings on 49 acres of land. The property was 99%
occupied at December 31, 1997.
Seattle Business Parks Fee simple interest in office/industrial parks located at two
Kent and Tukwila, Washington separate sites.The buildings were completed between 1972 and 1978
and contain an aggregate of 432,467 net rentable square feet of
space in 18 buildings on 27 acres of land. At December 31, 1997,
the property was 97% occupied.
</TABLE>
For information regarding the encumbrances to which the properties are subject
and the status of the related mortgage loans, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" contained in Item 7 and Note 5 to the Consolidated Financial
Statements and Schedule III contained in Item 8.
PAGE 5 OF 35
<PAGE> 6
ITEM 3. LEGAL PROCEEDINGS
On February 27, 1997, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners,
L.P. and Hallwood Realty Corporation (C.A. No. 15578). The complaint sought
access to certain books and records of HRP, a list of the limited partners and
reimbursement of the plaintiff's expenses.
On June 20, 1997, Gotham Partners, L.P. filed a separate complaint in the
Chancery Court for New Castle County, Delaware, styled Gotham Partners, L.P. v.
Hallwood Realty Partners, L.P., et al. (C.A. No. 15754), against Hallwood, HRP,
the general partner of HRP, and the directors of the general partner, alleging
claims of breach of fiduciary duties, breach of HRP's partnership agreement,
fraud, and as to Hallwood, aiding and abetting these alleged breaches. At the
same time as the filing of this complaint, plaintiff filed a motion to amend
its complaint in the earlier action to allege the same facts and demand the
same relief as plaintiff sought in the separate complaint.
On June 27, 1997, the parties entered into a Stipulation and Order under which
HRP provided to plaintiff copies of certain of the documents requested. The
other claims in the two actions remain outstanding.
On August 27, 1997, defendants moved to dismiss the complaint in the separate
action for plaintiff's failure either to make a demand on the general partner
to bring suit or to allege adequately that such a demand was futile. On
February 6, 1998, the Court granted defendants' motion to dismiss but gave
plaintiff thirty days to file an amended complaint.
Defendants believe that the claims are without merit and intend to defend the
cases vigorously, but because of their early stages, cannot predict the outcome
of the claims or any possible effect an adverse outcome might have.
HRP is from time to time involved in various legal proceedings and claims which
arise in the ordinary course of business. These matters are generally covered
by insurance. Management believes that the resolution of these matters will not
have a material adverse effect on HRP's financial position, cash flow or
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of HRP during the
fourth quarter of 1997.
PAGE 6 OF 35
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS
The Partnership's units are traded on the American Stock Exchange under the
symbol "HRY". As of March 3, 1998, there were approximately 35,000 unitholders
of record of the 1,672,556 units outstanding. HRP has not paid any cash
distributions since February, 1992. Each quarter HRC reviews HRP's capacity to
make cash distributions to its partners.
The following table shows the range of sales prices for the periods indicated,
as reported by the American Stock Exchange:
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Trading Ranges
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High Low
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<S> <C> <C>
1996 -
1st Quarter $ 20.375 $ 16.50
2nd Quarter 21.75 19.125
3rd Quarter 30.00 21.625
4th Quarter 29.00 24.50
1997 -
1st Quarter $ 27.625 $ 24.50
2nd Quarter 29.75 24.50
3rd Quarter 55.50 29.50
4th Quarter 54.75 47.375
</TABLE>
PAGE 7 OF 35
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding the
Partnership's results of operations and financial position as of the dates
indicated. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Item 7 and the Consolidated Financial Statements and notes thereto
contained in Item 8.
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Year Ended December 31,
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1997 1996 1995 1994 1993
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(in thousands except per unit amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Total revenues $ 53,899 $ 49,612 $ 50,829 $ 48,615 $ 48,065
Income (loss) before extraordinary item 2,357 (9,428) (9,024) (18,161) (18,769)
Net income (loss) 2,357 (9,428) (9,789) (18,161) (18,769)
Net income (loss) per unit - basic (a) 1.40 (5.50) (5.55) (10.38) (10.73)
Net income (loss) per unit -
assuming dilution (a) $ 1.35 (5.50) (5.55) (10.38) (10.73)
Balance Sheet:
Real estate, net (b) $ 179,028 $ 182,877 $ 192,266 $ 205,212 $ 219,710
Total assets 207,134 210,214 225,359 225,418 248,093
Mortgages payable 157,911 160,732 166,675 160,296 162,938
Partners' capital (c) 33,041 30,684 41,917 51,522 69,683
</TABLE>
Notes to Selected Financial Data:
(a) Reflects effect of a 1-for-5 reverse split of the outstanding units
effective as of the close of business on March 3, 1995.
(b) Real estate assets declined in each of the years, primarily due to
depreciation and amortization exceeding the additions of tenant and
property improvements.
(c) Partners' capital is allocated 99% to the limited partners and 1% to
the general partner.
PAGE 8 OF 35
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with Item 6 - Selected Financial
Data and Item 8 - Financial Statements and Supplemental Information.
RESULTS OF OPERATIONS:
1997 VERSUS 1996 -
REVENUE FROM PROPERTY OPERATIONS in 1997 increased $4,099,000, or 8.4%, as
compared to 1996. The following table illustrates the components of the change:
<TABLE>
<S> <C>
Rental income, net $ 3,651,000
Expense recoveries 145,000
Other property income 303,000
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Net increase $ 4,099,000
===========
</TABLE>
RENTAL INCOME increased primarily as the result of a rise in average occupancy
between 1996 and 1997 from 87.8% to 93.1%. As of December 31, 1997, HRP had
leases executed and in place for 94.4% of the portfolio's net rentable square
feet.
GAIN FROM PROPERTY SALE of $394,000 in 1997 represents the sale of one building
in Fairlane Commerce Park containing 3,500 net rentable square feet on
approximately 0.5 acres for $510,000 before expenses of $8,000.
INTEREST INCOME decreased $206,000 primarily as a result of decreased earnings
on overnight investments due to lower average cash balances.
PROPERTY OPERATIONS EXPENSES for 1997 increased $213,000, or 0.9%, as compared
to 1996, primarily due to higher janitorial, security costs and management
fees, due to increased occupancy, as well as higher salary costs, partially
offset by lower property insurance and utilities' costs. The following table
illustrates the components of the change:
<TABLE>
<S> <C>
Administrative costs $ 90,000
Management fees 99,000
Marketing and leasing (51,000)
Utilities (81,000)
Services, including janitorial 276,000
Repairs and maintenance 4,000
Real estate taxes (7,000)
Insurance (117,000)
----------
Net increase $ 213,000
==========
</TABLE>
INTEREST EXPENSE decreased $577,000, or 4.3%, due to loan modifications/renewals
for First Maryland Building and Executive Park in 1996. First Maryland's costs
dropped $92,000 and is comprised of a $112,000 reduction in cash interest paid
to the lender and a $20,000 decrease in amortization of mortgage principal
forgiveness. Executive Park's costs decreased $313,000 due to the reduction in
its interest rate by slightly more than 1%. All other interest costs fell
$172,000 due to a reduction in debt levels as a result of monthly principal
amortization payments.
DEPRECIATION AND AMORTIZATION EXPENSE decreased $6,958,000 primarily due to an
extension of depreciable lives of certain building costs effective January 1,
1997 (see Note 2 to the Consolidated Financial Statements in Item 8).
GENERAL AND ADMINISTRATIVE EXPENSES decreased $176,000, or 5.1%, as the result
of a net decrease in professional fees and services in 1997 as compared to
1996, including certain due diligence costs for a potential acquisition in
1996, partially offset by an increase in legal costs in 1997 as a result of the
legal proceeding described in Note 9 to the Consolidated Financial Statements
in Item 8.
PAGE 9 OF 35
<PAGE> 10
RESULTS OF OPERATIONS:
1996 VERSUS 1995 -
REVENUE FROM PROPERTY OPERATIONS in 1996 decreased $1,359,000, or 2.7%, as
compared to 1995. The following table illustrates the components of the
change:
<TABLE>
<S> <C>
Rental income, net $ (459,000)
Expense recoveries (539,000)
Other property income (361,000)
-----------
Net decrease $(1,359,000)
===========
</TABLE>
This change in rental income is primarily due to a reduction in rental rates at
First Maryland Building and decreases in occupancy at Parklane Towers and
Corporate Square, partially offset by a rise in occupancy at Executive Park and
the addition of the Joy Road property in February 1996. The First Maryland
Building rental rate reduction is discussed in Note 4 to the financial
statements. Corporate Square's decrease in occupancy was temporary due to the
expiration of a significant lease in late 1995. In early 1996, the space was
re-leased and effective September 25, 1996, the new tenant took possession,
which increased the property's occupancy from 72% to 91%.
