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 September 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 of (I.R.S. Employer Identification No.)
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.
September 30, 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......................................15
Item 3 Quantitative and Qualitative Disclosure About Market Risk..... 22
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..............................................23
Item 6 Exhibits and Reports on Form 8-K...............................26
Signatures...............................................27
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(amounts in thousands)
September 30, December 31,
2001 2000
(Unaudited) (Audited)
------------ ------------
Assets:
Cash $ 550 $ 150
Restricted cash 1,977 2,699
Accounts receivable (net) 1,036 582
Due from affiliate 7,558 4,581
Prepaid and other assets 230 279
Investment in joint venture 432 377
------------ ------------
Total 11,783 8,668
------------ ------------
Property:
Land, buildings and other $ 2,497 $ 2,683
Less accumulated depreciation 213 137
------------ ------------
Net land, buildings and other 2,284 2,546
Land held for sale 729 740
Housing inventories 11,865 20,354
Land held for development 4,837 5,497
Capitalized predevelopment costs 9,457 9,779
------------ ------------
Net properties 29,172 38,916
------------ ------------
Total Assets $ 40,955 $ 47,584
============ ============
Liabilities:
Notes payable $ 7,974 $ 14,675
Accounts payable and accrued
expenses 2,692 7,267
Accrued real estate taxes 656 776
Allowance for claims and liabilities 4,337 4,478
Unearned rents and deferred income 1,555 1,632
Other liabilities 2,794 3,260
------------ ------------
Total Liabilities 20,008 32,088
------------ ------------
Partners' Capital:
General Partner $ 81 $ 27
Class A Limited Partners - 2,142 units
authorized, issued and outstanding 11,276 5,906
Class B Limited Partner 9,590 9,563
------------ ------------
Total Partners' Capital 20,947 15,496
------------ ------------
Total Liabilities and Partners'
Capital $ 40,955 $ 47,584
============ ============
See accompanying notes to consolidated financial statements.
3
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(amounts in thousands except per unit data)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Income:
Property sales $ 5,233 $ 17,463 $ 26,486 $ 39,957
Less: Cost of property sales 3,900 12,068 17,508 29,046
--------- --------- --------- ---------
Gross profit on property sales 1,333 5,395 8,978 10,911
--------- --------- --------- ---------
Operating Expenses:
Sales and marketing expenses 929 574 2,828 1,975
General and administrative
expenses 569 410 1,540 1,740
Real estate taxes 36 23 153 68
Environmental expenses 18 22 59 155
--------- --------- --------- ---------
Total operating expenses 1,552 1,029 4,580 3,938
--------- --------- --------- ---------
Net operating (loss) income (219) 4,366 4,398 6,973
Other Income and (Expenses):
Portfolio income 268 96 900 228
Rental income 74 210 269 578
Other income 34 161 279 465
Depreciation (25) (89) (76) (184)
Management fee (107) (319) (319) (319)
--------- --------- --------- ---------
Total other income 244 59 1,053 768
--------- --------- --------- ---------
Net income $ 25 $ 4,425 $ 5,451 $ 7,741
========= ========= ========= =========
Net income allocated to
General Partner $ - $ 39 $ 54 $ 39
========= ========= ========= =========
Net income allocated to
Class B Limited Partner $ - $ 584 $ 27 $ 3,900
========= ========= ========= =========
Net income allocated to
Class A Limited Partner $ 25 $ 3,802 $ 5,370 $ 3,802
========= ========= ========= =========
Net income per Class A
Limited Partnership Unit $ 0.01 $ 1.77 $ 2.51 $ 1.77
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(amounts in thousands)
(Unaudited)
September 30, September 30,
2001 2000
------------ ------------
Cash Flow from Operating Activities:
Net income $ 5,451 $ 7,741
Adjustments reconciling net income
to net cash from operating activities:
Equity in earnings of joint venture (55) (148)
Depreciation 280 184
Net change in allowance for claims and liabilities (141) 62
(Increase) decrease in accounts receivable (454) 236
Decrease in housing
inventories, net 8,489 4,984
Decrease in land held for sale 11 7
Decrease in land held for development 660 185
Decrease in capitalized
predevelopment costs 322 491
Decrease in accounts payable and
accrued expenses (4,575) (3,877)
Net change in other assets and liabilities (614) (566)
------------ ------------
Net cash provided by operating activities 9,374 9,299
------------ ------------
Cash Flow from Investing Activities:
Increase in due from affiliate (2,977) (2,066)
(Additions to) sales of land, buildings and other (18) 21
------------ ------------
Net cash used in investing activities (2,995) (2,045)
------------ ------------
Cash Flow from Financing Activities:
Repayments on notes payable, net (6,701) (7,541)
Decrease in restricted cash 722 128
------------ ------------
Net cash used in financing activities (5,979) (7,413)
------------ ------------
Increase (decrease) in cash 400 (159)
Cash at beginning of the period 150 230
------------ ------------
Cash at end of the period $ 550 $ 71
============ ============
See accompanying notes to consolidated financial statements.
