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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10643
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HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
-----------------------
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
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 REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING
OWNERSHIP OF LIMITED PARTNER INTERESTS.
NUMBER OF UNITS OUTSTANDING AT AUGUST 3, 1999: 1,672,556 UNITS.
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HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital Resources 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Items 1 to 6 Other Information 13
Signature 14
</TABLE>
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HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Land $ 56,441 $ 56,441
Buildings and improvements 262,837 262,588
Tenant improvements 16,692 17,692
---------- ------------
335,970 336,721
Accumulated depreciation and amortization (162,841) (160,942)
---------- ------------
Real estate, net 173,129 175,779
Cash and cash equivalents 15,772 14,497
Accounts receivable 1,707 1,456
Lease commissions, net 9,242 7,186
Loan reserves and escrows 7,531 6,986
Loan costs, net 3,717 3,923
Prepaid expenses and other assets 3,567 4,196
---------- ------------
Total assets $ 214,665 $ 214,023
========== ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 160,877 $ 162,078
Accounts payable and accrued expenses 3,379 4,435
Prepaid rent and security deposits 2,234 2,703
Payable to affiliates, net 1,145 173
---------- ------------
Total liabilities 167,635 169,389
---------- ------------
Partners' capital:
Limited partners - 1,672,556 units outstanding 46,560 44,188
General partner 470 446
---------- ------------
Total partners' capital 47,030 44,634
---------- ------------
Total liabilities and partners' capital $ 214,665 $ 214,023
========== ============
</TABLE>
See notes to consolidated financial statements.
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HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Property operations $ 14,030 $ 13,552 $ 28,368 $ 27,228
Interest 222 219 443 366
-------- -------- -------- --------
Total revenues 14,252 13,771 28,811 27,594
-------- -------- -------- --------
EXPENSES:
Property operations 5,568 5,150 11,404 10,741
Interest 3,387 3,135 6,766 6,318
Depreciation and amortization 2,955 3,010 5,980 6,088
General and administrative 1,160 821 2,265 1,723
-------- -------- -------- --------
Total expenses 13,070 12,116 26,415 24,870
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 1,182 1,655 2,396 2,724
Extraordinary item -
Loss on early extinguishments of debt -- (265) -- (1,876)
-------- -------- -------- --------
NET INCOME $ 1,182 $ 1,390 $ 2,396 $ 848
======== ======== ======== ========
ALLOCATION OF NET INCOME:
Limited partners $ 1,170 $ 1,376 $ 2,372 $ 839
General partner 12 14 24 9
-------- -------- -------- --------
Total $ 1,182 $ 1,390 $ 2,396 $ 848
======== ======== ======== ========
NET INCOME PER UNIT AND
POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary item $ .70 $ .98 $ 1.42 $ 1.61
Loss on early extinguishments of debt -- (.16) -- (1.11)
-------- -------- -------- --------
Net income $ .70 $ .82 $ 1.42 $ .50
======== ======== ======== ========
Earnings per unit - assuming dilution
Income before extraordinary item $ .67 $ .94 $ 1.36 $ 1.55
Loss on early extinguishments of debt -- (.15) -- (1.07)
-------- -------- -------- --------
Net income $ .67 $ .79 $ 1.36 $ .48
======== ======== ======== ========
WEIGHTED AVERAGE UNITS USED IN
COMPUTING NET INCOME PER UNIT
AND POTENTIAL UNIT:
Basic 1,673 1,673 1,673 1,673
======== ======== ======== ========
Assuming dilution 1,740 1,743 1,740 1,741
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,396 $ 848
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,980 6,088
Loss on early extinguishments of debt -- 1,876
Amortization of mortgage principal forgiveness -- (847)
Effective rent adjustments (460) (173)
Changes in assets and liabilities:
Receivables (251) (266)
Lease commissions (3,182) (1,230)
Prepaid expenses and other assets 733 604
Accounts payable and other liabilities (553) (545)
-------- --------
Net cash provided by operating activities 4,663 6,355
-------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (2,151) (2,054)
-------- --------
Net cash used in investing activities (2,151) (2,054)
-------- --------
FINANCING ACTIVITIES:
Mortgage principal proceeds -- 41,500
Mortgage principal refinanced -- (35,046)
Mortgage prepayment penalties -- (1,655)
Mortgage principal payments (1,201) (1,489)
Loan reserves -- (550)
Loan fees and expenses (36) (1,122)
-------- --------
Net cash provided by (used in) financing activities (1,237) 1,638
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,275 5,939
BEGINNING CASH AND CASH EQUIVALENTS 14,497 6,665
-------- --------
ENDING CASH AND CASH EQUIVALENTS $ 15,772 $ 12,604
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash during the period $ 6,511 $ 6,933
======== ========
</TABLE>
See notes to consolidated financial statements.