During the first quarter of 1995, expense recoveries were abnormally high due
to adjustments made to the amount of real estate recoveries from tenants in the
state of Michigan for the two years prior to 1995.Accordingly, expense
recoveries for 1996 decreased from 1995. Michigan eliminated certain property
taxes as the major source of school funding in the summer of 1993 and later
reinstated them.
INTEREST INCOME increased $142,000 primarily as a result of increased earnings
on investments of funds held in loan reserve escrow accounts.
PROPERTY OPERATIONS EXPENSES for 1996 increased $834,000, or 3.8%, as compared
to 1995, primarily due to higher utility costs, security control costs and
repairs to heating and air duct systems, partially offset by one-time costs for
certain professional fees in 1995. The following table illustrates the
components of the change:
<TABLE>
<S> <C>
Administrative costs $ 49,000
Management fees (22,000)
Marketing and leasing 60,000
Utilities 191,000
Services, including janitorial 203,000
Repairs and maintenance 289,000
Real estate taxes 65,000
Insurance (1,000)
---------
Net increase $ 834,000
=========
</TABLE>
INTEREST EXPENSE decreased $2,199,000, or 14.0%, due to (i) an increase of
$1,356,000 in amortization of First Maryland's debt forgiveness, (ii) reduction
in First Maryland's cash interest expense of $998,000 due to lower debt, (iii)
reduction in loan cost amortization of $251,000, and (iv) a net increase of
$406,000 in interest costs associated with all of the mortgages and notes
excluding First Maryland. This net increase of $406,000 is the result of a
higher average debt level between the years, partially offset by a reduction in
the aggregate average interest rates between the years.
DEPRECIATION AND AMORTIZATION EXPENSE decreased $46,000 primarily due to
reduced building improvement depreciation, partially offset by an increase in
lease commission amortization.
GENERAL AND ADMINISTRATIVE EXPENSES increased $598,000, or 20.8%, in 1996 as
compared to 1995, as the result of certain due diligence costs which were
expensed for a potential acquisition which was not completed, and increases in
business/franchise taxes, certain professional fees, personnel and other
overhead costs.
PAGE 10 OF 35
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LIQUIDITY AND CAPITAL RESOURCES
HRP is engaged in diversified real estate activities, including the
acquisition, ownership and operation of commercial office and industrial real
estate and other real estate related assets. While it is the General Partner's
primary intention to operate HRP's existing real estate investments and to
acquire and operate additional real estate investments, HRC also continually
evaluates each of HRP's real estate investments in light of current economic
trends and operations to determine if any should be considered for disposal.
As of December 31, 1997, HRP had cash and cash equivalents of $6,665,000, as
compared to $3,556,000 as of December 31, 1996. Therefore, the Partnership's
cash position increased $3,109,000 during 1997. The sources of cash for 1997
were $9,864,000 of cash provided by operating activities, $549,000 of mortgage
principal proceeds, $502,000 of net cash proceeds from the sale of a building,
$46,000 of principal collections from a mortgage receivable, and $25,000 of
other financing related activities. Uses of cash for 1997 were $4,002,000 of
net tenant and property improvements, $649,000 of property acquisition costs,
and $3,226,000 of mortgage principal payments.
Substantially all of the buildings in eleven of HRP's Properties were
encumbered by and pledged as collateral under non-recourse mortgages as of
December 31, 1997. HRP has no mortgage loans maturing or requiring balloon
principal payments until the year 2000. Based upon loan amortization's in
effect, HRP is required to pay $3,489,000 of principal payments in 1998.
As of December 31, 1997, HRP had remaining commitments for current construction
projects of about $1,500,000. Additionally, HRP has estimated and budgeted for
1998 tenant and capital improvements (excluding the aforementioned commitments)
of approximately $5,370,000 and lease commissions of about $1,570,000.
On February 27, 1998, but to be effective as of March 20, 1998, HRP entered into
an agreement to re-finance the mortgage loan secured by Executive Park. The new
loan reduces the interest rate from 8.87% to 7.32% and extends the amortization
period from fifteen years to twenty-six and a half years with a maturity date of
April 11, 2008. The loan proceeds of $34,000,000 will be used (i) to pay the
current principal balance of $28,800,000, (ii) to pay transaction costs and
prepayment penalties of approximately $2,500,000, and (iii) for general working
capital.
For the foreseeable future, HRP anticipates that mortgage principal payments,
tenant and capital improvements, and lease commissions will be funded by net
cash from operations. The primary sources of capital to fund any future
acquisitions will be proceeds from the sale or financing of one or more of its
Properties.
Each quarter HRC, as General Partner, reviews the Partnership's capacity to
make cash distributions. HRP has not made any cash distributions since
February, 1992.
HRP anticipates that it will not incur any costs associated with its computers
and building operating systems as it relates to the conversion to the year
2000.
This Form 10-K contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1924, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of
management for future operations. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
HRP. Although HRP believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Form 10-K will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by HRP or any other person that the objectives and plans of HRP
will be achieved.
Page 11 of 35
<PAGE> 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: Page
----
<S> <C>
Independent Auditors' Report 13
Consolidated Balance Sheets as of December 31, 1997 and 1996 14
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 15
Consolidated Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995 16
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 17
Notes to Consolidated Financial Statements 18
FINANCIAL STATEMENT SCHEDULE:
Schedule III - Real Estate and Accumulated Depreciation 28
All other schedules have been omitted because they are not
applicable, not required, or the required information is
disclosed in the consolidated financial statements or notes
thereto.
</TABLE>
PAGE 12 OF 35
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
To the Partners of Hallwood Realty Partners, L.P.
We have audited the accompanying consolidated balance sheets of Hallwood Realty
Partners, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item 8.
These financial statements and financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Realty Partners, L.P. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1997, the Partnership extended the depreciable lives of certain
building costs based on a review of its real estate lives. The effect of the
change in estimate reduced depreciation and amortization expense and improved
the net results by approximately $7,200,000.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 6, 1998 (Except for Note 10,
as to which the date is February 27, 1998).
PAGE 13 OF 35
<PAGE> 14
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Real estate:
Land $ 56,441 $ 55,900
Buildings and improvements 259,220 257,913
Tenant improvements 18,734 18,578
--------- ---------
334,395 332,391
Accumulated depreciation and amortization (155,367) (149,514)
--------- ---------
Real estate, net 179,028 182,877
Cash and cash equivalents 6,665 3,556
Accounts receivable 1,162 1,606
Prepaid lease commissions, net 7,049 6,959
Lease concessions 2,511 2,354
Loan reserves and escrows 6,215 7,739
Loan costs, net 3,213 3,691
Prepaid expenses and other assets, net 1,291 1,432
--------- ---------
Total assets $ 207,134 $ 210,214
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 157,911 $ 160,732
Unamortized mortgage payable forgiveness 8,926 10,456
Accounts payable and accrued expenses 4,157 4,834
Prepaid rent and security deposits 2,764 2,600
Payable to affiliates 335 908
--------- ---------
Total liabilities 174,093 179,530
--------- ---------
COMMITMENTS AND CONTINGENCIES
Partners' capital:
Limited partners - 1,672,556 units outstanding 32,711 30,377
General partner 330 307
--------- ---------
Total partners' capital 33,041 30,684
--------- ---------
Total liabilities and partners' capital $ 207,134 $ 210,214
========= =========
</TABLE>
See notes to consolidated financial statements.
