UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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.
(Exact name of registrant as specified in its charter)
Delaware 36-3606475
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification no.)
330 North Jefferson Court, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/575-0400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
Class A Limited Partnership Units American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [ ]
The aggregate market value of the Registrant's Class A Limited Partnership Units
held by non-affiliates of the Registrant, computed by reference to the last
reported sales price of the Registrant's units on the American Stock Exchange as
of March 28, 2002, was approximately $26,288,000. On that date there were
2,092,678 units outstanding. For the purposes of this computation, it is assumed
that non-affiliates of the Registrant are all holders other than directors and
officers of Heartland Technology, Inc., and managers of HTI Interests, LLC.
Exhibit index appears on Page 77.
1
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-K, 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-K. 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 statements. In addition, we do not have any intention or
obligation to update the forward-looking statements in this document. The
Company claims the protections of the safe harbor for forward-looking statements
contained in Section 21E of the Securities Exchange Act of 1934.
PART I
ITEM 1. Business
Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, 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. At December
31, 2001, CMC Heartland Partners ("CMC") was an operating general partnership
owned 99.99% by Heartland and .01% by Heartland Technology, Inc. ("HTI"),
formerly known as Milwaukee Land Company ("MLC"). HTI was the general partner of
Heartland. HTI transferred its general partner interest in the Company to HTI
Interests, LLC ("HTII"), a Delaware limited liability company, owned 99.9% by
HTI and .1% by HTI Principals, Inc., a Delaware corporation, owned by four of
HTI's Board of Directors and a former director of HTI. HTII is now the General
Partner of Heartland, (in such capacity, the "General Partner").
The following table sets forth various entities formed by the Company since its
inception, date and purpose of formation, development location and ownership:
YEAR
COMPANY FORMED BUSINESS PURPOSE
--------------------------------------------------- ------ ------------------------------------------------------------
Heartland Development Corporation ("HDC") 1993 General Partner of CMC Heartland Partners I, Limited Partnership
CMC Heartland Partners I, Limited ("CMCLP") 1993 Owned Bloomfield development
Partnership
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
2
DEVELOPMENT
COMPANY LOCATION OWNERSHIP
--------------------------------------------------- ------------------------------ ----------
Heartland Development Corporation ("HDC") Not applicable 100% (1)
CMC Heartland Partners I, Limited ("CMCLP") Rosemount, Minnesota 100% (2)
Partnership
CMC Heartland Partners I, LLC ("CMCI") Chicago,Illinois 100% (3)
CMC Heartland Partners II, LLC ("CMCII") Chicago,Illinois 100% (3)
CMC Heartland Partners III, LLC ("CMCIII") Chicago,Illinois 100% (3)
CMC Heartland Partners IV, LLC ("CMCIV") Fife,Washington 100% (3)
CMC Heartland Partners V, LLC ("CMCV") St. Marys,Georgia 100% (3)
CMC Heartland Partners VI, LLC ("CMCVI") Not Applicable 100% (3)
CMC Heartland Partners VII, LLC ("CMCVII") Southern Pines, North Carolina 100% (3)
CMC Heartland Partners VIII, LLC ("CMCVIII") Not Applicable 100% (3)
Lifestyle Construction Company,Inc. ("LCC") Not Applicable 100% (4)
Lifestyle Communities, Ltd. ("LCL") Not Applicable 100% (4)
(1) Stock wholly owned by Heartland.
(2) HDC owns a 1% General Partnership interest and CMC owns a 99% Limited
Partnership interest.
(3) Membership interest owned by CMC.
(4) 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.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, 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.
Subject to the limitation described in the preceding paragraph, the General
Partner has the discretion to cause Heartland to make distributions of
Heartland's available cash in an amount equal to 98.5% to the Unitholders, 0.5%
to the holder of the Class B Interest and 1% to the General Partner. Liquidating
distributions, upon dissolution of the partnership, are made pro rata to each
partner in accordance with its positive Capital Account balance after certain
adjustments set out in the partnership agreement. There can be no assurance as
to the amount or timing of Heartland's cash distributions or whether the General
Partner will cause Heartland to make a cash distribution if cash is available.
On November 24, 1997, Heartland declared a cash distribution in the amount of
$1.6 million to Unitholders and Partners of record on December 29, 1997, that
was paid on January 7, 1998. On December 4, 1997, Heartland's partnership
agreement was amended to allow the General Partner in its discretion to
establish a record date for distributions on the last day of any calendar month.