5
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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.
6
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
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").
The following tables set forth various entities formed by the Company since it's
inception, date and purpose of formation, development location and ownership:
YEAR
COMPANY FORMED BUSINESS PURPOSE
--------------------------------------------------- ------ ------------------------------------------------------------
CMC Heartland Partners I, LLC ("CMCI") 1998 Owns Kinzie Station Phase II
CMC Heartland Partners II, LLC ("CMCII") 1997 Owns the Goose Island Industrial Park joint venture.
CMC Heartland Partners III, LLC ("CMCIII") 1997 Owns Kinzie Station Phase I
CMC Heartland Partners IV, LLC ("CMCIV") 1998 Developing approximately 177 acres in Fife, Washington.
CMC Heartland Partners V, LLC ("CMCV") 1996 Owns lots and homes in Osprey Cove
CMC Heartland Partners VI, LLC ("CMCVI") 1997 To acquire and hold future acquisitions
CMC Heartland Partners VII, LLC ("CMCVII") 1997 Owns lots and homes in the Longleaf Country Club
CMC Heartland Partners VIII, LLC ("CMCVIII") 1998 To acquire and hold future acquisitions
Lifestyle Construction Company,Inc. ("LCC") 1998 Serves as the general contractor in North Carolina.
Lifestyle Communities, Ltd. ("LCL") 1996 Serves as the exclusive sales agent in the
Longleaf and Kinzie Station Phase I & II developments.
DEVELOPMENT
COMPANY LOCATION OWNERSHIP
--------------------------------------------------- ------------------------------ ----------
CMC Heartland Partners I, LLC ("CMCI") Chicago,Illinois 100% (1)
CMC Heartland Partners II, LLC ("CMCII") Chicago,Illinois 100% (1)
CMC Heartland Partners III, LLC ("CMCIII") Chicago,Illinois 100% (1)
CMC Heartland Partners IV, LLC ("CMCIV") Fife,Washington 100% (1)
CMC Heartland Partners V, LLC ("CMCV") St. Marys,Georgia 100% (1)
CMC Heartland Partners VI, LLC ("CMCVI") Not Applicable 100% (1)
CMC Heartland Partners VII, LLC ("CMCVII") Southern Pines, North Carolina 100% (1)
CMC Heartland Partners VIII, LLC ("CMCVIII") Not Applicable 100% (1)
Lifestyle Construction Company,Inc. ("LCC") Not Applicable 100% (2)
Lifestyle Communities, Ltd. ("LCL") Not Applicable 100% (2)
(1) Membership interest owned by CMC.
(2) Stock wholly owned by CMC.
Except as otherwise noted herein, references herein to "Heartland" or the
"Company" include CMC, HDC, CMCLP, CMCI, CMCII, CMCIII, CMCIV, CMCV, CMCVI,
CMCVII, CMCVIII, LCC and LCL. The consolidated financial statements include the
accounts of Heartland. All intercompany transactions have been eliminated in
consolidation.
7
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 account
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.
8
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
Housing inventories consisted of the following at September 30, 2001 (amounts in
thousands):
Land under development.......... $ 3,618
Direct construction costs....... 4,667
Capitalized project costs....... 3,580
-------
$11,865
=======
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 September 30, 2001, Heartland's allowance for claims and liabilities was
approximately $4.3 million of which $0.3 million was for the resolution of
non-environmental claims and $4 million was for environmental matters.