PAGE 14 OF 35
<PAGE> 15
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Property operations $ 52,946 $ 48,847 $ 50,206
Gain from property sale 394 -- --
Interest and other 559 765 623
-------- -------- --------
Total revenues 53,899 49,612 50,829
-------- -------- --------
EXPENSES:
Property operations 23,248 23,035 22,201
Interest 12,945 13,522 15,721
Depreciation and amortization 12,055 19,013 19,059
General and administrative 3,294 3,470 2,872
-------- -------- --------
Total expenses 51,542 59,040 59,853
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,357 (9,428) (9,024)
Extraordinary item -
Loss on early extinguishment of debt -- -- (765)
-------- -------- --------
NET INCOME (LOSS) $ 2,357 $ (9,428) $ (9,789)
======== ======== ========
ALLOCATION OF NET INCOME (LOSS):
Limited partners $ 2,334 $ (9,334) $ (9,691)
General partner 23 (94) (98)
-------- -------- --------
Total $ 2,357 $ (9,428) $ (9,789)
======== ======== ========
INCOME (LOSS) PER UNIT AND EQUIVALENT UNIT:
Earnings per unit - basic
Income (loss) before extraordinary item $ 1.40 $ (5.50) $ (5.12)
Loss on early extinguishment of debt -- -- (.43)
-------- -------- --------
Net income (loss) $ 1.40 $ (5.50) $ (5.55)
======== ======== ========
Earnings per unit - assuming dilution
Income (loss) before extraordinary item $ 1.35 $ (5.50) $ (5.12)
Loss on early extinguishment of debt -- -- (.43)
-------- -------- --------
Net income (loss) $ 1.35 $ (5.50) $ (5.55)
======== ======== ========
WEIGHTED AVERAGE UNITS
USED IN COMPUTING NET INCOME
(LOSS) PER UNIT AND EQUIVALENT UNIT:
Basic 1,673 1,698 1,745
======== ======== ========
Assuming dilution 1,730 1,698 1,745
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
PAGE 15 OF 35
<PAGE> 16
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
Limited
Partner
General Limited Units
Partner Partners Total Outstanding
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL, JANUARY 1, 1995 $ 515 $ 51,007 $ 51,522 1,732,459
Purchase of fractional units (2) (174) (176) (14,694)
Sale and issuance of units to General Partner 4 356 360 30,000
Net loss (98) (9,691) (9,789) --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1995 419 41,498 41,917 1,747,765
Purchase of units (18) (1,787) (1,805) (75,209)
Net loss (94) (9,334) (9,428) --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1996 307 30,377 30,684 1,672,556
Net income 23 2,334 2,357 --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1997 $ 330 $ 32,711 $ 33,041 1,672,556
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
PAGE 16 OF 35
<PAGE> 17
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,357 $ (9,428) $ (9,789)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 12,055 19,013 19,059
Amortization of mortgage principal forgiveness (1,674) (1,693) (338)
Gain from property sale (394) -- --
Lease concessions (157) 144 688
Changes in assets and liabilities:
Receivables 444 (526) 124
Prepaid lease commissions, net (2,191) (4,338) (2,172)
Prepaid expenses and other assets, net 510 (62) 659
Accounts payable and other liabilities (1,086) 487 (5,745)
-------- -------- --------
Net cash provided by operating activities 9,864 3,597 2,486
-------- -------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (5,534) (5,998) (4,477)
Tenant improvement escrow 1,532 (1,532) --
Property acquisition (649) (1,699) --
Cash proceeds from property sale, net of selling costs 502 -- --
Mortgage receivable principal payments 46 86 79
-------- -------- --------
Net cash used for investing activities (4,103) (9,143) (4,398)
-------- -------- --------
FINANCING ACTIVITIES:
Mortgage principal payments (3,226) (2,706) (2,600)
Mortgage principal proceeds 549 -- 88,400
Mortgage principal refinanced -- -- (70,171)
Loan reserves -- (450) (3,376)
Loan fees and expenses 25 (239) (4,009)
Purchase of units -- (1,805) --
Sale of units to General Partner -- -- 360
Purchase of fractional units -- -- (176)
-------- -------- --------
Net cash provided by (used for) financing activities (2,652) (5,200) 8,428
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,109 (10,746) 6,516
BEGINNING CASH AND CASH EQUIVALENTS 3,556 14,302 7,786
-------- -------- --------
ENDING CASH AND CASH EQUIVALENTS $ 6,665 $ 3,556 $ 14,302
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
PAGE 17 OF 35
<PAGE> 18
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
1. ORGANIZATION
Hallwood Realty Partners, L.P. ("HRP" or the "Partnership"), a publicly
traded Delaware limited partnership, is engaged in diversified real estate
activities, including the acquisition, ownership and operation of
commercial office, industrial real estate and other real estate related
assets. The limited partners' interests, or units, are traded on the
American Stock Exchange under the symbol "HRY". As of December 31, 1997,
there were 1,672,556 units outstanding.
As of December 31, 1997, HRP owned twelve real estate assets (the
"Properties"), located in six states. Seven are commercial office building
properties and five are industrial park properties containing approximately
2,608,000 and 2,554,000 net rentable square feet, respectively. HRP seeks
to maximize the value of its real estate by making capital and tenant
improvements, by executing marketing programs to attract and retain
tenants, and by controlling or reducing, where possible, operating
expenses.
Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is HRP's general partner and is responsible for asset
management of HRP and its Properties, including the decision making
responsibility for financing, refinancing, acquiring and disposing of
properties. In addition, HRC provides general operating and administrative
services to HRP. Hallwood Commercial Real Estate, Inc. ("HCRE"), another
wholly-owned subsidiary of Hallwood, provides property management services
to the Properties.
2. ACCOUNTING POLICIES
CONSOLIDATION
HRP fully consolidates into its financial statements majority owned
entities and reflects a minority interest for those entities not fully
owned. For each of the three years in the period ended December 31, 1997,
all entities and Properties were fully owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
HRP considers highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents.
PROPERTY
Property is stated at cost. Renovations and improvements are capitalized;
maintenance and repairs are expensed. When an asset is sold or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the accounts and any gain or any previously unanticipated loss is
recognized in the year of sale or disposition. HRP's management routinely
reviews its investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Depreciation of buildings is computed using the straight-line method over
estimated useful lives ranging from 15 to 43 years. Equipment and other
improvements are depreciated on the straight-line method over estimated
useful lives ranging from 3 to 23 years. Tenant improvements are
capitalized and amortized over the terms of the respective leases.
During 1997, HRP completed a review of its real estate lives. In light of
recent improvements and actions taken to increase its preventative
maintenance programs, the estimated economic lives for buildings were found
to be generally longer than the useful lives being used for depreciation
purposes. Accordingly, effective January 1, 1997, HRP extended the
depreciable lives of certain building costs. The effect of this change in
estimate reduced depreciation and amortization expense and improved the net
operating results by approximately $7,200,000 ($4.26 per unit.)
PAGE 18 OF 35
<PAGE> 19
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
2. ACCOUNTING POLICIES - CONTINUED
HRP accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable.
Accruals for estimated losses from environmental remediation obligations
generally are recognized no later than completion of a remedial feasibility
study. Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value.
Recoveries of environmental remediation costs from other parties are
recorded as assets when their receipt is deemed probable. HRP's management
is not aware of any environmental remediation obligations which would
materially affect the operations, financial position or cash flows of HRP
and therefore has made no loss accruals.
OTHER ASSETS
Lease concessions and commissions are amortized over the terms of the
respective leases. Leases in the Properties expire from 1998 to 2013.
Loan costs are amortized over the terms of the respective loans. The loans
mature between 2000 and 2011. Amortization of lease concessions income,
included in property operations revenues, was $157,000 in 1997.
Amortization of lease concessions expense, included in property operations
revenues, was $144,000 and $688,000 in 1996 and 1995, respectively.
Amortization of lease commissions, included in property operations expense,
was $2,101,000, $1,897,000, and $1,629,000 in 1997, 1996 and 1995,
respectively. Amortization of loan costs, included in interest expense, was
$453,000, $453,000, and $704,000 in 1997, 1996 and 1995, respectively.
The following table sets forth the components of prepaid expenses and other
assets (net) on the balance sheet as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Prepaid real estate taxes $ 851 $ 723
Prepaid insurance 311 472
Other deposits and prepaids 129 191
Mortgage receivable -- 46
------ ------
Total $1,291 $1,432
====== ======
</TABLE>
INCOME TAXES
Currently, HRP is a non-taxable entity. Federal and state income taxes, if
any, are the responsibility of the individual partners. Accordingly, the
Consolidated Financial Statements do not include a provision for income
taxes. However, certain business and franchise taxes are the
responsibility of HRP and subsidiary entities. These business and
franchises taxes, included in general and administrative expenses, were
$117,000, $206,000, and $8,000, in 1997, 1996, and 1995, respectively.
HRP's tax returns are subject to examination by federal and state taxing
authorities. If HRP's amounts are ultimately changed by the taxing
authorities, the tax liability of the partners could be changed
accordingly. Additionally, no assurance can be given that the federal or
state governments will not pass legislation that will characterize HRP as
an association taxable as a corporation for federal income tax purposes.
Such classification may have an adverse effect on HRP.
COMPUTATION OF EARNINGS PER UNIT
HRP has adopted Statements of Financial Accounting Standards ("SFAS") No.