On August 22, 2001, Heartland announced that it had been authorized by its
General Partner to purchase up to 50,000 of its outstanding Class A partnership
units. As of December 31, 2001, the Company had repurchased 47,360 Class A
partnership units at a total cost of $794,000. These repurchases are shown as a
reduction of Partners' Capital.
As of December 31, 2001, Heartland and CMC loaned HTI an aggregate of
$8,186,000. The loans are collateralized by a security interest in the Class B
limited partner interest and bear interest at 13%. The Company has also received
as compensation for the loans a Series C Warrant that entitles Heartland to
purchase 320,000 shares of HTI common stock at an exercise price of $1.05 per
share. HTI and the Company have provided loans, on market terms, to each other
from time to time, as provided in the agreements between them. The initial terms
of the loan were based on the collateral of the Class B interest and prevailing
borrowing rates. When HTI raised capital through the issuance of subordinated
debentures at 13% interest and the grant of warrants, the loan terms were
changed to reflect HTI's cost of capital.
3
At December 31, 2001, HTI owed Heartland and CMC approximately $8,186,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,186,000 is
recoverable through the Company's security interest in the Class B limited
partner interest.
Real Estate Development Activities
At year end 2001, property designated for development consisted of 12 sites
comprising approximately 522 acres. The book value of this land is approximately
$8,294,000 or an average of $15,900 per acre. Heartland reviews these properties
to determine whether to hold, develop, joint venture or sell them. Heartland's
objective for these properties is to maximize unitholder value over a period of
years.
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.
Kinzie Station
As of January 1, 2001, Heartland had 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 8 acres of land and 4 acres of air rights adjacent to
Kinzie Station. This acreage is currently zoned for industrial and manufacturing
uses. 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 closed 160 Tower units
and 18 Plaza units during the period May 1, 2000 to December 31, 2001.
Kinzie Station
Phase I
Unit Detail
As of December 31, 2001
Total Number Sale Contracts
of Units To-Date
Tower Building 163 160
Plaza 24 18
------------ --------------
Total 187 178
============ ==============
4
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 $1,500,000 remains outstanding at December 31,
2001, and changed the maturity date of the loan to February 23, 2002. Effective
February 23, 2002, the maturity date of this loan was extended to June 23, 2002.
The loan bears interest at the prime rate (4.75% at December 31, 2001).
Kinzie Station Phase II
As of January 1, 2001, Heartland had a 2.65 acre site in the City of Chicago
known as Kinzie Station Phase II. On approximately 1.45 acres, the Company has
zoning to construct a 267 unit residential tower building. On August 10, 2001,
the Company closed the sale of the 1.2 acre commercial property to a developer
for use as a parking facility for $2,937,000.
Osprey Cove
Included in the aforementioned 522 acres are approximately 2 acres consisting of
4 lots purchased for $161,000 or an average of $40,250 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 December 31, 2001, 65
contracts have closed in Osprey; 14 in 2001, 16 in 2000, 20 in 1999, 13 in 1998
and 2 in 1997.
Osprey Cove
Unit Inventory Detail
As of December 31, 2001
Sold homes completed 2
Lots owned (1 lot sold) 2
-------
Total unit inventory 4
=======
As of March 31, 2002, the 2 sold homes and 1 sold lot have closed. The 1 unsold
lot owned by Heartland is being marketed and is expected to be sold and closed
in the ordinary course of business.
At Osprey Cove in St. Marys, Georgia, the First National Bank of St. Marys
("FNB") in Georgia has made two loans on the two homes of $153,000 and $235,000
to the Company. The loans would have matured on November 7, 2002 and July 5,
2002, respectively. The loans bear interest at 7%. At December 31, 2001,
$388,000 had been advanced to Heartland on the two loans. As of March 19, 2002,
these two loans have been paid in full.
Longleaf
In September, 1998, the Company signed a contract to be the exclusive
homebuilder and marketer for the Longleaf Country Club in Southern Pines, North
Carolina. Under the terms of the contract, CMC was entitled to sell and build up
to 244 homes on lots owned by Longleaf Associates Limited Partnership ("LALP"),
an affiliate of General Investment & Development, an unrelated party. Heartland
assumed the day to day operations on April 1, 1998. On December 12, 2000,
Heartland executed a purchase agreement whereby it purchased the remaining 207
lots owned by LALP, by the assumption of certain liabilities owed by LALP to
other unrelated parties and the payment of $250,000. The purchase price of
$2,459,000, which includes the $250,000 paid on December 12, 2000, for these 207
lots was determined by calculating the net present value of the payments to be
paid over a ten year period using a discount rate of 10%. Also, per the purchase
agreement, the Company is obligated to pay LALP 49% of the Net Cash Flow, as
defined, each year for the period January 1, 2001 to December 31, 2005. At
December 31, 2001, no payments of Net Cash Flow are owed or due to LALP. At
December 31, 2001, the Company owned 204 lots purchased for approximately
$2,341,000, an average of $11,500 per lot. These 204 lots comprising 66 acres of
land, are also included in the aforementioned 522 acres.