Significant legal proceedings and contingencies are discussed in the 2000 Form
10-K. On July 15, 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 efforts to acquire the property by
condemnation. The Company and RACM entered into an agreement under which RACM
will perform, at RACM's cost, limited investigations and provide the results to
Heartland. Management is not able to express an opinion at this time as to the
merits of the condemnation action.
As part of the Company's sale of certain property in Milwaukee, Wisconsin to the
State of Wisconsin, in December, 2000, for $1,400,000, the Company undertook to
cause a lessee of part of the property to surrender its lease. By Settlement
Agreement dated July 5, 2001, the lessee agreed to surrender its lease in
consideration, among other things, of the payment from the Company of $126,000.
This amount was paid to the lessee in July, 2001.
9
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 $13,438,000 and $11,328,000 as of
September 30, 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 $432,000 and $377,000 at September 30, 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 is December 31, 2001. Advances against the
line of credit bear interest at the prime rate of LNB plus 1.5% (7.5% at
September 30, 2001). At September 30, 2001 and December 31, 2000, $4,000,000 and
$9,000,000, respectively, had been advanced to the Company by LNB against the
line of credit.
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
$560,000 at September 30, 2001. The loans mature on November 7, 2002 and January
5, 2002, respectively. The loans bear interest at the London Interbank Offering
Rate plus 3.35% and 3.85%, respectively (6% and 6.5% at September 30, 2001). At
September 30, 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. This $250,000 was the first payment
related to certain liabilities assumed by the Company in accordance with a
purchase agreement executed on December 12, 2000. The carrying value of the land
and housing inventories for these two loans at September 30, 2001 and December
31, 2000, is $3,490,000 and $3,577,000, respectively. The line of credit and the
$250,000 loan mature April 12, 2002 and bear interest at the prime rate (6% at
September 30, 2001). At September 30, 2001 and December 31, 2000, $1,569,000 and
$1,383,000, respectively, had been advanced by Bank One to Heartland on these
two loans.
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, of which $2,000,000 remains outstanding at September 30, 2001, and
changed the maturity date of the loan to February 23, 2002. The loan bears
interest at the prime rate (6% at September 30, 2001).
10
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
nine months of 2001 of $319,000 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 $641,000 for the
nine months ended September 30, 2001. Heartland also makes cash advances to HTI.
HTI owed the Company $7,558,000 and $4,581,000 as of September 30, 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. On May 11, 2001, HTI executed an
additional line of credit promissory note in the amount of $1,000,000. On July
3, 2001, the $1,000,000 promissory note was cancelled and a replacement line of
credit promissory note in the amount of $1,500,000 was executed. On October 11,
2001, the $1,500,000 line of credit promissory note was cancelled and a
replacement line of credit promissory note in the amount of $2,000,000 was
executed. The line of credit promissory notes bear interest at 13%. The total of
the two line of credit promissory notes is $8,000,000. As collateral for these
two notes, HTI Class B, LLC pledged, on December 14, 2000, to Heartland a senior
lien and a senior security interest in the Heartland Class B Limited Partnership
Interest owned by HTI Class B, LLC.
On March 31, 2001, the two Kinzie Station Phase I model homes (a one bedroom
unit and a two bedroom unit) and furniture were purchased by two officers of the
Company at fair market value. Heartland has leased these model homes back from
the officers starting April 1, 2001 and ending April 1, 2004. The monthly rent
on the one bedroom model is $2,350 and on the two bedroom model is $4,200. The
leases contain standard insurance and maintenance clauses as customary in these
types of leases.