128 - "Earnings per Share". Comparative earnings per unit data have been
restated to conform to the adoption of this new standard. Basic earnings
per unit is computed by dividing net income (loss) attributable to the
limited partners' interests by the weighted average number of units
outstanding. Earnings per unit assuming dilution is computed by dividing
net income (loss) attributable to the limited partners' interests by the
weighted average number of units and equivalent units outstanding. The
options to acquire units described in Note 7 are considered to be unit
equivalents. The number of equivalent units is computed using the treasury
stock method which assumes that the increase in the number of units is
reduced by the number of units which could have been repurchased by HRP
with the proceeds from the exercise of the options. In 1997, the weighted
average units outstanding is calculated by increasing the actual weighted
average units outstanding by the assumed issuance of 86,000 units from the
options and the repurchase of 29,000 units with the proceeds of the
exercise of such options. The options are considered antidilutive in 1996
and 1995, and therefore are not taken into consideration in the computation
of earnings per unit assuming dilution.
PAGE 19 OF 35
<PAGE> 20
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
2. ACCOUNTING POLICIES - CONTINUED
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets,
liabilities, revenues, and expenses as of and for the reporting
periods. Actual results may differ from these estimates.
Certain reclassifications have been made in the prior year amounts to
conform to the classifications used in the current year. The
reclassifications had no effect on previously reported net losses.
SFAS No. 130 - "Reporting on Comprehensive Income", was issued in June 1997
and establishes standards for reporting and presenting comprehensive income
in financial statements. It is effective for periods beginning after
December 15, 1997 and will be adopted by HRP effective January 1, 1998. HRP
anticipates the adoption of SFAS No. 130 will not have any impact on its
current disclosures.
Also issued in June 1997 was SFAS No. 131 - "Disclosures about Segments of
an Enterprise and Related Information", which redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. SFAS No. 131
may require additional disclosure by HRP and will be effective for HRP
beginning January 1, 1998.
3. TRANSACTIONS WITH RELATED PARTIES
HRC receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive
disposition fees. Specifically, HRC is entitled to receive (i) an asset
management fee equal to 1% of the net aggregate base rents of the
Properties, (ii) acquisition fees equal to 1% of the purchase price of
newly acquired properties, and (iii) incentive fees for performing
disposition services with respect to real estate investments, other than
the properties owned at the time of HRP's formation on November 1, 1990,
equal to 10% of the amount, by which the sales price of a property disposed
of exceeds the purchase price of such property.
HCRE receives compensation in connection with the management of the
Properties, which includes a property management fee, lease commissions and
construction supervision fees. The management contracts expire June 30,
1999 and provide for (i) basic compensation from a property management fee
which is an amount equal to 2.85% of cash receipts collected from the
Properties' tenants, (ii) lease commissions equal to the current market
rate as applied to the net aggregate rent, not to exceed 6% of the net
aggregate rent, and (iii) construction supervision fees for administering
all construction projects equal to 5% of the total contract costs of each
capital expenditure or tenant improvement project.
HRC and HCRE are compensated for services provided to HRP and its
Properties as described above. The following table sets forth such
compensation and reimbursement paid by HRP for the periods presented (in
thousands):
<TABLE>
<CAPTION>
Entity
Paid or
Reimbursed 1997 1996 1995
---------- ------ ------ ------
<S> <C> <C> <C> <C>
Asset management fee HRC $ 458 $ 450 $ 446
Property management fee HCRE 1,524 1,433 1,459
Lease commissions HCRE 1,425 2,888 1,501
Construction fees HCRE 353 382 270
Acquisition fee HRC 7 17 --
Reimbursement of costs (a) HRC 2,316 2,321 1,992
</TABLE>
- ----------
(a) These costs are mostly recorded as General and Administrative Expenses
and represent reimbursement to HRC, at cost, for partnership level
salaries, employee and director insurance and certain overhead costs.
HRP pays, on a monthly basis, the balance of its account with HRC.
PAGE 20 OF 35
<PAGE> 21
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
4. PROPERTY ACQUISITION AND PROPERTY SALE
In May 1997, HRP acquired approximately 6.2 acres of land at the Corporate
Square office complex of which about half is a parking lot and the other half
is wooded land for a purchase price of $725,000, plus about $25,000 of
miscellaneous costs. The purchase price consists of a $75,000 cash down
payment and a $650,000 seven year, fully-amortizing non-recourse mortgage
note with 0% interest the first year; 4% interest in years two and three; 6%
interest in years four and five; and 8% interest in years six and seven. For
financial reporting purposes, the carrying values of the mortgage note and
land were reduced by $101,000 in order to reflect an imputed market interest
rate of 8% for the mortgage note. HCRE has erected a "build to suit" sign in
order to further explore HRP's possibilities for the land's usage.
In October 1997, HRP sold one building in Fairlane Commerce Park containing
3,500 net rentable square feet on approximately 0.5 acres for $510,000 in
cash before closing expenses of $8,000. HRP recorded a $394,000 gain from the
property sale.
5. MORTGAGES PAYABLE
Substantially all of the buildings in eleven of HRP's Properties were
encumbered and pledged as collateral by six non-recourse mortgages
aggregating $157,911,000 as of December 31, 1997. These mortgages have
interest rates varying from 8.5% to 9.25%, with an effective average interest
rate of 8.9% and mature between 2000 and 2011. Certain mortgages provide for
variable interest rates. Cash interest payments were $14,177,000,
$14,947,000, and $15,396,000, in 1997, 1996 and 1995, respectively.
Most of the mortgages require monthly principal payments with balloon
payments due at maturity. The following table shows for the periods presented
the principal and balloon payments that are required (in thousands),
excluding First Maryland Building's mortgage principal forgiveness discussed
below:
<TABLE>
<CAPTION>
Total
Principal Balloon Mortgage
Payments Payments Payments
-------- --------- ---------
<S> <C> <C> <C>
1998 $ 3,489 $ -- $ 3,489
1999 3,954 -- 3,954
2000 4,048 6,069 10,117
2001 4,478 -- 4,478
2002 4,862 -- 4,862
Thereafter 29,894 101,117 131,011
-------- --------- ---------
Total $ 50,725 $ 107,186 $ 157,911
======== ========= =========
</TABLE>
NOMURA REFINANCING -
On September 29, 1995, a newly formed limited partnership owned 99.9% by HRP
entered into an agreement for an $88,400,000 loan with Nomura Asset Capital
Corporation. The loan has a 25 year principal amortization period with an
interest rate of 8.7% through October 10, 2005 and 13.7% thereafter. The
non-recourse loan is secured by cross collateralized, cross defaulted,
perfected first mortgage liens on Airport Plaza, Bellevue Corporate Plaza,
about 64% of Corporate Square, about 93% of Fairlane Commerce Park, Montrose
Office Center, Parklane Towers, and Raintree Industrial Park.
PAGE 21 OF 35
<PAGE> 22
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
5. MORTGAGES PAYABLE - (CONTINUED)
FIRST MARYLAND BUILDING -
Per the loan modification agreement described below, HRP was required to
spend $2,700,000 for the costs of improvements and the lease commission for
the lease renewal of First Maryland Building's major tenant. The tenant's
previous lease was not scheduled to expire until mid-1997, however the tenant
had been in negotiations with HRP since early 1996 in an effort to reduce
their rental rate of $25 per square foot per annum, which was substantially
above the prevailing market rate in downtown Baltimore, Maryland. Concurrent
with the loan modification, HRP executed a revised ten-year lease with the
tenant which calls for rents ranging from $15 to $17 per square foot per
annum and increased their space from 62% to 71% of the property's net
rentable space of approximately 343,000 square feet.
On October 3, 1996, but effective May 1, 1996, the lender for First Maryland
Building extended the loan to April 30, 2003 with an unchanged interest rate
of LIBOR plus 3.25% (9.13% as of December 1997) and forgave $3,237,000 of the
principal balance in addition to the $9,250,000 of forgiveness granted in
September 1995, resulting in a loan principal balance of $25,552,000. Under
this agreement, 49.9% of the property's net cash flow must be used to
amortize the principal of the loan. During 1997, an additional $144,000 of
forgiveness was recorded.
For financial reporting purposes, the mortgage principal forgiveness is
treated as a troubled debt restructuring and accordingly, HRP did not
recognize a gain. Instead, the mortgage principal forgiveness remains on the
balance sheet and is being amortized over the life of the loan. Interest
expense is computed in such a way that a constant effective interest rate
(currently equal to approximately 1.7%) is applied to the carrying amount of
the loan.
The contingent nature of the forgiveness that was part of the September 1995
loan modification was removed with the October 1996 loan modification.
Accordingly, for federal income tax purposes, the total forgiveness of
$12,487,000 was reported as a gain to the partners of HRP on their 1996
Schedule K-1s.
