UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------------------------------------
OR
[ ] 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: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 36-3606475
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
330 North Jefferson Court,Chicago,Illinois 60661
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(Address of principal executive offices) (Zip Code)
312/575-0400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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
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1
HEARTLAND PARTNERS, L.P.
March 31, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets......................3
Consolidated Statements of Operations............4
Consolidated Statements of Cash Flows............5
Notes to Consolidated Financial Statements.......6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................13
Item 3 Quantitative and Qualitative Disclosure About Market
Risk................................................. 21
PART II. OTHER INFORMATION
Item 1 Legal Proceedings.....................................22
Item 6 Exhibits and Reports on Form 8-K......................25
Signatures......................................26
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
(amounts in thousands)
March 31, December 31,
2001 2000
(Unaudited) (Audited)
------------ ------------
Assets:
Cash $ 3,670 $ 150
Restricted cash 2,670 2,699
Accounts receivable(net) 601 582
Due from affiliate 5,961 4,581
Prepaid and other assets 272 279
Investment in joint venture 467 377
------------ ------------
Total 13,641 8,668
------------ ------------
Property:
Land, buildings and other $ 2,690 $ 2,683
Less accumulated depreciation 162 137
------------ ------------
Net land, buildings and other 2,528 2,546
Land held for sale 733 740
Housing inventories 18,050 20,354
Land held for development 5,198 5,497
Capitalized predevelopment costs 9,230 9,779
------------ ------------
Net properties 35,739 38,916
------------ ------------
Total Assets $ 49,380 $ 47,584
============ ============
Liabilities:
Notes payable $ 14,587 $ 14,675
Accounts payable and
accrued expenses 7,639 7,267
Accrued real estate taxes 651 776
Allowance for claims and liabilities 4,456 4,478
Unearned rents and deferred income 1,606 1,632
Other liabilities 2,751 3,260
------------ ------------
Total Liabilities $ 31,690 32,088
------------ ------------
Partners' Capital:
General Partner $ 49 $ 27
Class A Limited Partners - 2,142 units
authorized, issued and outstanding 8,067 5,906
Class B Limited Partner 9,574 9,563
------------ ------------
Total Partners' Capital 17,690 15,496
------------ ------------
Total Liabilities and Partners' Capital $ 49,380 $ 47,584
============ ============
See accompanying notes to consolidated financial statements
3
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED
MARCH 31, 2001 AND 2000
(amounts in thousands except per unit data)
(Unaudited)
Quarter Ended
March 31,
2001 2000
---------- ----------
Income:
Property sales $ 10,210 $ 2,650
Less: Cost of property sales 7,003 2,594
---------- ----------
Gross profit on property sales 3,207 56
---------- ----------
Operating Expenses:
Selling expenses 979 587
General and Administrative expenses 523 534
Real estate taxes 24 22
Environmental expenses 19 77
---------- ----------
Total operating expenses 1,545 1,220
---------- ----------
Net operating income (loss) 1,662 (1,164)
Other Income and (Expenses):
Portfolio income 370 54
Rental income 91 158
Other income 202 80
Depreciation (25) (47)
Management fee (106) 0
---------- ----------
Total other income 532 245
---------- ----------
Net income (loss) $ 2,194 $ (919)
========== ==========
Net income (loss) allocated to
General Partner $ 22 $ 0
========== ==========
Net income (loss) allocated to
Class B Limited Partner $ 11 $ (919)
========== ==========
Net income (loss) allocated to
Class A Limited Partner $ 2,161 $ 0
========== ==========
Net income (loss) per Class A
Limited Partnership Unit $ 1.01 $ 0
========== ==========
See accompanying notes to consolidated financial statements
4
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2001 AND 2000
(amounts in thousands)
(Unaudited)
March 31, March 31,
2001 2000
---------- ----------
Cash Flow from Operating Activities:
Net income (loss) $ 2,194 $ (919)
Adjustments reconciling net income (loss)
to net cash from operating activities:
Equity from earnings in investment in joint venture (90) (30)
Depreciation 25 47
Net change in allowance for claims and liabilities (22) 47
Increase in accounts receivable (19) (39)
Increase in due from affiliate (1,380) (440)
Decrease (increase) in housing
inventories, net 2,304 (5,662)
Decrease in land held for sale 7 5
Decrease in land held for development 299 0
Decrease (increase) in capitalized
predevelopment costs 549 (482)
Increase (decrease) in accounts payable and
accrued expenses 372 (680)
Net change in other assets and liabilities (653) 385
---------- ----------
Net cash provided by (used in) operating activities 3,586 (7,768)
---------- ----------
Cash Flow from Investing Activities:
Additions to land, buildings and other (7) (36)
---------- ----------
Net cash used in investing activities (7) (36)
---------- ----------
Cash Flow from Financing Activities:
(Repayments) advances on notes payable, net (88) 7,959
Decrease (increase) in restricted cash 29 (242)
---------- ----------
Net cash (used in) provided by financing activities (59) 7,717
---------- ----------
Increase (decrease) in cash 3,520 (87)
Cash at beginning of the period 150 230
---------- ----------
Cash at end of the period $ 3,670 $ 143
========== ==========
See accompanying notes to consolidated financial statements
5
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
These unaudited Consolidated Financial Statements of Heartland
Partners, L.P., a Delaware Limited Partnership, and its
subsidiaries (collectively, "Heartland" or the "Company"), have
been prepared pursuant to the Securities and Exchange Commission
("SEC") rules and regulations and should be read in conjunction
with the financial statements and notes thereto included in the
Company's 2000 Annual Report on Form 10-K (the "2000 Form
10-K"). The following Notes to Consolidated Financial Statements
highlight significant changes to the Notes included in the 2000
Form 10-K and present interim disclosures as required by the
SEC. The accompanying Consolidated Financial Statements reflect
in the opinion of management all adjustments necessary for a fair
presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature. Certain
reclassifications have been made to the prior periods' financial
statements in order to conform with current period presentation.