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
1 ORGANIZATION AND ACCOUNTING POLICIES
Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its
commercial real estate assets. The limited partners' interests, or units,
are traded on the American Stock Exchange under the symbol "HRY". As of June
30, 1999, there were 1,672,556 units outstanding.
Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company 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 real estate properties. Hallwood Commercial
Real Estate, LLC ("HCRE"), another wholly-owned subsidiary of Hallwood,
provides property management services for HRP's real estate properties.
The accompanying unaudited consolidated financial statements of Hallwood
Realty Partners, L.P. have been prepared in accordance with generally
accepted accounting principles for the interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote
disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
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.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999. These financial statements should be read in conjunction with the
audited consolidated financial statements and related disclosures thereto
included in Form 10-K for the year ended December 31, 1998.
Statement of Financial Accounting Standards No. 133 "Accounting of
Derivative Instruments and Hedging Activities" was issued in June 1998 and
the original effective date for periods beginning after June 15, 1999 has
been extended one year to June 15, 2000. HRP is currently not planning on
early adoption and has not had an opportunity to evaluate the impact of the
provisions on its consolidated financial statements relating to future
adoption.
2 TRANSACTIONS WITH RELATED PARTIES
During June 1999, the management contract agreements for HRP's properties
were extended five years to June 30, 2004. There were no changes to fee
compensation. Realty and HCRE are compensated for services provided to HRP
and its real estate properties and are set forth in the following table for
the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
ENTITY JUNE 30, JUNE 30,
PAID OR ------------------------ --------------------------
REIMBURSED 1999 1998 1999 1998
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Asset management fee Realty $ 126 $ 123 $ 249 $ 244
Reimbursements of costs (a) Realty 588 512 1,306 1,158
Property management fee HCRE 405 396 815 787
Lease commissions HCRE 2,418 649 2,834 1,036
Construction fees HCRE 98 48 193 105
</TABLE>
(a) These costs are mostly recorded as general and administrative expenses
and represent reimbursement to Realty, 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 Realty.
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
3 COMPUTATION OF NET INCOME PER UNIT
Basic earnings per unit is computed by dividing net income 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 attributable to the limited partners' interests by the weighted
average number of units and potential units outstanding. Options to acquire
units were issued during 1995 and are considered to be potential units. The
number of potential 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 these options. The following table illustrates the amounts used
to calculate the weighted average number of units outstanding:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average units outstanding - basic 1,673 1,673 1,673 1,673
Issuance of units from options 86 86 86 86
Repurchase of units from unit option proceeds (19) (16) (19) (18)
------ ------ ------ ------
Weighted average units outstanding - assuming dilution 1,740 1,743 1,740 1,741
====== ====== ====== ======
</TABLE>
4 DEVELOPMENT OF LAND AT CORPORATE SQUARE
During the second quarter of 1999, HRP began construction of a 5-story
office building containing approximately 125,000 rentable square feet. It is
being constructed on 6.1 acres of land that was acquired in May 1997 within
the Corporate Square complex in Atlanta, Georgia. About 72% of the space has
been pre-leased to the General Services Administration for 20 years, with
occupancy expected by Spring 2000. The building, tenant improvements, lease
commissions and loan costs are estimated to be $15,300,000 (excluding the
land). HRP will use cash to pay off the outstanding loan balance ($486,000
as of June 30, 1999) secured by the land and to pay the lease commissions
incurred in the second quarter of 1999 of $1,746,000. Half of the lease
commission was paid in June 1999 upon execution of the lease and the
remaining half will be paid when the tenant takes occupancy of the space.