EXECUTIVE PARK -
Executive Park's mortgage notes matured on June 16, 1996. On October 8, 1996,
the lender and HRP entered into a renewal and loan modification agreement,
which extended the maturity date fifteen years to November 15, 2011 and set
the initial interest rate at 8.87%. The notes are self-amortizing and include
call options every three years for evaluation of financial performance. The
interest rate may be adjusted, within certain parameters, at the call option
dates. For further information regarding this mortgage loan, see Note 10.
6. LEASE AGREEMENTS
The lease provisions generally require tenants to pay fixed rental amounts
plus their proportionate share of certain building operating costs and real
property taxes. In addition, certain leases include provisions for annual
rental adjustments. Revenue from expense recoveries, included in property
operations, was $2,561,000, $2,416,000, and $3,358,000 in 1997, 1996 and
1995, respectively. At December 31, 1997, the Properties, in the aggregate,
were 94% occupied and minimum cash rental payments to be received under
non-cancelable leases with tenants were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 44,076
1999 35,832
2000 28,019
2001 18,894
2002 14,029
Thereafter 45,498
---------
Total $ 186,348
=========
</TABLE>
PAGE 22 OF 35
<PAGE> 23
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
6. LEASE AGREEMENTS - (CONTINUED)
During 1997 and 1996, two tenants leasing space in the Properties each
contributed more than 10% of the total revenues of the Partnership. Ford
Motor Company and affiliates ("Ford") leases space in Parklane Towers and
Fairlane Commerce Park and contributed approximately 15% and 16% of revenues
in 1997 and 1996, respectively. The Centers for Disease Control and
Prevention ("CDC"), an agency of the U.S. Department of Health and Human
Services, leases space in Corporate Square and Executive Park and contributed
approximately 10% of the revenues in 1997 and 1996.
As of December 31, 1997, Ford occupied approximately 248,000 square feet of
office space under 10 separate leases at Parklane Towers and approximately
246,000 square feet of office, technical laboratory and industrial space
under 8 separate leases at Fairlane Commerce Park. These leases expire
between 1998 and 2002 and most contain renewal options, providing for one to
ten year renewals. As of December 31, 1997, CDC occupied approximately
202,000 square feet of office space at Executive Park under 3 leases which
expire between 1999 and 2003. CDC also occupied approximately 158,000 square
feet of office space at Corporate Square under a lease which expires in 2013.
The remaining tenants are not concentrated in any one industry, nor is HRP
otherwise dependent on any one tenant or group of tenants for 10% or more of
its revenues.
7. PARTNERS' CAPITAL
REVERSE SPLIT
On February 27, 1995, the General Partner approved a one-for-five reverse
split ("Reverse Split") of the outstanding units of the Partnership ("Old
Units"). The result is that each five Old Units as of the close of business
on the effective date of March 3, 1995 were converted into one new unit ("New
Units"). The New Units began trading on March 6, 1995 at the post-Reverse
Split price. All references in the consolidated financial statements to the
number of units, per unit amounts, and market prices of the Partnership's
units have been restated to reflect the effect of the Reverse Split.
In anticipation of the need for cash to pay for fractional New Units, the
General Partner purchased 30,000 New Units from the Partnership on March 6,
1995 for $11.875 per unit. Unitholders received cash in lieu of fractional
New Units as they exchanged their certificates that they held prior to the
Reverse Split for new certificates. The cash paid to unitholders for their
fractional New Units was $11.875 (based on five times the average closing
price of the Old Units on the American Stock Exchange for the five trading
days preceding the Reverse Split's effective date). The fractional New Units
were purchased by the Partnership. As a result of these transactions, the
number of outstanding units decreased from 8,662,298 Old Units to 1,747,765
New Units. During the first quarter of 1995, the General Partner's capital
account was adjusted for the above mentioned transactions in order to
maintain its 1% general partner interest, in accordance with HRP's
Partnership Agreement.
UNIT OPTIONS
In a separate action taken by the Board of Directors of the General Partner
on February 27, 1995, a Unit Option Plan providing for the grants of options
("Options") to certain executives was approved. The Unit Option Plan calls
for up to an aggregate of 86,000 New Units to be available for issuance by
HRP upon the exercise of such Options. As of December 31, 1997, none of the
Options have been exercised. Also approved was a loan program that provides
for HRP, under certain limited conditions, to loan to the optionees the
amounts necessary to exercise the Options. These nonqualified options were
granted at an exercise price of $11.875 (equal to five times the closing
price on the American Stock Exchange on the date before the grant to give
effect of the above mentioned Reverse Split), to vest to 100% by February 27,
1997 and expire after 10 years. The options are considered antidilutive in
1996 and 1995, and therefore were not included in the calculation of loss per
unit amounts.
PAGE 23 OF 35
<PAGE> 24
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
7. PARTNERS' CAPITAL - (CONTINUED)
HRP has adopted the disclosure-only provisions of SFAS No. 123 - "Accounting
for Stock Based Compensation". Accordingly, no compensation cost has been
recognized for the Options. Had compensation costs for the Options been
determined based on the fair value at the grant date for the awards in 1995
consistent with the provisions of SFAS No. 123, HRP's net loss and net loss
per unit for 1997, 1996 and 1995 would have been the pro forma amounts
indicated below (in thousands except per unit amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) - as reported $ 2,357 $ (9,428) $ (9,789)
Net income (loss) - pro forma 2,325 (9,623) (10,146)
Net income (loss) per unit:
As reported -
Basic 1.40 (5.50) (5.55)
Assuming dilution 1.35 (5.50) (5.55)
Pro forma -
Basic 1.38 (5.61) (5.76)
Assuming dilution 1.33 (5.61) (5.76)
</TABLE>
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used:
expected volatility of 57.8%, risk-free interest rate of 7.1%, expected life
of 5 years and no distribution yield.
COMMISSION-FREE OFFER TO PURCHASE UNITS
On June 5, 1995, HRP announced a commission-free program for unitholders to
sell their holdings of less than 100 units as of the record date of May 31,
1995. The offer allowed eligible unitholders to sell all, but not less than
all, of their units to HRP without incurring any brokerage commissions. The
offer benefits HRP by reducing the annual unitholder servicing costs incurred
for tax reporting, printing, postage and transfer agent costs.
Units were purchased by HRP on the first business day (the "Purchase Date")
on which HRP determined that the unit certificate was in proper form and that
the Letter of Transmittal form was properly completed. The per unit price
paid by HRP was based on the average of the closing market prices of the
units for the five trading days immediately preceding the Purchase Date, as
reported by The Wall Street Journal. On July 10, 1995 the offer expired. HRP
acquired about 294,000 units from over 16,600 unitholders. As planned, HRP
resold the acquired units to Hallwood for the amount that it had paid for the
units, approximately $4,100,000.
OTHER UNIT PURCHASES
HRP purchased, in private transactions, 74,760 units for $1,775,000 in May
1996 and 449 units for $12,000 in July 1996. Accordingly, HRP's outstanding
units have decreased from 1,747,765 Units to 1,672,556 units. In addition,
the General Partner's capital account was adjusted by $18,000 in order to
maintain its 1% general partner interest, in accordance with HRP's
Partnership Agreement.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts of certain financial instruments have been
determined using available market information based upon negotiations held by
HRC with potential lenders or other appropriate valuation methodologies that
require considerable judgment in interpreting market data and developing
estimates. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Partnership could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
PAGE 24 OF 35
<PAGE> 25
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The fair value of financial instruments that are short-term or re-price
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. These include cash and cash equivalents,
short term receivables, accounts payable and other liabilities. Real estate
and other assets consist of nonfinancial instruments.
Management has reviewed the carrying values of its mortgages payable in
connection with interest rates currently available to the Partnership for
borrowing with similar characteristics and maturities (approximately 7.75%
and 8.8% as of December 31, 1997 and 1996, respectively) and has determined
that they would equal approximately $166,871,000 and $159,096,000 (excluding
the unamortized mortgage payable forgiveness discussed in Note 4) of
estimated fair value as of December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, the fair value information presented herein
is based on pertinent information available to management. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore current estimates of fair value may differ significantly from the
amounts presented herein.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
On February 27, 1997, a lawsuit was filed in the Chancery Court for New
Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578). The
complaint sought access to certain books and records of HRP, a list of the
limited partners and reimbursement of the plaintiff's expenses.
On June 20, 1997, Gotham Partners, L.P. filed a separate complaint in the
Chancery Court for New Castle County, Delaware, styled Gotham Partners, L.P.
v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754), against Hallwood,
HRP, the general partner of HRP, and the directors of the general partner,
alleging claims of breach of fiduciary duties, breach of HRP's partnership
agreement, fraud, and as to Hallwood, aiding and abetting these alleged
breaches. At the same time as the filing of this complaint, plaintiff filed a
motion to amend its complaint in the earlier action to allege the same facts
and demand the same relief as plaintiff sought in the separate complaint.