11
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
5. Reportable Segments
The following table sets forth the reconciliation of net income for Heartland's
reportable segments for the quarters ended September 30, 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
September 30, September 30, September 30, September 30,
Income: 2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- --------- --------- ---------
Property sales $ 249 $ 61 $ 4,984 $ 17,402 $ 0 $ 0 $ 5,233 $ 17,463
Less: Cost of property sales 14 19 3,886 12,049 0 0 3,900 12,068
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit on property sales 235 42 1,098 5,353 0 0 1,333 5,395
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing expenses 165 167 764 407 0 0 929 574
General and administrative 0 0 0 22 569 388 569 410
Real estate taxes 18 0 18 23 0 0 36 23
Environmental expenses 18 22 0 0 0 0 18 22
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses 201 189 782 452 569 388 1,552 1,029
--------- --------- --------- --------- --------- --------- --------- ---------
Net operating income (loss) 34 (147) 316 4,901 (569) (388) (219) 4,366
Other Income and (Expense):
Portfolio income 0 0 0 0 268 96 268 96
Rental income 74 210 0 0 0 0 74 210
Other Income 0 0 34 161 0 0 34 161
Depreciation 0 0 (9) (23) (16) (66) (25) (89)
Management fee 0 0 0 0 (107) (319) (107) (319)
--------- --------- --------- --------- --------- --------- --------- ---------
Total other income 74 210 25 138 145 (289) 244 59
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 108 $ 63 $ 341 $ 5,039 $ (424) $ (677) $ 25 $ 4,425
========= ========= ========= ========= ========= ========= ========= =========
Properties, net of
accumulated depreciation $ 729 $ 759 $ 28,025 $ 43,774 $ 418 $ 346 $ 29,172 $ 44,879
========= ========= ========= ========= ========= ========= ========= =========
Total assets $ 1,765 $ 896 $ 30,064 $ 47,610 $ 9,126 $ 4,655 $ 40,955 $ 53,161
========= ========= ========= ========= ========= ========= ========= =========
12
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
(1) The Land Sales business segment consists of approximately 14,022 acres of
land located throughout 12 states for sale as of September 30, 2001, and
the related rentals, sales and marketing and operating expenses.
(2) The Property Development business segment consists of the approximately
534 acres representing 13 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. As of December 31, 2000 and for the nine months ended
September 30, 2001, $73,000 and $82,000, respectively, had been accrued as
compensation expense under this plan. As of September 30, 2001, $113,000 had
been paid to the President and Chief Executive Officer by the Company. On
October 18, 2000, the President and Chief Executive Officer of Heartland
borrowed $375,000 from the Company, of which $330,000 remains outstanding at
September 30, 2001 and is included as part of accounts receivable at September
30, 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.
As a result of this amendment, $45,000 of the above described payment of
$113,000 was applied to the outstanding note balance.
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. As
of December 31, 2000 and for the nine months ended September 30, 2001, $533,000
and $392,000, respectively, had been accrued as compensation expense under the
plans. As of September 30, 2001, $267,000 had been paid to the officers by the
Company.
13
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
7. Subsequent Events
On October 1, 2001, the 14 acre property in Bozeman, Montana sold to the Bozeman
Public Library closed at a sales price of $2,150,000. At that time, a paydown of
$1,600,000 was made on the LNB line of credit. The outstanding amount owed LNB
is $2,400,000 at October 3, 2001. Also, on October 31, 2001, the LNB line of
credit was reduced permanently from $9,600,000 to $6,600,000.
On August 22, 2001, Heartland announced that it had been authorized by its
General Partner, HTI, to purchase up to 50,000 of its outstanding Class A
partnership units. As of October 31, 2001, the Company had repurchased 46,360
Class A partnership units at a total cost of $777,000. These repurchases will be
shown as a reduction of Partners' Capital.
14
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 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 $2,527,000 (including $1,977,000 of restricted cash) at
September 30, 2001, and $2,849,000 (including $2,699,000 of restricted cash) at
December 31, 2000.
Net cash provided by operating activities was $9,374,000 in the first nine
months of 2001, compared to $9,299,000 provided by operating activities in the
first nine months of 2000 or an increase in net cash provided by operating
activities of $75,000 between the two nine month periods.
HTI owed Heartland $7,558,000 and $4,581,000 at September 30, 2001 and December
31, 2000, respectively. HTI is attempting to repay this obligation in the
ordinary course of business. In the event that HTI is unable to repay such
amount in full by December 31, 2001, the Company will reclassify the outstanding
balance at December 31, 2001 as a component of Partners' Capital.
Development Property
At September 30, 2001, property designated for development consisted of 13 sites
comprising approximately 534 acres. The book value of this land is $8,455,000 or
an average of $15,800 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.
15
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
Kinzie Station
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. 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.
The Company has entered into a contract, subject to various contingencies, to
sell a 1.66 acre parcel of this land to a developer for approximately
$2,000,000. Also, Heartland has entered into a letter of intent, subject to
various contingencies, to sell a 1.82 acre parcel of this land to a commercial
property developer for approximately $5,000,000.