5
In Longleaf, the Company has closed , as of December 31, 2001, a total of 37
contracts; 9 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 December 31, 2001, the Company has sold 43 homes and 5 lots for
these owners since April 1, 1998.
Longleaf
Unit Inventory Detail
As of December 31, 2001
Model homes completed 2
Sold homes not under construction 1
Inventory homes completed 5
Lots owned 196
------------
Total unit inventory 204
============
On December 8, 2000, Heartland entered into 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 from Bank One to
purchase the remaining lots owned by LALP. 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
(4.75% at December 31, 2001). At December 31, 2001, $1,358,000 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 dates of the revolving line of
credit and $250,000 loan. While the Company has no reason to believe the
extension of the credit facility and loan 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.
Bloomfield
At January 1, 2001, the Company owned two parcels of land in Rosemount,
Minnesota. The Company zoned, subdivided and improved parts of the property as a
master planned community called Bloomfield.
On March 31, 2001, the Company closed the sale of 113 acres it owned in
Rosemount, Minnesota to a local church for $4,000,000.
On June 21, 2001, Centex Homes purchased the Company's remaining 122 acres for
$5,275,000.
Bozeman, Montana
Heartland sold its 14-acre property in Bozeman, Montana to the Bozeman Public
Library for $2,150,000. This sale closed October 1, 2001.
Fife, Washington
On December 1, 1998, the Company's 177 acre 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. The
Fife City Council approved the preliminary plat for the project on September 25,
2001.
On December 28, 2001, Heartland executed a construction management agreement
with Crab Apple Beach, L.L.C., an unrelated party, to assist in the management
of the development, in phases, of the Fife property. Also, the Company
anticipates completing the engineering for the first phase of the development
and submitting to the City of Fife the final first phase plat for its approval
in the second quarter of the year 2002.
6
Goose Island Joint Venture
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 December 31, 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 expired December 31, 2001.
Menomonee Valley
The Company owns approximately 142 acres of property in the Menomonee River
Valley in Milwaukee, Wisconsin. The property is located next to Miller Park, the
home stadium of the Milwaukee Brewers baseball team. The Company has proposed a
mixed use development to include retail and entertainment uses complementary to
the baseball park as a recreational destination. The City of Milwaukee has
stated that it believes industrial development would be more appropriate for the
site and the Redevelopment Authority of the City of Milwaukee ("RACM") has
announced it will seek to acquire the property through eminent domain if
necessary. RACM is required to negotiate with the Company before it can file an
eminent domain proceeding. The Company may assert legal challenges to RACM's
authority if RACM does condemn the property. The outcomes of any eminent domain
proceeding or legal challenges to it are uncertain.
Property Sales and Leasing Activities
Heartland's current inventory of land held for sale consists of approximately
13,993 acres located throughout 12 states. The book value of this inventory is
approximately $723,000. 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 use and these sites may be improved
with the lessee's structures.
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 seven years due to the
less desirable characteristics of the remaining properties. The Company
anticipates that the sale of its remaining parcels may extend beyond the year
2002.
The Company leases less than 1% of its total acreage under operating leases. 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.
Other Activities
At December 31, 2001, the allowance for claims and liabilities established by
Heartland for environmental and other contingent liabilities totaled
approximately $4,337,000. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Given the uncertainty inherent
in litigation, resolution of these matters could require funds greater or less
than the $4,337,000 allowance for claims and liabilities.
Heartland engages outside counsel to defend it in connection with most of these
claims. Significant claims are summarized in Note 8 to the Consolidated
Financial Statements (See Item 8).
Regulation and Environmental Matters
For a discussion of regulation and environmental matters, see Notes 5 and 8 to
the Consolidated Financial Statements (See Item 8).
Employees
At December 31, 2001, Heartland employed 20 people.
7
Item 2. Properties
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.