1. Summary of Significant Accounting Policies
Consolidation
Heartland was formed on October 6, 1988. Heartland's existence
will continue until December 31, 2065, unless extended or
dissolved pursuant to the provisions of Heartland's partnership
agreement.
Heartland was organized to engage in the ownership, purchasing,
development, leasing, marketing, construction and sale of real
estate properties. CMC Heartland Partners ("CMC") is an
operating general partnership owned 99.99% by Heartland and .01%
by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of
Heartland (in such capacity, the "General Partner"). In July,
1993, Heartland Development Corporation ("HDC"), a Delaware
corporation, wholly-owned by Heartland, formed CMC Heartland
Partners I, Limited Partnership ("CMCLP"), a Delaware limited
partnership, to undertake a planned housing development in
Rosemount, Minnesota ("Bloomfield or Rosemount"). CMC has a 100%
membership interest in CMC Heartland Partners I ("CMCI"), CMC
Heartland Partners II ("CMCII"), CMC Heartland Partners III
("CMCIII"), CMC Heartland Partners IV ("CMCIV"), CMC Heartland
Partners V ("CMCV"), CMC Heartland Partners VI ("CMCVI"), CMC
Heartland Partners VII ("CMCVII") and CMC Heartland Partners VIII
("CMCVIII"). CMCI has been formed to develop a portion of the
Kinzie Station property ("Kinzie Station Phase II") in Chicago,
IL. CMCII was formed to participate in the Goose Island
Industrial Park joint venture in Chicago, Illinois. CMCIII was
formed in 1997 to develop a portion of the Kinzie Station
property ("Kinzie Station Phase I") in Chicago, IL. CMCIV was
formed in 1998 and is developing approximately 177 acres in Fife,
Washington. CMCV was formed in 1996 to acquire finished lots,
sell and construct homes in Osprey Cove ("Osprey"), a
master-planned residential community in St. Marys, GA. CMCVII was
formed in 1998 to acquire lots and engage in sales, marketing and
construction of homes in the Longleaf Country Club, Southern
Pines, NC ("Southern Pines or Longleaf"). CMCVI and CMCVIII were
formed at various times to acquire and hold future acquisitions.
CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sales agent in the St.
Marys, Southern Pines and Kinzie Station developments. LCL is
also the general contractor in the St. Marys development. CMC
owns 100% of the stock of Lifestyle Construction Company, Inc.
("LCC") which serves as the general contractor in North
Carolina. Except as otherwise noted herein, references herein to
"Heartland" or the "Company" include CMC, HDC, CMCLP, CMCI,
CMCII, CMCIII, CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC.
The consolidated financial statements include the accounts of
Heartland. All intercompany transactions have been eliminated in
consolidation.
6
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues from housing and land sales are recognized in the period
which title passes and cash is received.
Investment in Joint Venture
Investment in joint venture represents recording of the Company's
interest under the equity method of accounting. Under the equity
method of accounting, the Company recorded its initial interest
at cost and adjusts its investment accounts for additional
capital contributions, distributions and its share of joint
venture income or loss.
Segment Reporting
The Company has two primary reportable business segments, which
consist of land sales and property development (See Note 5 to the
Consolidated Financial Statements).
Property
Properties are carried at their historical cost. Expenditures
which significantly improve the values or extend useful lives of
the properties are capitalized. Predevelopment costs including
interest, financing fees, and real estate taxes that are directly
identified with a specific development project are capitalized.
Repairs and maintenance are charged to expense as incurred.
Housing inventories, (including completed model homes),
consisting of land, land development, direct and indirect
construction costs and related interest, are recorded at cost
which is not in excess of fair value.
7
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
Housing inventories consisted of the following at March 31, 2001
(amounts in thousands):
Land under development.......... $ 4,920
Direct construction costs....... 8,730
Capitalized project costs....... 4,400
---------
$ 18,050
=========
In December, 1999, Heartland decided to cease building operations
in Osprey Cove. The homes and lots are being sold in the
ordinary course of business.
2. Contingencies
At March 31, 2001, Heartland's allowance for claims and
liabilities was approximately $4.5 million of which $0.4 million
was for the resolution of non-environmental claims and $4.1
million was for environmental matters. Significant legal
proceedings and contingencies are discussed in the 2000 Form
10-K. During the second quarter of 1999 and again on February
20, 2001, the Company modified its October 1, 1998 settlement
agreement with the Port of Tacoma in which the Port of Tacoma
released all claims against the Company and the Company agreed
either to (a) pay $1.1 million on or before December 31, 2001,
plus interest from January 1, 1999, or (b) convey real property
to be agreed upon at a later date.
On December 2, 2000, the Redevelopment Authority of the City of
Milwaukee ("RACM") filed suit in Milwaukee County Circuit Court
to obtain access to appraise, survey and conduct environmental
and geo-technical investigations on certain property owned by the
Company adjacent to the Milwaukee Brewers baseball stadium in
furtherance of RACM's future acquisition of the property by
condemnation. Heartland has vigorously opposed certain elements
of RACM's request for access and right to proceed. Management is
not able to express an opinion at this time as to the merits of
this action.