Kinzie Station Phase I
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 158 Tower
units and 17 Plaza units during the period May 1, 2000 to September 30, 2001.
Kinzie Station
Phase I
Unit Detail
As of September 30, 2001
Total Number Sale Contracts
of Units To-Date
------------ --------------
Tower Building 163 159
Plaza 24 17
Townhomes 5 3
------------ --------------
Total 192 179
============ ==============
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, of which $2,000,000 remains outstanding at September 30,
2001, and changed the maturity date of the loan to February 23, 2002. The loan
bears interest at the prime rate (6% at September 30, 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 an
approximately 250 apartment complex with the remaining 1.2 acres available for
future commercial development. The Company entered into a contract to sell
the 1.2 acre commercial property to a developer for use as a parking facility
for $2,937,000. This sale closed August 10, 2001. As described above in the
Kinzie Station section, zoning approval was received March 28, 2001.
16
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
Osprey Cove
Included in the aforementioned 534 acres are approximately 2 acres consisting of
5 lots purchased for $200,000 or an average of $40,000 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 September 30, 2001, a total of
64 contracts have closed in Osprey; 13 in 2001, 16 in 2000, 20 in 1999, 13 in
1998 and 2 in 1997.
It is anticipated that the 2 completed inventory homes and 3 owned inventory
lots will be sold and closed in the ordinary course of business.
Osprey Cove
Unit Inventory Detail
As of September 30, 2001
Inventory homes 2
Lots owned-inventory 3
------------
Total unit inventory 5
============
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 November 7, 2002 and January 5,
2002, respectively. The loans bear interest at the London Interbank Offering
Rate plus 3.35% and 3.85%, respectively (6% and 6.5% at September 30, 2001). At
September 30, 2001, $405,000 had been advanced to Heartland on the two loans.
Longleaf
At September 30, 2001, the Company owns 207 lots in its Longleaf community
located in Southern Pines, North Carolina. These 207 lots were purchased for
$2,401,000, an average of $11,600 per lot.
In Longleaf, the Company has closed , as of September 30, 2001, a total of 34
contracts; 6 in 2001, 15 in 2000 and 13 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 September 30, 2001, the Company has sold 38 homes and 5 lots for
these owners since April 1, 1998.
17
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
Longleaf
Unit Inventory Detail
As of September 30, 2001
Model homes 2
Sold homes under construction 2
Inventory homes under construction 6
Lots owned 197
--------------
Total unit inventory 207
==============
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. This $250,000 was the first payment related
to certain liabilities assumed by the Company in accordance with a purchase
agreement executed on December 12, 2000. The revolving line of credit and
$250,000 loan mature April 12, 2002 and bear interest at the prime rate (6% at
September 30, 2001). At September 30, 2001, $1,569,000 had been advanced by Bank
One to Heartland on these two loans.
Bloomfield
Heartland owned 122 acres of undeveloped acreage in Rosemount, Minnesota. On
June 21, 2001, Centex Homes purchased the 122 acres from the Company for
$5,175,000.
Bozeman, Montana
Heartland entered into a contract to sell its 14-acre property in Bozeman,
Montana to the Bozeman Public Library for $2,150,000. This sale closed October
1, 2001.
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 September 30, 2001, the buildings
had been built and leases had been signed for all of the 265,000 square feet. On
August 27, 2001, Heartland signed a listing agreement with Grubb & Ellis, a
national real estate brokerage firm, to sell its interest in the Goose Island
Industrial Park. This listing agreement expires December 31, 2001.
18
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
On December 1, 1998, the Fife property was annexed to the City of Fife,
Washington. A Local Improvement District 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 to the City for
acceptance. The Fife City Council approved the preliminary plat for the project
on September 25, 2001. In October, 2001, the Company entered into a contract,
subject to various contingencies, to sell this 177 acre property to a developer
for approximately $17,000,000. The contract calls for the developer to purchase
the property in three phases. The developer is required to complete the purchase
of each phase in December, 2001, 2002 and 2003, respectively.
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 14,022 acres
located throughout 12 states. The book value of this inventory is approximately
$729,000. 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.
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 the Company's sales has slowed over the last five years due to the
less desirable characteristics of the remaining properties.
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.
19
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
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 million at September 30, 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 $.3 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
it 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.