In addition to the 522 acres designated for development at December 31, 2001,
real estate holdings consisted of approximately 13,993 acres of scattered land
parcels. States in which large land holdings are located are Illinois, Iowa,
Minnesota, Montana, North Carolina, North Dakota, South Dakota, Washington, and
Wisconsin. The remaining acreage is located in Georgia, Idaho, Indiana, Michigan
and Missouri. Most of the properties are former railroad rights-of-way, located
in rural areas, comprising of long strips of land approximately 100 feet in
width. Also, included in these scattered land parcels are former station grounds
and rail yards. The Company owns certain air rights in the Chicago, Illinois and
Milwaukee, Wisconsin areas.
Other than land classified under Real Estate Development Activities in Item 1,
the land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Heartland's headquarters occupies approximately 4,000 square feet of owned
office space located at 330 North Jefferson Court, Suite 305, Chicago, Illinois.
This office space is in the Tower building of the Company's Kinzie Station Phase
I development.
Item 3. Legal Proceedings
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 of Tacoma which calls for the Company to either pay the Port of Tacoma
$1,100,000 or transfer to the Port of Tacoma real estate to be agreed upon at a
later date. On January 9, 2002, 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 $1,100,000 on or before December 31, 2002 plus interest from January 1,
1999, or (b) convey real property to be agreed upon at a later date.
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.
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.
8
In February, 2002, the Company filed suit against the Southeast Wisconsin
Professional Baseball District to enforce a provision of a contract between the
District and Heartland providing for the construction of an additional two lane
bridge to the Company's Menomonee Valley project.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Unitholders of Heartland in the fourth
quarter ended December 31, 2001.
9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Units are listed and traded on the American Stock Exchange under the symbol
"HTL". The Units began trading on a "when issued" basis on June 20, 1990. The
following table sets forth the high and low sales prices per Unit by quarter for
the years ended December 31, 2001 and 2000.
2001 High Low
First quarter $ 19 $ 17 1/2
Second quarter 17 1/2 14 1/4
Third quarter 15 1/2 13 3/5
Fourth quarter 17 1/4 14 5/6
2000
First quarter $ 23 3/4 $ 20 1/2
Second quarter 22 1/8 18 3/4
Third quarter 22 5/8 18 7/8
Fourth quarter 22 3/16 18 3/4
Based on records maintained by Heartland's Unit transfer agent and registrar,
there were approximately 522 record holders of Heartland's Units as of March 15,
2002.
The amount of Heartland's cash available to be distributed to Unitholders, the
holder of the Class B Interest and the General Partner ("Available Cash Flow")
will be determined by the General Partner, in its sole discretion, after taking
into account all factors deemed relevant by the General Partner, including,
without limitation, general economic conditions and Heartland's financial
condition, results of operations and cash requirements, including (i) the
servicing and repayment of indebtedness, (ii) general and administrative
charges, including fees and expenses payable to HTI under management and other
arrangements, (iii) property and operating taxes, (iv) other costs and expenses,
including legal and accounting fees, and (v) reserves for future growth,
commitments and contingencies.
Heartland's Available Cash Flow will be derived from CMC, CMCLP, CMCI, CMCII,
CMCIII, CMCIV, CMCV, CMCVII and LCL. When available and appropriate, the General
Partner expects to cause Heartland to make distributions of Heartland's
Available Cash Flow in an amount equal to 98.5% to the Unitholders, 0.5% to the
holder of the Class B Interest, and 1% to the General Partner, although there
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. Liquidating distributions, upon dissolution of the
partnership, are made pro rata to each partner in accordance with its positive
Capital Account balance after certain adjustments set out in the Partnership
agreement. Future lenders to Heartland may impose restrictions on Heartland's
ability to make distributions. In addition, distributions may not be made to
Unitholders until Heartland has paid to HTI (or its assignee) all accrued and
unpaid management fees pursuant to the Management Agreement between Heartland
and HTI. On December 4, 1997, Heartland's partnership agreement was amended to
allow the General Partner in its discretion to establish a record date for
distributions on the last day of any calendar month.
On August 22, 2001, Heartland announced that it had been authorized by its
General Partner to purchase up to 50,000 of its outstanding Class A partnership
units. As of December 31, 2001, the Company had repurchased 47,360 Class A
partnership units at a total cost of $794,000. These repurchases are shown as a
reduction of Partners' Capital.