On June 27, 1997, the parties entered into a Stipulation and Order under
which HRP provided to plaintiff copies of certain of the documents requested.
The other claims in the two actions remain outstanding.
On August 27, 1997, defendants moved to dismiss the complaint in the separate
action for plaintiff's failure either to make a demand on the general partner
to bring suit or to allege adequately that such a demand was futile. On
February 6, 1998, the Court granted defendants' motion to dismiss but gave
plaintiff thirty days to file an amended complaint.
Defendants believe that the claims are without merit and intend to defend the
cases vigorously, but because of their early stages, cannot predict the
outcome of the claims or any possible effect an adverse outcome might have.
HRP is from time to time involved in various legal proceedings and claims
which arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the resolution of these
matters will not have a material adverse effect on HRP's financial position,
cash flow or operations.
PAGE 25 OF 35
<PAGE> 26
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
9. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
ASBESTOS
Parklane Towers, as well as certain other properties to a lesser extent, are
known to contain asbestos. Removal of the asbestos at Parklane Towers is
estimated to cost approximately $1,700,000; however, it is not required to
be removed since it is not friable and the Partnership has an Operations and
Maintenance Program in place. Federal and state environmental legislation or
regulations may have an impact on the future operations of Parklane Towers
or certain other properties if such legislation or regulations require the
immediate expenditure of funds to comply with applicable restrictions or
requirements.
RIGHTS PLAN
HRP has a Unit Purchase Rights Agreement ("Rights Plan") that provides for a
distribution of one right for each unit of the Partnership to holders of
record at the close of business as of December 10, 1990. The rights will
become exercisable only in the event, with certain exceptions, an acquiring
party accumulates 15 percent or more of the Partnership's units, or if a
party commences or announces an intent to commence a tender offer or
exchange offer to acquire 30 percent or more of such units. The rights will
expire on November 30, 2000. Each right will entitle the holder to buy one
additional unit at a price of $250. In addition, upon the occurrence of
certain events, holders of the rights will be entitled to purchase either
Partnership units or shares in an "acquiring entity" at half of market
value. HRP will generally be entitled to redeem the rights at $.01 per right
at any time on or prior to the tenth day following the acquisition of a 15
percent or greater interest in its units.
10. SUBSEQUENT EVENT
On February 27, 1998, but to be effective as of March 20, 1998, HRP entered
into an agreement to re-finance the mortgage loan secured by Executive Park.
The new loan reduces the interest rate from 8.87% to 7.32% and extends the
amortization period from fifteen years to twenty-six and a half years with a
maturity date of April 11, 2008. The loan proceeds of $34,000,000 will be
used (i) to pay the current principal balance of $28,800,000, (ii) to pay
transaction costs and prepayment penalties of approximately $2,500,000, and
(iii) for general working capital.
PAGE 26 OF 35
<PAGE> 27
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is selected quarterly financial data for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ending
----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands except per unit amounts)
<S> <C> <C> <C> <C>
1997
Total revenues (a) $ 12,908 $ 13,443 $ 13,533 $ 14,015
Property operations revenues less property
operations expenses and general
and administrative expenses 6,135 7,054 6,693 6,522
Net income 68 936 569 784
Net income per unit - basic .04 .55 .34 .47
Net income per unit - assuming dilution .04 .54 .33 .45
1996
Total revenues $ 12,432 $ 12,258 $ 12,277 $ 12,645
Property operations revenues less property
operations expenses and general
and administrative expenses 5,485 5,682 5,689 5,486
Net loss (2,520) (2,324) (2,103) (2,481)
Net loss per unit - basic (1.43) (1.35) (1.24) (1.48)
Net loss per unit - assuming dilution (1.43) (1.35) (1.24) (1.48)
</TABLE>
- ----------
(a) Total revenues in the fourth quarter of 1997 include $394,000 of gain
from the sale of a property.
PAGE 27 OF 35
<PAGE> 28
HALLWOOD REALTY PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Costs
capitalized
subsequent to Gross amount at which
Initial cost acquisition carried at close of period
----------------------- ------------ -----------------------------------
Buildings Buildings Buildings
and and and
Description (A) Encumbrances Land improvements improvements Land improvements Total (B)
------------ -------- ------------ ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Airport Plaza $ 781 $ 300 $ 4,013 $ 337 $ 300 $ 4,350 $ 4,650
Bellevue Corporate Plaza 15,623 7,428 17,617 2,999 7,428 20,616 28,044
Corporate Square 13,488 6,142 14,112 8,304 6,142 22,416 28,558
Executive Park 28,974 15,243 34,982 9,897 15,243 44,879 60,122
First Maryland Building 24,873 2,100 43,772 3,418 2,100 47,190 49,290
Montrose Office Center 6,347 5,096 15,754 3,660 5,096 19,414 24,510
Parklane Towers 23,435 3,420 37,592 3,203 3,420 40,795 44,215
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks 6,349 5,018 15,563 4,448 5,018 20,011 25,029
Fairlane Commerce Park 20,701 5,191 18,080 5,319 5,191 23,399 28,590
Joy Road Distribution Center -- 359 1,340 1,299 359 2,639 2,998
Raintree Industrial Park 10,936 1,191 18,208 1,264 1,191 19,472 20,663
Seattle Business Parks 6,404 4,953 8,730 3,955 4,953 12,685 17,638
OFFICE EQUIPMENT -- -- -- 88 -- 88 88
-------- -------- -------- -------- -------- -------- --------
TOTAL $157,911 $ 56,441 $229,763 $ 48,191 $ 56,441 $277,954 $334,395
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Accumulated
depreciation Date
Description (A) B)(C) acquired
------------ --------
<S> <C> <C>
OFFICE PROPERTIES:
Airport Plaza $ 3,819 4/30/87
Bellevue Corporate Plaza 5,198 6/30/88
Corporate Square 13,613 8/2/85 & 10/1/92
Executive Park 32,185 12/19/85
First Maryland Building 25,708 6/29/84
Montrose Office Center 7,455 1/8/88
Parklane Towers 28,358 12/16/84
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks 10,845 9/24/85
Fairlane Commerce Park 10,321 12/30/86 & 7/1/87
Joy Road Distribution Center 280 2/14/96
Raintree Industrial Park 9,901 7/17/86
Seattle Business Parks 7,636 4/24/86
OFFICE EQUIPMENT 48 various
--------
TOTAL $155,367
========
</TABLE>
See notes to Schedule III on following page.
PAGE 28 OF 35
<PAGE> 29
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO SCHEDULE III
DECEMBER 31, 1997
(IN THOUSANDS)
(A) PROPERTY LOCATIONS ARE AS FOLLOWS:
Office Building Properties:
Airport Plaza - San Diego, California Bellevue Corporate Plaza -
Bellevue, Washington Corporate Square - Atlanta, Georgia
Executive Park - Atlanta, Georgia First Maryland Building -
Baltimore, Maryland Montrose Office Center - Rockville, Maryland
Parklane Towers - Dearborn, Michigan
Industrial Park Properties:
Bradshaw Business Parks - Sacramento and Rancho Cordova,
California
Fairlane Commerce Park - Dearborn, Michigan
Joy Road Distribution Center - Detroit, Michigan
Raintree Industrial Park - Solon, Ohio
Seattle Business Parks - Kent and Tukwila, Washington
(B) RECONCILIATION OF CARRYING COSTS (in thousands):
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
--------- ------------
<S> <C> <C>
Balance, January 1, 1995 $ 332,503 $ 127,291
Additions 4,477 17,423
Retirements (6,502) (6,502)
--------- ---------
Balance, December 31, 1995 330,478 138,212
Additions 7,697 17,086
Retirements (5,784) (5,784)
--------- ---------
Balance, December 31, 1996 332,391 149,514
Additions 6,183 9,924
Retirements and disposition (4,179) (4,071)
--------- ---------
Balance, December 31, 1997 $ 334,395 $ 155,367
========= =========
</TABLE>
(C) COMPUTATION OF DEPRECIATION:
Depreciation of buildings is computed using the straight-line method
over estimated useful lives ranging from 15 to 43 years. Equipment
and other improvements are depreciated on the straight-line method
over estimated useful lives ranging from 3 to 23 years. Tenant
improvements are capitalized and amortized over the term of the
respective leases. Accumulated depreciation also includes loss
reserves established for anticipated losses on future dispositions.