8
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
3. Notes Payable
Heartland has a line of credit agreement in the amount of $9.6
million with LaSalle National Bank ("LNB"), pursuant to which
Heartland granted LNB a first lien on certain parcels of land in
Chicago, Illinois, Milwaukee, Wisconsin and Fife, Washington
which had a carrying value of $12,283,000 and $11,328,000 as of
March 31, 2001 and December 31, 2000, respectively. The Company
has also pledged as collateral its interest in the Goose Island
Joint Venture which has a carrying value of $467,000 and $377,000
at March 31, 2001 and December 31, 2000, respectively. Also,
pursuant to the line of credit agreement, Heartland has pledged
cash in the amount of $1,150,000 as an interest reserve. The
maturity date of the line of credit was March 31, 2001. Advances
against the line of credit bear interest at the prime rate of LNB
plus 1.5% (9.5% at March 31, 2001). At March 31, 2001 and
December 31, 2000, $9,600,000 and $9,000,000, respectively, had
been advanced to the Company by LNB against the line of credit.
The Company is currently in negotiations with LNB to extend the
maturity date of the revolving line of credit. While the Company
has no reason to believe the extension of the credit facility
will not be approved by LNB, there can be no assurance the
contemplated extension will be given. The consolidated financial
statements do not contain any adjustments to reflect the ultimate
outcome of this uncertainty.
At Osprey Cove in St. Marys, Georgia, the First National Bank of
St. Marys ("FNB") in Georgia has made two loans on two inventory
homes of $170,000 and $235,000 to the Company. The carrying
value of the two homes is approximately $531,000 at March 31,
2001. The loans mature on October 12, 2001 and January 5, 2002,
respectively. The loans bear interest at the London Interbank
Offering Rate plus 3.35% and 3.85%, respectively (8.2% and 8.7%
at March 31, 2001). At March 31, 2001, $405,000 had been
advanced to Heartland on the two loans.
As of December 8, 2000, Heartland has an agreement for a
$3,000,000 revolving line of credit for the construction of homes
in its Longleaf community located in Southern Pines, NC with Bank
One of Illinois ("Bank One"). Also, on December 8, 2000,
Heartland borrowed $250,000 from Bank One to purchase the
remaining lots owned by the developer of Longleaf. The carrying
value of the collateral for these two loans at March 31, 2001 and
December 31, 2000, is $3,277,000 and $3,577,000, respectively.
The line of credit and the $250,000 loan mature April 12, 2001
and bear interest at the prime rate (8.0% at March 31, 2001). At
March 31, 2001 and December 31, 2000, $1,582,000 and $1,383,000,
respectively, had been advanced by Bank One to Heartland on these
two loans. The Company is currently in negotiations with Bank One
to extend the maturity date of the line of credit and the
$250,000 loan. While the Company has no reason to believe the
extension of the credit facility will not be approved by Bank
One, there can be no assurance the contemplated extension will be
given. The consolidated financial statements do not contain any
adjustments to reflect the ultimate outcome of this uncertainty.
On January 30, 2001, the final principal and interest payment was
made on the $5,250,000 Kinzie Station Plaza building loan. On
February 23, 2001, the Company amended this loan agreement with
Bank One, and borrowed an additional $3,000,000, which remains
outstanding at March 31, 2001, and changed the maturity date of
the loan to February 23, 2002. The loan bears interest at the
prime rate (8.0% at March 31, 2001).
9
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
4. Related Party Transactions
Heartland has a management agreement with Heartland Technology,
Inc. ("HTI") pursuant to which Heartland is required to pay HTI
an annual management fee in the amount of $425,000 until June 27,
2005. The management fee for the first quarter of 2001 of
$106,000 has been accrued as an expense and was credited against
amounts owed the Company by HTI.
Under a management services agreement, HTI reimburses Heartland
for reasonable and necessary costs and expenses for services.
These totaled $248,000 for the three months ended March 31, 2001.
Heartland also makes cash advances to HTI. HTI owed the Company
$5,961,000 and $4,581,000 as of March 31, 2001 and December 31,
2000, respectively, related to these expenses and cash advances.
On December 29, 2000, HTI executed a line of credit promissory
note that is due on demand, payable to Heartland in the amount of
$6,000,000. At that time, HTI granted the Company a Series C
Warrant that entitles Heartland to purchase 320,000 shares of HTI
common stock at an exercise price of $1.05. The warrant is
exercisable on or before February 16, 2006. This $6,000,000 line
of credit promissory note bears interest at 13% on March 31, 2001.
10
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
5. Reportable Segments
The following table sets forth the reconciliation of net income for
Heartland's reportable segments for the quarters ended March 31, 2001,
and 2000 (See Note 1 to the Consolidated Financial Statements).