10
Item 6. Selected Financial Data
Following is a summary of Heartland's selected financial data for the years
ended December 31, 2001, 2000, 1999, 1998 and 1997 (amounts in thousands except
per Unit data):
Operating Statement Data: 2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
Operating income (loss) $ 4,426 $ 8,436 $(5,010) $(6,998) $(3,096)
Other income 932 1,408 1,253 914 933
-------- ------- ------- ------- -------
Net income (loss) $ 5,358 $ 9,844 $(3,757) $(6,084) $(2,163)
======== ======= ======= ======= =======
Net income (loss) allocated to
General Partner and
Class B Interest $ 80 $ 3,938 $(3,757) $ (182) $ (33)
======== ======= ======= ======= =======
Net income (loss) allocated
to Class A units $ 5,278 $ 5,906 $ -- $(5,902) $(2,130)
======== ======= ======= ======= =======
Net income (loss) per Class A Unit $ 2.48 $ 2.76 $ -- $ (2.76) $ (0.99)
======== ======= ======= ======= =======
Distribution declared per Class
A limited Partnership unit $ -- $ -- $ -- $ -- $ 0.75
======== ======= ======= ======= =======
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
Balance Sheet Data 31, 2001 31, 2000 31, 1999 31, 1998 31, 1997
---------- ---------- ---------- ---------- ----------
Net Properties $ 28,201 $ 38,916 $ 50,751 $ 28,052 $ 23,196
Total assets 38,420 47,584 57,256 33,231 26,838
Allowance for
claims and liabilities 4,337 4,478 2,804 2,762 2,169
Total liabilities 18,360 32,088 51,604 23,822 11,347
Partners' capital 20,060 15,496 5,652 9,409 15,491
Item 7. 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 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. 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 statements. In addition, we do not have
any intention or obligation to update the forward-looking statements in this
document. 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 for operating activities has been derived primarily from development
activities, proceeds of property sales, rental income, interest income and
proceeds from sales of securities. Cash was $1,299,000 (including $1,196,000 of
restricted cash) at December 31, 2001, $2,849,000 (including $2,699,000 of
restricted cash) at December 31, 2000 and $4,412,000 (including $4,182,000 of
restricted cash) at December 31, 1999. The decrease of $1,550,000 from December
31, 2000 to December 31, 2001, is primarily due to the closing of 38 Kinzie
Station Phase I units and the return of all of the Kinzie Station Phase II
purchasers' earnest money. The decrease of $1,563,000 from December 31, 1999 to
December 31, 2000 was primarily due to the closing of 140 Kinzie Station Phase I
units. (See the Consolidated Statements of Cash Flows).
11
Net cash provided by operating activities was $10,444,000 in 2001, compared to
$16,364,000 in 2000. The cash provided by operating activities from the year
2001 compared to the year 2000 decreased by $5,920,000. This is primarily due to
housing inventories decreasing $9,507,000 in 2001 compared to $13,909,000 in
2000, which is a difference of $4,402,000. This difference is attributable to
closing 38 units in 2001 in Kinzie Station Phase I, compared to 140 units in
2000. Also, the net cash used to reduce accounts payable and accrued liabilities
in 2001 was $4,642,000 as compared to 2000 of $3,063,000. This is an increase of
$1,579,000 in cash used in operating activities between the years. Net cash
provided by operating activities was $16,364,000 in 2000, compared to
($18,208,000) of cash used in operating activities in 1999. The cash provided by
operating activities for 2000 compared to 1999 increased $34,572,000. This is
primarily due to the significant increase of housing inventories in 1999
relating to the development of Kinzie Station Phase I and other homebuilding
activities. During 2000, the Company's housing inventories decreased primarily
as a result of sales of units in Kinzie Station Phase I. Additionally, the
Company's housing inventories decreased significantly at Osprey Cove and
Rosemount due to the Company's decision to cease homebuilding activities and the
bulk sale of developed property at Rosemount. This resulted in a decrease in
housing inventories of $34,194,000 from 1999 to 2000. (See the Consolidated
Statements of Cash Flows).
During the year 2002, cash flows to pay development and homebuilding
construction costs will be provided by development, construction and line of
credit loans received from various sources.