During 1997, HRP completed a review of its real estate lives. In
light of recent improvements and actions taken to increase its
preventative maintenance programs, the estimated economic lives for
buildings were found to be generally longer than the useful lives
being used for depreciation purposes. Accordingly, effective January
1, 1997, HRP extended the depreciable lives of certain building
costs. The effect of this change in estimate reduced depreciation
and amortization expense by approximately $7,200,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PAGE 29 OF 35
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no officers or directors. HRC, as general partner of the
Partnership, performs all functions ordinarily performed by officers and
directors. HRC was incorporated in Delaware in January 1990.
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS OF HRC -
ANTHONY J. GUMBINER, 53, CHAIRMAN OF THE BOARD AND DIRECTOR OF HRC
Mr. Gumbiner has served as Chairman of the Board of Directors of Hallwood
since 1981 and as its Chief Executive Officer since April 1984. He has
served as Chairman of the Board of Directors since May 1984 and Chief
Executive Officer since February 1987 of the general partner of Hallwood
Energy Partners, L.P. ("HEP"). He has also served as the managing
director of Hallwood Holdings S.A. ("HHSA") since March 1984; as a
director of HRC since 1990; and as a director of Hallwood Consolidated
Resources Corporation ("HCRC") since 1992. Mr. Gumbiner is also a
Solicitor of the Supreme Court of Judicature of England.
BRIAN M. TROUP, 50, DIRECTOR OF HRC
Mr. Troup has served as a director of Hallwood since 1981 and as
President and Chief Operating Officer of Hallwood since April 1986. Mr.
Troup has served as a director of the general partner of HEP since May
1984. He also has served as a director of HCRC since 1992; as a director
of HHSA since March 1984; and as a director of HRC since 1990. He is an
associate of the Institute of Bankers in Scotland and a member of the
Society of Investment Analysts in the United Kingdom.
WILLIAM L. GUZZETTI, 54, PRESIDENT AND DIRECTOR OF HRC
Mr. Guzzetti has been President and a director of HRC since January 1990.
He has served as Executive-Vice President of Hallwood since October 1989
and as President and a director of HCRC since 1992. Mr. Guzzetti has been
President and a director of the general partner of HEP since February
1985.
JOHN G. TUTHILL, 54, EXECUTIVE VICE PRESIDENT AND SECRETARY
Mr. Tuthill has been the Executive Vice President and Secretary of HRC
since January 1990. Mr. Tuthill joined Hallwood in October 1989 to head
all property management functions, having previously served as President
of Southmark Commercial Management since November 1986, where he was
responsible for a diversified real estate portfolio of over 18,000,000
square feet.
JEFFREY D. GENT, 50, VICE PRESIDENT - FINANCE
Mr. Gent has been the Vice President-Finance of HRC since March 1990,
having previously served as Vice President -Finance of Southmark
Commercial Management since September 1984, where he was responsible for
the financial functions of a diversified real estate portfolio of over
18,000,000 square feet.
ALAN G. CRISP, 56, DIRECTOR OF HRC
Mr. Crisp was Chairman and Chief Executive Officer of Atlantic
Metropolitan Holdings (U.K.) plc from 1979 until 1988, when he joined
Interallianz Bank Zurich AG. From 1988 to 1993, he was General Manager of
the London Office of the Bank. Since 1994, Mr. Crisp has been a
consultant for various international companies. He is a Fellow of the
Royal Institution of Chartered Surveyors and holds a B.A. (Hons) Degree.
WILLIAM F. FORSYTH, 48, DIRECTOR OF HRC
Mr. Forsyth has been Chairman of Kildalton & Co., an investment
management consultancy based in Edinburgh, Scotland since 1992. He
graduated in law at Edinburgh University in 1971, and is a member of the
Society of Investment Analysts in the United Kingdom.
EDWARD T. STORY, 54, DIRECTOR OF HRC
Mr. Story has been President and Chief Executive Officer of SOCO
International, plc, an oil and gas company, since September, 1991. Prior
to September 1991, he was Founder and Chairman of Thaitex Petroleum
Company, Co-founder and Chief Financial Officer of Conquest Exploration
Company, the Chief Financial Officer for Superior Oil Company and
Exploration and Production Controller with Exxon Corporation.
UDO H. WALTHER, 50, DIRECTOR OF HRC
Mr. Walther has been President and Chief Executive Officer of Walther
Group, Inc., a full service design and construction consultancy, and
President of Precept Builders, Inc. since 1991. Previously, Mr. Walther
was a Partner at Trammell Crow Company, Project Manager with HCB
Contractors and Marketing Vice President for Researched Investments, Ltd.
PAGE 30 OF 35
<PAGE> 31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)
Section 16(a) of the Securities and Exchange Act of 1934 requires a registrant's
officers and directors, if any, and persons who own more than ten percent of a
registered class of HRP's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC") and
the American Stock Exchange. Officers, directors and greater than ten percent
shareholders are required by the SEC regulations to furnish HRP with copies of
all Section 16(a) forms they file. Based solely on a review of the copies of
such forms furnished to HRP, or written representations that no Forms 5 were
required, HRP believes that during the period January 1, 1997 to December 31,
1997, all Section 16(a) filing requirements applicable to its officers and
directors were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND COMPENSATION OF
DIRECTORS
HRC does not have a compensation committee and compensation decisions are made
by the Board of Directors of HRC. During 1997, Messrs. Gumbiner, Troup and
Guzzetti served on the Board of Directors of HRC and the compensation committee
of Hallwood Energy. Mr. Gumbiner is also Chief Executive Officer of Hallwood,
HRC and the general partner of HEP. Mr. Troup is also President and Chief
Operating Officer of Hallwood. Mr. Guzzetti is also President and Chief
Operating Officer of HRC, Chief Operating Officer and President of the general
partner of HEP, and Executive Vice President of Hallwood. Messrs. Forsyth,
Crisp, Story and Walther were each paid $20,000 in each of the three years ended
December 31, 1997 for director fees.
HRC receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive disposition
fees. Specifically, HRC is entitled to receive (i) an asset management fee equal
to 1% of the net aggregate base rents of the Properties, (ii) acquisition fees
equal to 1% of the purchase price of newly acquired properties, and (iii)
incentive fees for performing disposition services with respect to real estate
investments, other than the properties owned at the time of HRP's formation on
November 1, 1990, equal to 10% of the amount, by which the sales price of a
property disposed of exceeds the purchase price of such property.
HCRE receives compensation in connection with the management of the Properties,
which includes a property management fee, lease commissions and construction
supervision fees. The management contracts expire June 30, 1999 and provide for
(i) basic compensation from a property management fee which is an amount equal
to 2.85% of cash receipts collected from the Properties' tenants, (ii) lease
commissions equal to the current market rate as applied to the net aggregate
rent, not to exceed 6% of the net aggregate rent, and (iii) construction
supervision fees for administering all construction projects equal to 5% of the
total contract costs of each capital expenditure or tenant improvement project.
HRC and HCRE are compensated for services provided to HRP and its Properties as
described above. The following table sets forth such compensation and
reimbursement paid by HRP for the periods presented (in thousands):
<TABLE>
<CAPTION>
Entity
Paid or
Reimbursed 1997 1996 1995
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Asset management fee HRC $ 458 $ 450 $ 446
Property management fee HCRE 1,524 1,433 1,459
Lease commissions HCRE 1,425 2,888 1,501
Construction fees HCRE 353 382 270
Acquisition fee HRC 7 17 -
Reimbursement of costs (a) HRC 2,316 2,321 1,992
</TABLE>
(a) These costs are mostly recorded as General and Administrative Expenses and
represent reimbursement to HRC, at cost, for partnership level salaries,
employee and director insurance and certain overhead costs. HRP pays, on a
monthly basis, the balance of its account with HRC.
PAGE 31 OF 35
<PAGE> 32
ITEM 11. EXECUTIVE COMPENSATION - (CONTINUED)
CASH COMPENSATION OF EXECUTIVE OFFICERS
The Partnership has no executive officers, however, employees of HRC (general
partner of the Partnership) perform all functions ordinarily performed by
executive officers. The following table sets forth annual compensation
information for the Chief Executive Officer and the three other executive
officers with earnings that exceeded $100,000 for the year ended December 31,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
-------------------------------------------------------- ---------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary (a) Bonus Compensation (b) Options/SARs (c)
- --------------------------- ---- ---------- ----- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 1997 $ - $ - $ - -
Chairman of the Board and 1996 - - - -
Chief Executive Officer 1995 - - - 25,800
William L. Guzzetti 1997 200,000 17,583 - -
President and Chief 1996 200,000 8,333 - -
Operating Officer 1995 200,000 8,333 - 15,000
John G. Tuthill 1997 150,360 46,265 8,256 -
Executive Vice President 1996 150,360 46,265 3,345 -
and Secretary 1995 150,360 6,265 8,556 13,000
Jeffrey D. Gent 1997 99,396 11,212 6,385 -
Vice President - Finance 1996 90,360 15,648 2,317 -
1995 90,360 5,648 6,356 7,000
</TABLE>
- -----------------------------
(a) Represents executive officers' gross salary before contributions to the
qualified 401(k) Tax Favored Savings Plan.