Property
Land Sales (1) Development (2) Corporate (3) Consolidated
(amounts in thousands) Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, March 31, March 31, March 31,
Income: 2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- --------- --------- ---------
Property Sales $ 341 $ 60 $ 9,869 $ 2,590 $ 0 $ 0 $ 10,210 $ 2,650
Less: Cost of property sales 18 9 6,985 2,585 0 0 7,003 2,594
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit on property sales 323 51 2,884 5 0 0 3,207 56
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses
Selling expenses 226 189 753 398 0 0 979 587
General and administrative 0 0 0 60 523 474 523 534
Real estate taxes 6 0 18 22 0 0 24 22
Environmental expenses 19 48 0 29 0 0 19 77
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses 251 237 771 509 523 474 1,545 1,220
--------- --------- --------- --------- --------- --------- --------- ---------
Net operating income (loss) 72 (186) 2,113 (504) (523) (474) 1,662 (1,164)
Other Income and (Expense):
Portfolio income 0 0 0 0 370 54 370 54
Rental income 91 158 0 0 0 0 91 158
Other Income 0 0 202 80 0 0 202 80
Depreciation 0 0 (8) (22) (17) (25) (25) (47)
Management fee 0 0 0 0 (106) 0 (106) 0
--------- --------- --------- --------- --------- --------- --------- ---------
Total other income 91 158 194 58 247 29 532 245
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 163 $ (28) $ 2,307 $ (446) $ (276) $ (445) $ 2,194 $ (919)
========= ========= ========= ========= ========= ========= ========= =========
Properties, net of
accumulated depreciation $ 733 $ 761 $ 34,555 $ 55,857 $ 451 $ 261 $ 35,739 $ 56,879
========= ========= ========= ========= ========= ========= ========= =========
Total assets $ 1,334 $ 1,173 $ 40,484 $ 60,012 $ 7,562 $ 2,944 $ 49,380 $ 64,129
========= ========= ========= ========= ========= ========= ========= =========
11
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
(1) The Land Sales business segment consists of approximately
14,208 acres of land located throughout 12 states for sale
as of March 31, 2001, and the related rentals, sales and
marketing and general and administrative expenses.
(2) The Property Development business segment consists of the
approximately 662 acres representing 14 sites that Heartland
is in the process of developing or homebuilding communities
in which Heartland is currently acquiring finished lots,
selling and building homes. The related selling and
operating expenses are also reported for this business
segment.
(3) The Corporate level consists of portfolio income from
investments, salaries and general and administrative
expenses for the employees and occupied commercial space at
Kinzie Station Phase I located in Chicago, Illinois.
6. Employee Compensation Arrangements
The President and Chief Executive Officer of the Company will
receive commencing January 1, 2000 and continuing thereafter
during the time he is employed incentive payments equal to 1/2% of
the net proceeds from sales of certain real estate after
deducting any debt obligations, closing costs and any real estate
brokers commission. For the three months ended March 31, 2001,
$14,000 has been earned under this plan. No payments have been
made as of March 31, 2001. On October 18, 2000, the President
and Chief Executive Officer of Heartland borrowed $375,000 from
the Company, which remains outstanding at March 31, 2001 and is
included as part of accounts receivable at March 31, 2001. The
note is due October 17, 2005, and interest is payable quarterly
at the rate of 11% per year. On October 17, 2000, an amendment
to the employment agreement authorizes the Company to deduct from
any incentive payment made to him 40% of that payment and apply
it to his outstanding note due to the Company.
Effective January 1, 2000, the Company approved the CMC Heartland
Partners Incentive Plan ("CMC Plan") and the Sales Incentive Plan
("Sales Plan") to provide incentives to attract, retain or
motivate highly competent employees of the Company. The
aggregate benefits payable under the CMC Plan shall be computed
by multiplying the following percentages (3% for the years 2000
and 2001, 2 % for the year 2002 and 1% for the year 2003) by the
net proceeds from the sale of certain land parcels during those
years. The aggregate benefits payable under the Sales Plan shall
be computed by multiplying 3% for the years 2000 and 2001 by the
net proceeds from the sale of certain real estate during those
years. For the three months ended March 31, 2001, $91,000 had
been earned under the plans. No payments to the officers have
been made as of March 31, 2001.
12
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
We caution you that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations section, and elsewhere in this Form 10-Q are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not guarantees of future performance. They
involve risks, uncertainties and other important factors,
including the risks described in the Management's Discussion and
Analysis of Financial Condition and Results of Operations
section, and elsewhere in this Form 10-Q. The Company's actual
future results, performance or achievement of results and the
value of the partnership Units, may differ materially from any
such results, performance or achievement or value implied by
these statements. We caution you not to put undue reliance on
any forward-looking statement in these documents. The Company
claims the protections of the safe harbor for forward-looking
statements contained in Section 21E of the Securities Exchange
Act of 1934.
Liquidity and Capital Resources
Cash flow from operating activities has been derived primarily
from proceeds of property sales. Cash was $6,340,000 (including
$2,670,000 of restricted cash) at March 31, 2001, and $2,849,000
(including $2,699,000 of restricted cash) at December 31, 2000.
Net cash provided by operating activities was $3,586,000 in the
first three months of 2001, compared to $7,768,000 used in
operating activities in the first three months of 2000. The
increase in net cash provided by operating activities between the
quarters of $11,354,000 is mainly attributable to the increase of
housing inventories in the first quarter of 2000 relating to the
development of Kinzie Station Phase I and other homebuilding
activities. During the first quarter of 2001, the Company's
housing inventories decreased primarily as a result of the
closing of sold units in Kinzie Station Phase I.
Development Property
At March 31, 2001, property designated for development consisted
of 14 sites comprising approximately 662 acres. The book value of
this land is $5,198,000 or an average of $7,900 per acre.
Heartland reviews these properties to determine whether to hold,
develop, joint venture or sell. Heartland's objective for these
properties is to maximize unitholder value over a period of years.
13
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Kinzie Station Phase I
Heartland has a 3.88 acre site in the City of Chicago known as
Kinzie Station. Zoning approval for the construction of 381
residential units on this 3.88 acre site was received in 1997.