Proceeds from property sales provided cash flow of $30,471,000 in 2001,
$61,009,000 in 2000 and $11,548,000 in 1999. Sales in 2001 consists of 38 units
in Kinzie Station Phase I for $11,903,000, 9 units in Longleaf for $2,395,000,
235 acres of land in Rosemount, Minnesota for $9,275,000, 14 acres of land in
Bozeman, Montana for $2,150,000 and 1.2 acres of land in Kinzie Station Phase II
for $2,937,000. Sales in 2000 consists of 140 units in Kinzie Phase I for
$33,637,000, 16 units in Osprey Cove for $2,477,000, 15 units in Longleaf for
$3,839,000, 21 units and developed acreage in Rosemount for $8,249,000, 67 acres
at Galewood in Chicago, Illinois for $7,160,000 and 2 acres at Kinzie Station in
Chicago, Illinois for $2,457,000. Sales in 1999 consists of 20 units in Osprey
Cove for $4,975,000, 13 units in Longleaf for $2,989,000, 6 units in Rosemount
for $999,000 and a parcel of land in Milwaukee, WI for $1,100,000.
During the year 2002, proceeds from property sales will consist of the sale of
Kinzie Phase I units, Longleaf homes, Osprey Cove homes and lots, development
properties, and land held for sale acreage.
The cost of property sales for 2001 was $19,908,000 or 65% of sales proceeds,
for 2000 was $45,612,000 or 75% of sales proceeds and for 1999 $9,772,000 or 85%
of sales proceeds.
It is not expected that future cost of sales ratios for real estate other than
development projects and home sales will change materially from ratios
experienced in prior years, as the balance of Heartland's real estate other than
development projects consists primarily of railroad properties acquired over the
past 150 years at values far lower than current fair values.
Portfolio income is derived principally from the interest earned on the HTI note
receivable, interest earned on certificates of deposit and investment of cash
not required for operating activities in various U. S. Government and corporate
obligations. Portfolio income for 2001 was $1,176,000 compared to $390,000 for
2000 and $123,000 for 1999. The increase in portfolio income from the year 2000
to the year 2001 of $786,000 is mainly attributable to additional interest
earned on the HTI note receivable of $588,000 and interest earned of $162,000 on
the delayed closing of the 113 acres in Rosemount, Minnesota.
As of December 31, 2001, Heartland had designated 12 sites, or approximately 522
acres with a book value of approximately $8,294,000, for development.
Capitalized expenditures at these sites were $9,891,000 in 2001, $30,250,000 in
2000 and $32,247,000 in 1999. At December 31, 2001, capitalized costs on
development properties including housing inventories totaled $17,626,000.
Expenditures which significantly increase the value and are directly identified
with a specific project are capitalized.
12
At December 31, 2001, land held for sale consists of 13,993 acres with a book
value of $723,000. It will be disposed of in an orderly fashion. It is
anticipated that it will extend beyond the year 2002 to dispose of most of these
properties.
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 $4,066,000 at December 31, 2001 and $4,096,000 at December 31, 2000
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. If the Company were to use a
different approach, the reserve could be materially higher. However, estimates
can be affected by various uncertainties including future changes in technology,
changes in regulations or requirements of local governmental authorities, third
party claims, the scope and cost to be performed at each site, the portion of
costs that may be shared and the timing of the remediation work. At December 31,
2001, there is not sufficient information to reasonably estimate all the
environmental liabilities of which management is aware. Accordingly, management
is able to determine whether environmental liabilities which management is
unable to reasonably estimate will or will not have a material effect on
Heartland's results of operations or financial condition. As additional
information becomes available, the Company will reassess its reserves which may
then be modified and related charges/credits against earnings may then be made.
In addition, Heartland has established an allowance for resolution of
non-environmental claims of $271,000 at December 31, 2001 and $382,000 at
December 31, 2000.
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.
While the timing of the payment of environmental claims has not significantly
adversely effected 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.
Notwithstanding, at December 31, 2001, there is not sufficient information to
reasonably estimate all the environmental liabilities of which management is
aware. Accordingly, management is unable to determine whether environmental
liabilities which management is unable to reasonably estimate will or will not
have a material effect on Heartland's results of operations or financial
condition.
At December 31, 2001, HTI owed Heartland and CMC approximately $8,186,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,186,000
is recoverable through the Company's security interest in the Class B limited
partner interest.
13
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 December 31, 2001, the Company had a line of
credit with LaSalle National Bank ("LNB") in the amount of $5,000,000. Cash in
the amount of $1,150,000 is pledged as an interest reserve. Heartland has also
granted LNB, as collateral for the line of credit, a first lien on certain
parcels of land in Chicago, Illinois, Milwaukee, Wisconsin and Fife, Washington.
The Company has also pledged as collateral its interest in the Goose Island
joint venture. The net worth requirement for the line of credit is $5,500,000.