The balance of the project will be funded by an interim-construction loan
until completion and ultimately replaced by permanent financing.
5 LITIGATION
Reference is made to Note 9 to the audited consolidated financial statements
contained in Form 10-K for the year ended December 31, 1998. Beginning in
1997, HRP has been involved in two lawsuits with Gotham Partners, L.P. The
first complaint seeks access to certain books and records of HRP, a list of
the limited partners and reimbursement of the plaintiff's expenses. The
second complaint alleges claims of breach of fiduciary duties, breach of
HRP's partnership agreement, fraud, and as to Hallwood, aiding and abetting
these alleged breaches. 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. Plaintiffs
filed an amended complaint on March 6, 1998, which defendants again moved to
dismiss. This motion was denied and the parties are proceeding with
discovery.
HRP's management believes 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.
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HALLWOOD REALTY PARTNERS, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RESULTS OF OPERATIONS
SECOND QUARTER OF 1999 COMPARED TO THE SECOND QUARTER OF 1998
REVENUE FROM PROPERTY OPERATIONS increased $478,000, or 3.5%, for the second
quarter of 1999, compared to the 1998 second quarter. The following table
illustrates the components of the change, in thousands:
<TABLE>
<S> <C>
Rental income, net $ 440
Other property income 38
-----
Net increase $ 478
=====
</TABLE>
Overall, net rental income increased due to higher rental rates, partially
offset by a slight decline in average occupancy between the comparable periods
from 93.3% to 93.2%. Other property income increased primarily due to the
receipt of non-recurring parking revenues and due to an increase in tenants'
utility cost reimbursements.
INTEREST INCOME increased $3,000 as a result of additional earnings on overnight
investments due to higher average cash balances available for investment between
the periods.
PROPERTY OPERATING EXPENSES increased $418,000, or 8.1%, for the second quarter
of 1999, compared to the same period in 1998. The increase is comprised of the
following components:
o Real estate taxes increased $466,000, primarily due to non-recurring
refunds of $391,000 received in the 1998 period for prior years' taxes.
o Combined, all other operating costs decreased $48,000, or less than 1%,
between the periods.
INTEREST EXPENSE increased $252,000, or 8.0%, for the second quarter of 1999 as
compared to the same period in 1998. The 1998 period included $423,000 of
non-cash amortization of Allfirst Building's (formerly named First Maryland
Building) loan forgiveness, which was eliminated in November 1998 as the result
of the retirement and refinancing of that loan. Partially offsetting this was a
reduction in cash mortgage interest of $171,000, primarily as the result of
reduced contractual interest rates from 1998 loan refinancings.
DEPRECIATION AND AMORTIZATION EXPENSE was consistent with the prior year
quarter, decreasing $55,000, or 1.8%.
GENERAL AND ADMINISTRATIVE EXPENSES increased $339,000, or 41.3%, for the second
quarter of 1999, as compared to the same period in 1998, as a result of an
increase of $403,000 in litigation costs (see Note 5 to the consolidated
financial statements) partially offset by a $64,000 decrease of other costs,
primarily certain professional fees incurred in the 1998 period and lower state
franchise taxes.
LOSS ON EARLY EXTINGUISHMENT OF DEBT of $265,000 in the 1998 period represents a
prepayment penalty of $190,000 incurred with the early payoff of a loan secured
by Seattle Business Parks and the write off of $75,000 of unamortized loan costs
associated with the retired loan.
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HALLWOOD REALTY PARTNERS, L.P.