On March 28, 2001, zoning approval to increase the total number
of residential units from 381 to 442 units was received from the
City of Chicago. The first phase of this site, Kinzie Station
Phase I, is situated on 1.23 acres. The construction of Kinzie
Station Phase I started on October 1, 1998. The Company has
closed 140 Tower units and 16 Plaza units during the period May
1, 2000 to March 31, 2001.
Kinzie Station
Phase I
Unit Detail
As of March 31, 2001
Total Number Sale Contracts
of Units To-Date
-------------- --------------
Tower Building 163 146
Plaza 24 17
Townhomes 5 3
-------------- --------------
Total 192 166
============== ==============
In addition to the 3.88 acre site, the Company owns approximately
9 acres of land and 4 acres of air rights adjacent to Kinzie
Station. This acreage is currently zoned for industrial and
manufacturing uses.
On October 20, 1999, the Company executed loan documents with
Bank One of Illinois ("Bank One") for a loan of $5,250,000 to
construct the Kinzie Station Plaza building. On January 30,
2001, the final principal and interest payment was made on the
$5,250,000 Kinzie Station Plaza building loan. On February 23,
2001, the Company amended this loan agreement with Bank One, and
borrowed an additional $3,000,000, which remains outstanding at
March 31, 2001, and changed the maturity date of the loan to
February 23, 2002. The loan bears interest at the prime rate
(8.0% at March 31, 2001).
Kinzie Station Phase II
Heartland has a 2.65 acre site in the City of Chicago known as
Kinzie Station Phase II. On approximately 1.45 acres, the
Company expects to construct 250 residential units with the
remaining 1.2 acres available for future commercial development.
The Company has entered into a contract, subject to various
contingencies, to sell the 1.2 acre commercial property to a
developer for $2,937,000. As described above in the Kinzie
Station Phase I section, zoning approval was received March 28,
2001.
14
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Kinzie Station
Phase II
Unit Detail
As of March 31, 2001
Total Number
of Units
------------
Tower Building 242
Townhomes 8
------------
Total 250
============
As of March 31, 2001, the Company has pre-sold 25 Tower units for
a total sales volume of approximately $7,100,000.
Osprey Cove
Included in the aforementioned 662 acres are approximately 5
acres consisting of 16 lots purchased for $614,000 or an average
of $38,400 per lot at Osprey Cove in St. Marys, GA. Osprey Cove
is a master-planned residential community with a wide range of
natural and recreation amenities, which includes a recreational
complex, lakes, a boat dock and a boat launch. In December,
1999, the Company decided to cease operations at Osprey Cove. As
of March 31, 2001, 53 contracts have closed in Osprey; 2 in 2001,
16 in 2000, 20 in 1999, 13 in 1998 and 2 in 1997.
It is anticipated that the 2 completed inventory homes will be
sold and closed during the year 2001. The 14 lots owned by
Heartland are being marketed and will be sold and closed in the
ordinary course of business. It is anticipated it may take to
the end of the year 2002 to sell all the lots.
Osprey Cove
Unit Inventory Detail
As of March 31, 2001
Inventory homes 2
Lots owned-sold 4
Lots owned-inventory 10
------------
Total unit inventory 16
============
15
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
At Osprey Cove in St. Marys, Georgia, the First National Bank of
St. Marys ("FNB") in Georgia has made two loans on two inventory
homes of $170,000 and $235,000 to the Company. The loans mature
on October 12, 2001 and January 5, 2002, respectively. The loans
bear interest at the London Interbank Offering Rate plus 3.35%
and 3.85%, respectively (8.2% and 8.7% at March 31, 2001). At
March 31, 2001, $405,000 had been advanced to Heartland on the
two loans.
Longleaf
At March 31, 2001, the Company owns 211 lots in its Longleaf
community located in Southern Pines, North Carolina. These 211
lots were purchased for $2,246,000, an average of $10,600 per lot.
In Longleaf, the Company has closed 2 homes in 2001, 15 homes in
2000 and 13 homes in 1999. When the Company assumed day to day
operations of Longleaf in April, 1998, there were a number of
homes under construction which were owned by the developer, as
well as resale homes, on the market. As of March 31, 2001, the
Company has sold 34 homes and 4 lots for these owners since April
1, 1998.
Longleaf
Unit Inventory Detail
As of March 31, 2001
Model homes 2
Sold homes under construction 1
Inventory homes under construction 7
Lots owned 201
------------
Total unit inventory 211
============
As of December 8, 2000, Heartland has an agreement for a
$3,000,000 revolving line of credit for the construction of homes
in Longleaf with Bank One. Also, on December 8, 2000, Heartland
borrowed $250,000 to purchase the remaining lots owned by the
developer of Longleaf. The revolving line of credit and $250,000
loan mature April 12, 2001 and bear interest at the prime rate
(8.0% at March 31, 2001). At March 31, 2001, $1,582,000 had been
advanced by Bank One to Heartland on these two loans. The Company
is currently in negotiations with Bank One to extend the maturity
date of the line of credit and the $250,000 loan. While the
Company has no reason to believe the extension of the credit
facility will not be approved by Bank One, there can be no
assurance the contemplated extension will be given. The
consolidated financial statements do not contain any adjustments
to reflect the ultimate outcome of this uncertainty.
16
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Bloomfield
Heartland owns 122 acres of undeveloped acreage in Rosemount,
Minnesota. The development is known as Bloomfield. On October
3, 2000, Centex Homes executed a sale contract that included an
option to purchase these 122 acres. An amendment to this sale
contact executed on March 30, 2001, extended the date to exercise
the option from January 15, 2001 to May 15, 2001.