Advances against the line of credit bear interest at the prime rate of LNB plus
1.5% (6.25% at December 31, 2001). At December 31, 2001, $3,500,000 had been
advanced to Heartland by LNB against the line of credit. The loan matured
February 28, 2002. The Company is currently in negotiations with LNB to increase
the loan amount and extend the maturity date of the revolving line of credit.
While the Company has no reason to believe the increase in the loan amount and
extension of the credit facility will not be approved by LNB, there can be no
assurance the contemplated increase and extension will be given. The
consolidated financial statements do not contain any adjustments to reflect the
ultimate outcome of this uncertainty.
At December 31, 2001, the Company had capital and operating lease obligations of
the following:
2002 2003 2004 2005 Total
---------- ---------- ---------- ---------- ----------
Capital leases $ 47,000 $ 25,000 $ -- $ -- $ 72,000
Operating leases 34,000 20,000 9,000 3,000 66,000
Model home rent - two
officers of Heartland 79,000 79,000 20,000 -- 178,000
---------- ---------- ---------- ---------- ----------
Total $ 160,000 $ 124,000 $ 29,000 $ 3,000 $ 316,000
========== ========== ========== ========== ==========
Results of Operations
For the year ended December 31, 2001, operations resulted in a net income of
$5,358,000 or $2.48 per Class A Unit. Operations for the years ended December
31, 2000 and 1999 resulted in a net income of $9,844,000 or $2.76 per Class A
Unit and a net loss of $3,757,000 or $0 per Class A Unit, respectively.
The difference in net income in 2001 compared to the net income in 2000 of
$4,486,000 is due to a decrease in sales volume. Net income in 2000, compared to
the net loss in 1999, increased $13,601,000 due to a substantial increase in
sales volume.
Total operating expenses for 2001 were $6,137,000 compared to $6,961,000 for
2000 and $6,786,000 for 1999. The decrease of $824,000 in 2001 compared to 2000
is primarily due to decreased general and administrative expenses of $471,000.
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
and tornadoes, 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.
14
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 December 31, 2001, Heartland's
total consolidated indebtedness was $6,746,000. This amount is due within one
year from January 1, 2002. 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 December 31, 2001, is
$6,746,000. The Company pays interest on its outstanding borrowings under
revolving credit facilities and fixed loan amounts at prime or the prime rate
plus 1.50% and at a fixed rate of 8%. (See Note 4 to the Consolidated Financial
Statements.) An adverse change of 1.00% in the prime rate would increase the
yearly interest incurred by approximately $67,000.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
See Management's Discussion and Analysis of Financial Condition and Results
of Operations: Economic and Other Conditions and Interest Rate Sensitivity.
15
PART II
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and Unitholders of Heartland Partners, L.P.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 67, present fairly, in all material
respects, the financial position of Heartland Partners, L.P. and its
subsidiaries at December 31, 2001, and the results of their operations and their
cash flows for the year ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the index appearing
under Item 14(a)(2) on page 67, present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 29, 2002
16
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
December 31, 2001
(amounts in thousands)
2001
---------
Assets:
Cash $ 103
Restricted cash 1,196
Accounts receivable 430
Note receivable from affiliate 8,186
Prepaid and other assets 138
Investment in joint venture 166
---------
Total 10,219
---------
Property:
Land 1,072
Buildings and improvements 1,630
Less accumulated depreciation 1,144
---------
Net land, buildings and improvements 1,558
Land held for sale 723
Housing inventories 10,847
Land held for development 4,807
Capitalized predevelopment costs 10,266
---------
Net properties 28,201
---------
Total assets $ 38,420
=========
Liabilities:
Notes payable $ 6,746
Accounts payable and accrued expenses 2,625
Cash overdraft 278
Accrued real estate taxes 817
Allowance for claims and liabilities 4,337
Unearned rents and deferred income 1,530
Other liabilities 2,027
---------
Total liabilities $ 18,360
---------
Partners' Capital:
General Partner 81
Class A Limited Partners - 2,142 units authorized,
issued and 2,095 units outstanding 10,390
Class B Limited Partner 9,589
---------
Total partners' capital 20,060
---------
Total liabilities and partners' capital $ 38,420
=========
See accompanying notes to Consolidated Financial Statements
17
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
(amounts in thousands, except for per unit data)
2001
----------
Income:
Property sales $ 30,471
Less: Cost of property sales 19,908