RESULTS OF OPERATIONS - CONTINUED
FIRST SIX MONTHS OF 1999 COMPARED TO THE FIRST SIX MONTHS OF 1998
REVENUE FROM PROPERTY OPERATIONS increased $1,140,000, or 4.2%, for the first
six months of 1999, compared to the first six months of 1998. The following
table illustrates the components of the change, in thousands:
<TABLE>
<S> <C>
Rental income, net $ 687
Other property income 453
------
Net increase $1,140
======
</TABLE>
Overall, net rental income increased due to higher rental rates, partially
offset by a slight decline in average occupancy between the comparable periods
from 93.6% to 92.8%. Other property income increased primarily due to the
receipt of non-recurring parking revenue, an increase in tenant utility
reimbursements, and increases in various tenant services.
INTEREST INCOME increased $77,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment between the periods.
PROPERTY OPERATING EXPENSES increased $663,000, or 6.2%, for the first six
months of 1999, compared to the same period in 1998. The increase is comprised
of the following components:
o Real estate taxes increased $538,000, primarily due to non-recurring
refunds of $413,000 received in the 1998 period for prior years' taxes.
o Snow removal costs increased $171,000 due to a milder 1998 winter.
o Combined, all other operating costs decreased $46,000, or less than 1%,
between the periods.
INTEREST EXPENSE increased $448,000, or 7.1%, for the first six months of 1999
as compared to the same period in 1998. The 1998 period included $848,000 of
non-cash amortization of Allfirst Building's (formerly named First Maryland
Building) loan forgiveness, which was eliminated in November 1998 as the result
of the retirement and refinancing of that loan. Partially offsetting this was a
reduction in cash mortgage interest of $393,000, primarily as the result of
reduced contractual interest rates from 1998 loan refinancings, and due to lower
miscellaneous interest of $7,000.
DEPRECIATION AND AMORTIZATION EXPENSE was consistent with the prior year period,
decreasing $108,000, or 1.8%.
GENERAL AND ADMINISTRATIVE EXPENSES increased $542,000, or 31.5%, for the first
six months of 1999, as compared to 1998's first six months, primarily as a
result of an increase of $547,000 in litigation costs (see Note 5 to the
consolidated financial statements).
LOSS ON EARLY EXTINGUISHMENT OF DEBT of $1,876,000 in the 1998 period represents
prepayment penalties of $1,655,000 incurred with the early payoff of loans
secured by Executive Park and Seattle Business Parks, along with the write off
of $221,000 of unamortized loan costs associated with the retired loans.
PAGE 9
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES
HRP is engaged in the acquisition, ownership and operation of commercial real
estate assets. While it is the General Partner's intention to operate HRP's
existing real estate investments and to acquire and operate additional real
estate investments, Realty 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 June 30, 1999, HRP owned twelve real estate properties located in six
states containing 5,161,000 net rentable square feet. 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.
HRP's cash position increased $1,275,000 during the first six months of 1999
from $14,497,000 as of December 31, 1998 to $15,772,000 as of June 30, 1999. The
source of cash during the period was $4,663,000 of cash provided by operating
activities. The uses of cash during the period were $2,151,000 of property and
tenant improvements, $1,201,000 of mortgage principal payments, and $36,000 of
loan fees and expenses.
Substantially all of the buildings in eleven of HRP's real estate properties
were encumbered by and pledged as collateral under non-recourse mortgages as of
June 30, 1999. HRP has no mortgage loans maturing or requiring balloon principal
payments until the year 2003. Based upon loan amortizations in effect, HRP is
required to pay approximately $1,269,000 of principal payments during the
remainder of 1999.
For 1999, HRP's budget (exclusive of the new building's construction discussed
in the next paragraph) for tenant and capital improvements was approximately
$7,303,000 and for lease commissions was about $2,127,000. In the first six
months of 1999, HRP incurred $2,151,000 of tenant and capital improvements and
$1,436,000 of lease commissions of these budgeted amounts.