Bozeman, Montana
Heartland has entered into an option to purchase contract to sell
its 14-acre property in Bozeman, Montana to the Bozeman Public
Library for $2.25 million.
Other Development Activities
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago
based real estate company, and Wooton Construction, have formed a
joint venture to develop approximately 265,000 square feet of
industrial space in the Goose Island Industrial Park in Chicago,
Illinois. As of March 31, 2001, the buildings had been built and
leases had been signed for all of the 265,000 square feet.
On December 1, 1999, the Fife property was annexed to the City of
Fife, Washington. A Local Improvement District (LID) has been
approved in order to support the improvement and extension of
sewers and sewer capacity for the site. The city of Fife has
zoned the property for residential usage. Heartland has prepared
and submitted the Environmental Impact Statement ("EIS") and the
preliminary site plan for the site to the City for acceptance and
approval. The Company expects the EIS to be accepted during the
third quarter of 2001 and the site plan to be approved during the
second quarter of the year 2001.
The real estate development business is highly competitive.
Heartland is subject to competition from a great number of real
estate developers, including developers with national operations,
many of which have greater sales and financial resources than
Heartland.
Property Sales and Leasing Activities
The Company has the right to sell easements for fiber optic lines
along or across 83 miles of rail right of way running from
downtown Chicago west to Elgin and Northwest to Fox Lake,
Illinois. The Company actively markets fiber optics easements
and is seeking opportunities to generate additional proceeds
through the sale of these rights. The Company receives 2/3 of
the proceeds of any sale.
Heartland's current inventory of land held for sale consists of
14,208 acres located throughout 12 states. The book value of
this inventory is approximately $733,000. The majority of the
land is former railroad rights-of-way, long, narrow strips of
land approximately 100 feet in width. Some of Heartland's sites
located in small rural communities or outlying mid-cities are
leased to third parties for agricultural, industrial, retail and
residential use. These properties may be improved with the
lessee's structures and include grain elevators, storage sheds,
parking lots and small retail service facilities.
17
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
The sale, management and leasing of the Company's non-development
real estate inventory is conducted by Heartland's Sales and
Property Management Department. The volume of Company's sales
has slowed over the last five years due to the less desirable
characteristics of the remaining properties. The Company
anticipates that the sale of its remaining parcels may take
beyond the year 2002.
The Company has a current active lease portfolio of approximately
150 leases. Less than 1% of its total acreage is leased. The
number of leases declines each year as sales of properties are
made to existing lessees. The majority of the leases provide
nominal rental income to Heartland. The leases generally require
the lessee to construct, maintain and remove any improvements,
pay property taxes, maintain insurance and maintain the condition
of the property. The majority of the leases are cancellable by
either party upon thirty to sixty days notice. Heartland's
ability to terminate or modify certain of its leases is
restricted by applicable law and regulations.
For properties held for sale, an impairment loss is recognized
when the fair value of the property, less the estimated cost to
sell, is less than the carrying amount of the property.
It is the Company's practice to evaluate environmental
liabilities associated with the Company's properties. Heartland
monitors the potential exposure to environmental costs on a
regular basis and has recorded a liability in the amount of $4.1
million at March 31, 2001 for possible environmental liabilities,
including remediation, legal and consulting fees. A reserve is
established with regard to potential environmental liabilities
when it is probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. The amount
of any liability is determined independently from any claim for
recovery. If the amount of the liability cannot be reasonably
estimated, but management is able to determine that the amount of
the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate,
then a reserve in the minimum amount of the range is accrued.
In addition, Heartland has established an allowance for
resolution of non-environmental claims of $.4 million.
Heartland does not at this time anticipate that these claims or
assessments will have a material effect on the Company's
liquidity, financial position and results of operations beyond
the reserve which the Company has established for such claims and
assessments. In making this evaluation, the Company has assumed
that the Company will continue to be able to assert the
bankruptcy bar arising from the reorganization of its predecessor
and that resolution of current pending and threatened claims and
assessments will be consistent with the Company's experience with
similar previously asserted claims and assessments.
18
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
While the timing of the payment in respect of environmental
claims has not significantly adversely affected the Company's
cash flow or liquidity in the past, management is not able to
reasonably anticipate whether future payments may or may not have
a significant adverse effect in the future.
Heartland's management believes it will have sufficient funds
available for operating expenses, but anticipates the necessity
of utilizing outside financing to fund development projects. As
of March 31, 2001, the Company had a line of credit with LaSalle
National Bank ("LNB") in the amount of $9.6 million. Cash in the
amount of $1,150,000 is pledged as an interest reserve. The line
of credit matured March 31, 2001. Advances against the line of
credit bear interest at the prime rate of LNB plus 1.5% (9.5% at
March 31, 2001). At March 31, 2001, $9,600,000 had been advanced
to the Company by LNB against the line of credit. The Company is
currently in negotiations with LNB to extend the maturity date of
the revolving line of credit. While the Company has no reason to
believe the extension of the credit facility will not be approved
by LNB, there can be no assurance the contemplated extension will
be given. The consolidated financial statements do not contain
any adjustments to reflect the ultimate outcome of this
uncertainty.
Results of Operations
Operations for the three months ended March 31, 2001, resulted in
net income of $2,194,000. For the three months ended March 31,
2001, the income allocated to the Class A Limited Partners is
$2,161,000 or $1.01 per Class A Unit. Operations for the three
months ended March 31, 2000, resulted in a net (loss) of
$(919,000). The loss was allocated 100% to the Class B Limited
Partner.