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 September 30, 2001, the Company had a line
of credit with LaSalle National Bank ("LNB") in the amount of $9.6 million. On
October 31, 2001, the line of credit was permanently reduced to $6.6 million.
Cash in the amount of $1,150,000 is pledged as an interest reserve. The line of
credit matures December 31, 2001. Advances against the line of credit bear
interest at the prime rate of LNB plus 1.5% (7.5% at September 30, 2001). At
September 30, 2001, $4,000,000 had been advanced to the Company by LNB against
the line of credit. On October 1, 2001, the 14 acre property in Bozeman, Montana
sold to the Bozeman Public Library closed at a sales price of $2,150,000. At
that time, a paydown of $1,600,000 was made on the LNB line of credit. The
outstanding amount owed LNB at October 3, 2001 is $2,400,000. If the $1,150,000
interest reserve was applied to the outstanding note balance on October 3, 2001
of $2,400,000, Heartland would owe LNB $1,250,000.
Results of Operations
Operations for the third quarter and nine months ended September 30, 2001,
resulted in net income of $25,000 and $5,451,000, respectively. For the third
quarter and nine months ended September 30, 2001, the income allocated to the
Class A Limited Partners is $25,000 and $5,370,000, respectively, or $.01 and
$2.51 per Class A Unit, respectively. Operations for the third quarter and nine
months ended September 30, 2000, resulted in net income of $4,425,000 and
$7,741,000, respectively. For the third quarter and nine months ended September
30, 2000, the income allocated to the Class A Limited Partners was $3,802,000 or
$1.77 per Class A Unit for each period.
20
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
In prior periods, 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, in the third quarter
of the year 2000, the Class A Limited Partners Capital accounts were restored to
a positive balance and income in the third quarter was allocated to the Class A
Limited Partners according to their proper percentage.
The decrease in net income for the first nine months of 2001 compared to net
income in the first nine months of 2000 of $2,290,000 is attributable to a
decrease in the gross revenues and gross profit on closed Kinzie Station Phase I
units. For the first nine months of the year 2001, and 2000, Heartland closed 35
units and 110 units, respectively, in Kinzie Station Phase I. These closed units
resulted in gross revenues of $10,980,000 and $23,641,000 for the nine months
ended September 30, 2001, and 2000, respectively. The difference in gross profit
in Kinzie Phase I closings between the years was $2,537,000.
Total operating expenses were $4,580,000 and $3,938,000 for the first nine
months ending September 30, 2001, and 2000, respectively. The increase of
$642,000 is due to increased sales and marketing expenses of $853,000 primarily
related to interest, homeowners fees and taxes on completed inventory homes in
the Kinzie Station Phase I development, Longleaf and Osprey Cove communities,
and the increased advertising expenses for the initial phase of selling units in
the new Kinzie Station Phase II development. This $853,000 increase in sales and
marketing expenses is offset by a reduction in general and administrative
expenses of $200,000.
Economic and Other Conditions Generally
The real estate industry is highly cyclical and is affected by changes in local,
national, and global 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.
21
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
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 September 30, 2001, Heartland's
total consolidated indebtedness was $7,974,000. 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 September 30, 2001 is
$7,974,000. 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 $20,000.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
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.
22
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At September 30, 2001, Heartland's allowance for claims and liabilities was
approximately $4.3 million. During the nine months ended September 30, 2001, a
decrease of approximately $141,000 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 July 15, 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 September
30, 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.
23
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 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 efforts to acquire the property by
condemnation. The Company and RACM entered into an agreement under which RACM
will perform, at RACM's cost, limited investigations and provide the results to
Heartland. Management is not able to express an opinion at this time as to the
merits of the condemnation action.
As part of the Company's sale of certain property in Milwaukee, Wisconsin to the
State of Wisconsin, in December, 2000, for $1,400,000, the Company undertook to
cause a lessee of part of the property to surrender its lease. By Settlement
Agreement dated July 5, 2001, the lessee agreed to surrender its lease in
consideration, among other things, of the payment from the Company of $126,000.
This amount was paid to the lessee in July, 2001.
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.
24
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
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.
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 potentially
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.
25
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------- ------------------------------------------------------------
10.54 $2,000,000 Line of Credit Promissory Note dated October 11,
2001 between Heartland Technology, Inc. (borrower) and
Heartland Partners, L.P. and CMC Heartland Partners
(collectively, the payee) (filed herewith).