During the second quarter of 1999, HRP began construction of a 5-story office
building containing approximately 125,000 rentable square feet. It is being
constructed on 6.1 acres of land that was acquired in May 1997 within the
Corporate Square complex in Atlanta, Georgia. About 72% of the space has been
pre-leased to the General Services Administration for 20 years, with occupancy
expected by Spring 2000. The building, tenant improvements, lease commissions
and loan costs are estimated to be $15,300,000 (excluding the land). HRP will
use cash to pay off the outstanding loan balance ($486,000 as of June 30, 1999)
secured by the land and to pay the lease commissions incurred in the second
quarter of 1999 of $1,746,000. Half of this lease commission was paid in June
1999 upon execution of the lease and the remaining half will be paid when the
tenant takes occupancy of the space. The balance of the project will be funded
by an interim-construction loan until completion and ultimately replaced by
permanent financing.
Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992. 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 real estate properties.
YEAR 2000 PLAN -
HRP realizes that many of the world's information systems and/or computer
programs currently do not have the ability to recognize four digit date code
fields and accordingly, they do not have the ability to distinguish a year that
begins with "20" instead of the familiar "19". If not corrected, many computer
applications could fail, become unstable, stop working altogether, or create
erroneous or incorrect results. Therefore, many companies and organizations are
spending considerable resources to update and modify their systems for Year 2000
compliance.
HRP developed a program to review and modify, where necessary, its computers,
computer programming and building systems to process transactions and/or operate
in the Year 2000 and beyond. HRP identified that its four primary business
systems vulnerable to the Year 2000 issue are: (1) General Ledger/Accounts
Payable/Accounts Receivable Systems These systems were modified by the vendor at
no cost to HRP during the third quarter of 1998 and are now Year 2000 compliant.
(2) Commercial Lease Administration - The system used by HRP is Year 2000
compliant. (3) K-1 Processing - HRP maintains data used to process its partners
Schedule K-1's for tax reporting purposes in an environment that is not Year
2000 compliant. A compliant system will be installed in the fourth quarter of
1999 at minimal cost. (4) Payroll Year 2000 compliant software was purchased and
installed in the fourth quarter of 1998 at minimal cost.
PAGE 10
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
In July 1999, HRP completed a survey of its significant service providers and
other external parties to determine their compliance with the Year 2000 issue
and what impact, if any, their efforts will have on HRP's business and
operations. This survey included the identification of certain on-site,
non-information technology systems that could be vulnerable to the Year 2000
issue. These non-information technology systems included, but were not limited
to, access gates, alarms, elevators, heating and air conditioning systems,
irrigation systems, security systems, thermostats, and utility meters and
switches.
HRP has utilized and will continue to utilize, as necessary, external and
internal resources to reprogram, upgrade, replace and/or test its systems for
Year 2000 modifications. HRP anticipates completing the remaining Year 2000
upgrades and replacements by October 31, 1999. Total costs, including
information and non-information technology systems, are not expected to exceed
$100,000.
Although HRP believes that it will not have any detrimental effects on its
operations from Year 2000 compliance issues, there can be no assurance that the
systems of other companies, on which HRP's systems may rely, will be converted
timely, or converted in a manner that is compatible with HRP's systems, or that
any such failures by such other companies would not have a material adverse
effect or risk to HRP. HRP plans to devote all necessary resources to resolve
any such unforseen issues in a timely manner. In the event of a complete failure
of our information technology systems, HRP would be able to continue the
affected functions either manually or through the use of non-Year 2000 compliant
systems. The primary costs associated with such a necessity would probably
include increased time delays associated with posting of information, and
increased personnel to manually process the information. HRP does not currently
have a contingency plan in place and believes, based upon current knowledge,
that one is not needed.
The cost of Year 2000 compliance and the estimated date of completion of
necessary modifications are based on HRP's best estimates, which were derived
from various assumptions of future events, including the continued availability
of certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ significantly from those anticipated.