For the three months ended March 31, 2000, no losses were
allocated to the Class A Unitholders because the partnership
agreement provides that if an allocation of a net loss to a
partner would cause that partner to have a negative balance in
its capital account at a time when one or more partners would
have a positive balance in their capital account such net loss
shall be allocated only among partners having positive balances
in their capital account. However, the Class A Limited Partners
Capital accounts have been restored to a positive balance and
income in the first quarter of 2001 was allocated to the Class A
Limited Partners according to their proper percentage.
The increase in net income for the first quarter of 2001 compared
to the net loss in the first quarter of 2000 of $3,113,000 is due
to the closing of 16 Tower and Plaza units at Kinzie Station
Phase I producing gross revenues of $5,045,000 and the closing of
the 113 acres in Bloomfield located in Rosemount, MN for
$4,000,000.
Total operating expenses were $1,545,000 and $1,220,000 for the
first quarter ending March 31, 2001, and 2000, respectively. The
increase of $325,000 is primarily due to increased selling
expenses of $392,000 related to the closing of the Kinzie Station
Phase I units.
19
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Economic and Other Conditions Generally
The real estate industry is highly cyclical and is affected by
changes in national, global and local economic conditions and
events, such as employment levels, availability of financing,
interest rates, consumer confidence and the demand for housing
and other types of construction. Real estate developers are
subject to various risks, many of which are outside the control
of the developer, including real estate market conditions,
changing demographic conditions, adverse weather conditions and
natural disasters, such as hurricanes, tornados, delays in
construction schedules, cost overruns, changes in government
regulations or requirements, increases in real estate taxes and
other local government fees and availability and cost of land,
materials and labor. The occurrence of any of the foregoing could
have a material adverse effect on the financial conditions of
Heartland.
Access to Financing
The real estate business is capital intensive and requires
expenditures for land and infrastructure development, housing
construction and working capital. Accordingly, Heartland
anticipates incurring additional indebtedness to fund their real
estate development activities. As of March 31, 2001, Heartland's
total consolidated indebtedness was $14,587,000. There can be no
assurance that the amounts available from internally generated
funds, cash on hand, Heartland's existing credit facilities and
sale of non-strategic assets will be sufficient to fund
Heartland's anticipated operations. Heartland may be required to
seek additional capital in the form of equity or debt financing
from a variety of potential sources, including additional bank
financing and sales of debt or equity securities. No assurance
can be given that such financing will be available or, if
available, will be on terms favorable to Heartland. If Heartland
is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures,
development projects may be delayed or abandoned. Any such delay
or abandonment could result in a reduction in sales and would
adversely affect Heartland's future results of operations.
Period-to-Period Fluctuations
Heartland's real estate projects are long-term in nature. Sales
activity varies from period to period, and the ultimate success
of any development cannot always be determined from results in
any particular period or periods. Thus, the timing and amount of
revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage
effectively their cash flows from operations would have an
adverse effect on their ability to service debt, and to meet
working capital requirements.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at March 31, 2001
is $14,587,000. The Company pays interest on its outstanding
borrowings under revolving credit facilities and fixed loan
amounts at the prime rate plus 0.00% to 1.5%. An adverse change
of 1.00% in the prime rate would increase the quarterly interest
incurred by approximately $36,000.
The Company does not have any other financial instruments for
which there is a significant exposure to interest rate changes.
20
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Management's Discussion and Analysis of Financial Condition
and Results of Operations: Economic and Other Conditions
Generally, Access to Financing and Interest Rate Sensitivity.
21
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 2001, Heartland's allowance for claims and
liabilities was approximately $4.5 million. During the three
months ended March 31, 2001, a decrease of approximately $22,000
in the provision was recorded in respect to environmental
matters. Material legal matters are discussed below.
Soo Line Matters
The Soo Line Railroad Company (the "Soo") has asserted that the
Company is liable for certain occupational injury claims filed
after the consummation of an Asset Purchase Agreement and related
agreements ("APA") by former employees now employed by the Soo.
The Company has denied liability for each of these claims based
on a prior settlement with the Soo. The Soo has also asserted
that the Company is liable for the remediation of releases of
petroleum or other regulated materials at six different sites
acquired from the Company located in Iowa, Minnesota and
Wisconsin. The Company has denied liability based on the APA.
The occupational and environmental claims are all currently being
handled by the Soo, and the Company understands the Soo has paid
settlements on many of these claims. As a result of Soo's
exclusive handling of these matters, the Company has made no
determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
In June, 1997, the Port of Tacoma ("Port") filed a complaint in
the United States District Court for the Western District of
Washington alleging that the Company was liable under Washington
state law for the cost of the Port's remediation of a railyard
sold in 1980 by the bankruptcy trustee for the Company's
predecessor to the Port's predecessor in interest.
On October, 1, 1998, the Company entered into a Settlement
Agreement with the Port, subsequently modified effective June,
1999 and February 20, 2001, in which the Port released all claims
and the Company agreed either to (a) pay $1.1 million on or
before December 31, 2001, plus interest from January 1, 1999, or
(b) to convey to the Port real property to be agreed upon at a
later date. At March 31, 2001, Heartland's allowance for claims
and liabilities for this site was $1,100,000.
The Company will not make a claim on its insurance carriers in
this matter because the settlement amount does not exceed the
self insured retention under the applicable insurance policies.