(b) Represents employer matching contributions to the 401(k) Tax Favored
Savings Plan or payments in lieu thereof made under a special bonus
arrangement.
(c) Represents the number of options granted for Partnership units under a
February 1995 plan - see Note 6 to the Consolidated Financial
Statements. Other than this plan, HRC and HRP do not have any long
term compensation awards and payouts, such as a stock option plan or
restricted stock awards.
The following table discloses for each of the executive officers of HRC, who
have been granted options to purchase securities of HRP the number of such
options held by each of the executive officers and the potential realizable
values for their options at December 31, 1997. None of the executive officers
exercised any options during the year ended December 31, 1997 and HRP has not
granted SARs.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND OPTION/SAR VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options at Options at
Units December 31, 1997 December 31, 1997
Acquired ------------------------------- ----------------------------
Name on Exercise Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 0 25,800 0 $ 919,125 $ 0
William L. Guzzetti 0 15,000 0 534,375 0
John G. Tuthill 0 13,000 0 463,125 0
Jeffrey D. Gent 0 7,000 0 249,375 0
</TABLE>
PAGE 32 OF 35
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 3, 1998 concerning the
number of Partnership units owned beneficially by (l) the persons who, to the
knowledge of the management, beneficially owned more than 5% of the units
outstanding on such date, (2) each director and (3) the present directors and
executive officers of HRC as a group:
<TABLE>
<CAPTION>
Amount Percent
Name and Address of Beneficially of
Beneficial Owner Owned (a) Class
- ----------------- ------------ -------
<S> <C> <C>
The Hallwood Group Incorporated
3710 Rawlins, Suite 1500
Dallas, Texas 75219 413,040 24.7%
Gotham Partners, L.P.
237 Park Avenue, 9th Floor
New York, NY 10017 247,994 14.8%
Private Management Group, Inc.
20 Corporate Park, Suite 400
Irvine, CA 92606 102,615 6.1%
Alan G. Crisp * - -
William F. Forsyth * - -
Anthony J. Gumbiner * 25,800 (b) 1.5% (b)
William L. Guzzetti * 15,100 (c) 0.9% (c)
Edward T. Story * - -
Brian M. Troup * 17,200 (d) 1.0% (d)
Udo H. Walther * - -
All directors and executive officers
as a group (9 persons) 78,100 (e) 4.5% (e)
</TABLE>
- -----------
* Represents the following address: c/o Hallwood Realty Corporation,
3710 Rawlins, Suite 1500, Dallas, Texas, 75219.
(a) Unless otherwise indicated, each of the persons named has sole
voting and investment power with respect to the units reported.
(b) Comprised of currently exercisable options to purchase 25,800 units.
(c) Includes currently exercisable options to purchase 15,000 units.
(d) Comprised of currently exercisable options to purchase 17,200 units.
(e) Includes currently exercisable options to purchase 78,000 units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information covered by this item, see Notes 3 and 6 to the Registrant's
financial statements included in Item 8 hereof.
PAGE 33 OF 35
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(1) Financial Statements.
See Index contained in Item 8.
(2) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1997 or
in 1998 prior to the filing of this Form 10-K for the year ended
December 31, 1997.
(3) Exhibits and Reports on Form 8-K.
The response to this portion of Item 14 is incorporated by reference as
detailed in the Exhibit Index.
(4) Financial Statement Schedules.
See Index contained in Item 8.
PAGE 34 OF 35
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HALLWOOD REALTY PARTNERS, L.P.
BY: HALLWOOD REALTY CORPORATION
GENERAL PARTNER
DATE: March 3, 1998 BY: /s/ WILLIAM L. GUZZETTI
------------- ----------------------------------------
William L. Guzzetti
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K for the year ended December 31, 1997, has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Anthony J. Gumbiner (Chief Executive Officer)
/s/ WILLIAM L. GUZZETTI President and Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
William L. Guzzetti (Chief Operating Officer)
/s/ JOHN G. TUTHILL Executive Vice President and Secretary, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
John G. Tuthill
/s/ JEFFREY D. GENT Vice President - Finance, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Jeffrey D. Gent (Chief Accounting Officer)
/s/ALAN G. CRISP Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Alan G. Crisp
/s/ WILLIAM F. FORSYTH Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
William F. Forsyth
/s/ EDWARD T. STORY Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Edward T. Story
/s/ BRIAN M. TROUP Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Brian M. Troup
/s/ UDO H. WALTHER Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Udo H. Walther
</TABLE>
PAGE 35 OF 35
<PAGE> 36
HALLWOOD REALTY PARTNERS, L.P.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
3.1 (a) Certificate of Limited Partnership of Hallwood Realty Partners, L.P., dated
January 10, 1990.
3.2 (a) Amended and Restated Agreement of Limited Partnership of Hallwood Realty
Partners, L.P., dated June 7, 1990.
4.1 Unit Purchase Rights Agreement, dated as of November 30,
1990, between the Partnership and The First National Bank
of Boston, as Rights Agent (filed as part of Exhibit 1 to
Current Report of Form 8-K, dated November 30, 1990, and
which is incorporated herein by reference - File
No. 1 -10643). (4.1)
10.1 (b) Management Agreement between Equitec/San Diego and Hallwood
Management Company dated July 1, 1994.
10.2 (b) Management Agreement between Equitec/Bellevue Investors and Hallwood
Management Company dated July 1, 1994.
10.3 (b) Management Agreement between BBP General Partnership and Hallwood
Management Company dated July 1, 1994.
10.4 (b) Management Agreement between Hallwood Real Estate Investors Fund XV
and Hallwood Management Company dated July 1, 1994.
10.5 (b) Management Agreement between Executive Park Ventures and Hallwood
Management Company dated July 1, 1994.
10.6 (b) Management Agreement between Equitec Dearborn Real
Estate Investors and Hallwood Management Company dated
July 1, 1994.
10.7 (b) Management Agreement between Hallwood Income Real
Estate Investors A and Hallwood Management Company dated
July 1, 1994.
10.8 (b) Management Agreement between Hallwood Real Estate
Investors Fund XVI Hallwood Management Company dated July
1, 1994.
10.9 (b) Management Agreement between First Associates Limited
Partnership and Hallwood Management Company dated July 1,
1994.
10.10 (b) Management Agreement between Montrose Center Limited
Partnership and Hallwood Management Company dated July 1,
1994.
</TABLE>
<PAGE> 37
HALLWOOD REALTY PARTNERS, L.P.
EXHIBIT INDEX - (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
10.11 (b) Management Agreement between Hallwood Real Estate Investors Fund XIV
and Hallwood Management Company dated July 1, 1994.
10.12 (b) Management Agreement between Hallwood Real Estate Investors Fund XVI
and Hallwood Management Company dated July 1, 1994.
10.13 (b) Management Agreement between SBP General and Hallwood Management
Company dated July 1, 1994.
10.14 (b) 1995 Unit Option Plan for Hallwood Realty Partners, L.P.
10.15 (b) 1995 Unit Option Plan Loan Program for Hallwood Realty Partners, L.P.
10.16 Loan Agreement between Hallwood 95, L.P. and Nomura Asset Capital
Corporation. (Incorporated by reference from exhibit 2.1 filed with Current
Report on Form 8-K dated September 29, 1995.)
10.17 Amended and Restate Agreement of Limited Partnership of Hallwood 95, L.P.
(Incorporated by reference from exhibit 10.17 filed with Annual Report on Form
10-K for the fiscal year ended December 31, 1995.)
27 Financial Data Schedule
</TABLE>
- ----------
(a) Filed as an Exhibit to Registration Statement No. 33-35621 on Form S-4
of the Partnership, filed with the Commission on June 28, 1990, as
amended, on June 29, 1990 and incorporated herein by reference.
(b) Incorporated by reference as the exhibit indicated and filed with
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,665
<SECURITIES> 0
<RECEIVABLES> 1,162
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 334,395
<DEPRECIATION> 155,367
<TOTAL-ASSETS> 207,134
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 32,711
<OTHER-SE> 330
<TOTAL-LIABILITY-AND-EQUITY> 207,134
<SALES> 0
<TOTAL-REVENUES> 53,899
<CGS> 0
<TOTAL-COSTS> 38,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,945
<INCOME-PRETAX> 2,357
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,357
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.35
</TABLE>