FORWARD-LOOKING STATEMENTS -
In the interest of providing investors with certain information regarding HRP's
future plans and operations, certain statements set forth in this Form 10-Q
relate to management's future plans and objectives. Such statements are
forward-looking statements within the meaning of federal securities laws.
Although any forward-looking statements contained in this Form 10- Q or
otherwise expressed by or on behalf of HRP are, to the knowledge and in the
judgment of the officers and directors of the General Partner, expected to prove
true and come to pass, management is not able to predict the future with
absolute certainty. 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 will prove to be accurate.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause HRP's actual performance and financial results in future periods
to differ significantly from any projection, estimate or forecasted result.
These risks and uncertainties include, 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; other risks and uncertainties may be described, from time to
time, in HRP's periodic reports and filings with the Securities and Exchange
Commission.
PAGE 11
<PAGE> 12
HALLWOOD REALTY PARTNERS, L.P.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to HRP's market risks during the six months
ended June 30, 1999.
QUALITATIVE INFORMATION -
HRP's primary risk management strategy is to manage its exposure to adverse
changes in interest rates by issuing fixed rate debt, where possible. HRP
attempts to manage the exposure to adverse changes in the fair value of its
fixed rate debt by issuing fixed rate debt when business and markets conditions
are favorable. There is inherent rollover risk for borrowings as they mature and
are renewed at the then current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and HRP's future financing requirements. HRP does not hold or issue derivative
financial instruments for trading purposes. As part of HRP's financing activity,
a derivative security was used for the sole purpose of fixing the interest rate
of HRP's only variable rate debt instrument.
SPECIFIC AND QUANTITATIVE INFORMATION -
HRP's derivative instrument, which is matched directly against an outstanding
borrowing is a "pay fixed/receive variable" interest rate swap with a highly
rated counterparty in which the interest payments are calculated on a notional
amount. The notional amount does not represent amounts exchanged by the parties
and thus are not a measure of exposure to HRP through its use of the derivative.
HRP is exposed to credit-related gains or losses in the event of non-performance
by counterparties to this financial instrument; however, HRP does not expect any
counterparties to fail to meet their obligations. The interest rate swap is
described as follows:
<TABLE>
<CAPTION>
Variable Rate as of June 30, 1999
-----------------------------------
Fair Value of
Notional Amount Maturity Date Fixed Rate% % Based On Swap (a)
- --------------- ------------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C> <C>
$ 25,000,000 April 30, 2006 6.78% 6.23% 30 day $ 1,157,000
LIBOR
</TABLE>
(a) The estimated amount that HRP would receive upon termination of its
interest rate swap agreement as of June 30, 1999 was based on a quote
received from the lender.
PAGE 12
<PAGE> 13
HALLWOOD REALTY PARTNERS, L.P.
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
----
<S> <C> <C>
1 Legal Proceedings None.
2 Changes in Securities and Use of Proceeds None.
3 Defaults upon Senior Securities None.
4 Submission of Matters to a Vote of Security Holders None.
5 Other Information None.
6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule Page 15
(b) Reports on Form 8-K None.
</TABLE>
PAGE 13
<PAGE> 14
HALLWOOD REALTY PARTNERS, L.P.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALLWOOD REALTY PARTNERS, L.P.
(Registrant)
By: HALLWOOD REALTY, LLC
General Partner
Date: August 3, 1999 By: /s/ JEFFREY D. GENT
-------------- ------------------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting Officer)
PAGE 14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,772
<SECURITIES> 0
<RECEIVABLES> 1,707
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 335,970
<DEPRECIATION> 162,841
<TOTAL-ASSETS> 214,665
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 46,560
<OTHER-SE> 470
<TOTAL-LIABILITY-AND-EQUITY> 214,665
<SALES> 0
<TOTAL-REVENUES> 28,811
<CGS> 0
<TOTAL-COSTS> 17,834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,766
<INCOME-PRETAX> 2,396
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,396
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.36
</TABLE>