22
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Wheeler Pit, Janesville, Wisconsin
In November, 1995, the Company settled a claim with respect to
the Wheeler Pit site near Janesville, Wisconsin. The Company's
only outstanding obligation under the settlement is to pay 32% of
the monitoring costs for twenty-five years beginning in 1997.
Milwaukee, Wisconsin
On December 2, 2000, the Redevelopment Authority of the City of
Milwaukee ("RACM") filed suit in Milwaukee County Circuit Court
to obtain access to appraise, survey and conduct environmental
and geo-technical investigations on certain property owned by the
Company adjacent to the Milwaukee Brewers baseball stadium in
furtherance of RACM's future acquisition of the property by
condemnation. Heartland has vigorously opposed certain elements
of RACM's request for access and right to proceed. Management is
not able to express an opinion at this time as to the merits of
this action.
Miscellaneous Environmental Matters
Under environmental laws, liability for hazardous substance
contamination is imposed on the current owners and operators of
the contaminated site, as well as the owner or the operator of
the site at the time the hazardous substance was disposed or
otherwise released. In most cases, this liability is imposed
without regard to fault. Currently, the Company has known
environmental liabilities associated with certain of its
properties arising out of the activities of its predecessor or
certain of its predecessor's lessees and may have further
material environmental liabilities as yet unknown. The majority
of the Company's known environmental liabilities stem from the
use of petroleum products, such as motor oil and diesel fuel, in
the operation of a railroad or in operations conducted by its
predecessor's lessees. The following is a summary of material
known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has
asserted that the Company is liable for some or all of the
investigation and remediation of certain properties in Montana
sold by its predecessor's reorganization trustee prior to the
consummation of its predecessor's reorganization. The Company has
denied liability at certain of these sites based on the
reorganization bar of the Company's predecessors. The Company's
potential liability for the investigation and remediation of
these sites was discussed in detail at a meeting with DEQ in
April, 1997. While DEQ has not formally changed its position, DEQ
has not elected to file suit. Management is not able to express
an opinion at this time whether the cost of the defense of this
liability or the environmental exposure in the event of the
Company's liability will or will not be material.
At twelve separate sites, the Company has been notified that
releases arising out of the operations of a lessee, former lessee
or other third party have been reported to government agencies.
At each of these sites, the third party is voluntarily
cooperating with the appropriate agency by investigating the
extent of any such contamination and performing the appropriate
remediation, if any.
23
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
The Company has petroleum groundwater remediation projects or
long term monitoring programs at Farmington, Minnesota, and Miles
City, Montana.
The Company has an interest in property at Moses Lake, Washington
previously owned and used by the United States government as an
Air Force base. A portion of the Company's property is located
over a well field which was placed on the national priority list
in October, 1992. Sampling by the Army Corps of Engineers has
indicated the presence of various regulated materials, primarily
in the groundwater, which were most likely released as a result
of military or other third party operations. The Company has not
been named as a primary responsible party.
In 1995, at a 5.95 acre parcel in Minneapolis, Minnesota,
environmental sampling disclosed that the parcel was impacted by
releases of regulated materials from the 1960s operations of a
former lessee. The Company continues to investigate the
environmental condition of the property on a voluntary basis
under the direction of the Minnesota Department of Agriculture.
Sampling performed in November, 2000, has indicated the presence
of solvents in the groundwater under certain property owned by
the Company in Milwaukee, Wisconsin. Management will not be able
to determine the materiality of the remediation costs, if any, of
these materials until the concentrations and location of the
release has been quantified.
In addition to the environmental matters set forth above, there
may be other properties, i), with environmental liabilities not
yet known to the Company, or ii), with potential environmental
liabilities for which the Company has no reasonable basis to
estimate or, iii), which the Company believes the Company is not
reasonably likely to ultimately bear the liability, but the
investigation or remediation of which may require future
expenditures. Management is not able to express an opinion at
this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the
Company's environmental liabilities. Due to the high deductibles
on these policies, the Company has not yet demanded that any
insurer indemnify or defend the Company. Consequently, management
has not formed an opinion regarding the legal sufficiency of the
Company's claims for insurance coverage.
The Company is also subject to other suits and claims which have
arisen in the ordinary course of business. In the opinion of
management, reasonably possible losses from these matters should
not be material to the Company's results of operations or
financial condition.
24
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------- ------------------------------------------------
10.48 Second Agreement dated February 20, 2001 between
the Port of Tacoma and CMC Heartland Partners
modifying terms of settlement agreement and
affecting real property in Pierce County,
Washington (filed herewith).
(b) Reports on Form 8-K;
No report on Form 8-K was filed during the quarter ended
March 31, 2001.
25
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
SIGNATURES
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.
HEARTLAND PARTNERS, L.P.
(Registrant)
Date: May 15, 2001 BY: /s/ Edwin Jacobson
-------------------
Edwin Jacobson
President and Chief Executive
Officer
Heartland Technology, Inc.
The General Partner
(Principal Executive Officer)
HEARTLAND PARTNERS, L.P.
(Registrant)
Date: May 15, 2001 BY: /s/ Richard P. Brandstatter
----------------------------
Richard P. Brandstatter
Vice President-Finance, Secretary
And Treasurer of
Heartland Technology, Inc.
The General Partner
(Principal Financial and Accounting
Officer)
26
HEARTLAND PARTNERS, L.P.
MARCH 31, 2001
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- ------------------------------------------------
10.48 Second Agreement dated February 20, 2001 between
the Port of Tacoma and CMC Heartland Partners
modifying terms of settlement agreement and
affecting real property in Pierce County,
Washington (filed herewith).
27