(b) Reports on Form 8-K;
A Form 8-K was filed by the Company on August 22, 2001 announcing, pursuant to
a press release dated August 16, 2001, that the Company has been authorized by
its General Partner, Heartland Technology, Inc., to purchase up to 50,000 of
its outstanding Class A partnership units.
26
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 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: November 14, 2001 BY: /s/ Edwin Jacobson
----------------------------------------
Edwin Jacobson
President and Chief Executive Officer
Heartland Technology, Inc.
The General Partner
(Principal Executive Officer)
Date: November 14, 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)
27
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2001
EXHIBIT INDEX
---------------
Exhibit No. Description
----------- ------------------------------------------------------------
10.54 $2,000,000 Line of Credit Promissory Note dated October 11,
2001 between Heartland Technology, Inc. (borrower) and
Heartland Partners, L.P. and CMC Heartland Partners
(collectively, the payee) (filed herewith).
28
Exhibit 10.54
LINE OF CREDIT PROMISSORY NOTE
$2,000,000
October 11, 2001
FOR VALUE RECEIVED, HEARTLAND TECHNOLOGY, INC. (the "Borrower"),
hereby unconditionally promises to pay to the order of HEARTLAND PARTNERS, L.P.
and CMC HEARTLAND PARTNERS (collectively, the "payee") at the office of the
Payee in lawful money of the United States of America on demand in immediately
available funds, the principal amount of the lesser of $2,000,000 or such
principal amount of unpaid advances from Payee as is then outstanding. The
Borrower further agrees to pay interest in like money at such office on the
unpaid principal amount hereof from time to time outstanding from the date of
borrowing until the principal amount is paid in full at a fixed rate of interest
equal to thirteen percent (13%), calculated on the basis of a 360 day year for
the number of days actually elapsed. Interest shall be payable in arrears at
maturity. The Borrower shall be permitted to borrow, repay and reborrow funds
under this Note.
All sums due hereunder shall, automatically, without further action,
become immediately due and payable, upon the occurrence of any of the following
events (each, an "Event of Default"):
(1) a receiver, liquidator or trustee of the Borrower or of any
property of the Borrower shall be appointed by court order and such order shall
remain unstayed and in effect for more than 60 days; or the Borrower shall be
adjudged bankrupt or insolvent; or any of the property of the Borrower shall be
restrained, attached or sequestered by court order of become subject to any levy
of any court and such order shall remain unstayed and in effect from more than
60 days; or a petition to reorganize the Borrower under any bankruptcy,
reorganization, arrangement, moratorium, or insolvency law or code or other
debtor relief proceedings shall be filed against the Borrower and shall not be
dismissed within 60 days after such filing or an order for relief shall be
entered against the Borrower (in being understood that for the purposes of
Paragraphs (1), (2), (3), (4) and (5), the term the "Borrower" includes any
"significant subsidiary" of the Borrower as that term is defined by the
Securities and Exchange Commission);
(2) the Borrower shall file a petition in voluntary bankruptcy or
requesting relief under any provision of any bankruptcy, reorganization, or
insolvency law or shall consent to the filing of any petition against it under
any such law or code;
(3) the Borrower shall make an assignment for the benefit of its
creditors or consent to the appointment of a receiver, trustee, or liquidator of
the Borrower or of all or any part of the property of the Borrower;
(4) the Borrower shall be dissolved or liquidated or the existence of
the Borrower shall terminate except pursuant to a merger pursuant to which the
Obligations become obligations of the surviving entity; or
(5) any seizure, vesting, or intervention by or under the authority
of any governmental agency by which the management of the Borrower is displaced
or its authority in the conduct of its business is curtailed shall occur.
29
THE BORROWER WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS NOTE, ANY LOAN DOCUMENT TO WHICH
IT IS A PARTY OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN
THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY
LENDING RELATIONSHIP EXISTING IN CONNECTION WITH THIS NOTE, AND AGREES THAT ANY
SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT
BEFORE A JURY.
This Note shall be governed by the substantive laws of the State of
Illinois.
HEARTLAND TECHNOLOGY, INC.
By: _______________________________
Title: _______________________________
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