----------
Gross profit on property sales 10,563
----------
Operating Expenses:
Selling expenses 3,921
General and administrative expenses 1,888
Real estate taxes 225
Environmental expense 103
----------
Total operating expenses 6,137
----------
Operating income 4,426
Other Income and (Expense):
Portfolio income 1,176
Rental income 378
Other income 122
Depreciation (319)
Management fee (425)
----------
Total other income 932
----------
Net income $ 5,358
==========
Net income allocated to General Partner $ 54
==========
Net income allocated to Class B limited partner $ 26
==========
Net income allocated to Class A limited partners $ 5,278
==========
Net income per Class A limited partnership unit $ 2.48
==========
Weighted average number of Class A limited
partnership units outstanding 2,127
==========
See accompanying notes to Consolidated Financial Statements
18
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
For the Year Ended December 31, 2001
(amounts in thousands)
Class A Class B
General Limited Limited
Partner Partners Partner Total
---------- ---------- ---------- ----------
Balances at December 31, 2000 $ 27 $ 5,906 $ 9,563 $ 15,496
Net income 54 5,278 26 5,358
Redemption of Class A Limited
Partners Units -- (794) -- (794)
---------- ---------- ---------- ----------
Balances at December 31, 2001 $ 81 $ 10,390 $ 9,589 $ 20,060
========== ========== ========== ==========
See accompanying notes to Consolidated Financial Statements
19
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001
(amounts in thousands)
2001
----------
Cash Flow from Operating Activities:
Net income $ 5,358
Adjustments reconciling net income to net cash provided by
operating activities:
Equity in loss of joint venture 136
Depreciation 319
Write off of Kinzie Station fixed assets 688
Net change in allowance for claims and liabilities (141)
Net change in assets and liabilities:
Decrease in accounts receivable 152
Decrease in housing inventories, net 9,507
Decrease in land held for sale 17
Decrease in land held for development 690
Increase in capitalized predevelopment costs, net (487)
Decrease in accounts payable and accrued liabilities (4,642)
Net change in other assets and liabilities (1,153)
----------
Net cash provided by operating activities 10,444
----------
Cash Flow from Investing Activities:
Additions to land, building and other, net (19)
Increase in note receivable from affiliate (3,605)
----------
Net cash used in investing activities (3,624)
----------
Cash Flow from Financing Activities:
Payoffs/advances on notes payable, net (7,929)
Redemption of Class A Limited Partner units (794)
Distributions received from joint venture 75
Decrease in restricted cash 1,503
Cash overdraft 278
----------
Net cash used in financing activities (6,867)
----------
Net decrease in cash (47)
Cash at beginning of year 150
----------
Cash at end of year $ 103
==========
See accompanying notes to Consolidated Financial Statements
20
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the year ended December 31, 2001
1. Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, 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. At December
31, 2001, CMC Heartland Partners ("CMC") was an operating general partnership
owned 99.99% by Heartland and .01% by Heartland Technology, Inc. ("HTI"),
formerly known as Milwaukee Land Company ("MLC"). HTI was the general partner of
Heartland. HTI transferred its general partner interest in the Company to HTI
Interests, LLC ("HTII"), a Delaware limited liability company, owned 99.9% by
HTI and .1% by HTI Principals, Inc., a Delaware corporation, owned by four of
HTI's Board of Directors and a former director of HTI. HTII is now the General
Partner of Heartland, (in such capacity, the "General Partner").
The following table sets forth various entities formed by the Company since its
inception, date and purpose of formation, development location and ownership:
YEAR
COMPANY FORMED BUSINESS PURPOSE
--------------------------------------------------- ------ ------------------------------------------------------------
Heartland Development Corporation ("HDC") 1993 General Partner of CMC Heartland Partners I, Limited Partnership
CMC Heartland Partners I, Limited ("CMCLP") 1993 Owned Bloomfield development
Partnership
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
--------------------------------------------------- ------------------------------ ----------
Heartland Development Corporation ("HDC") Not applicable 100% (1)
CMC Heartland Partners I, Limited ("CMCLP") Rosemount, Minnesota 100% (2)
Partnership
CMC Heartland Partners I, LLC ("CMCI") Chicago,Illinois 100% (3)
CMC Heartland Partners II, LLC ("CMCII") Chicago,Illinois 100% (3)
CMC Heartland Partners III, LLC ("CMCIII") Chicago,Illinois 100% (3)
CMC Heartland Partners IV, LLC ("CMCIV") Fife,Washington 100% (3)
CMC Heartland Partners V, LLC ("CMCV") St. Marys,Georgia 100% (3)
CMC Heartland Partners VI, LLC ("CMCVI") Not Applicable 100% (3)
CMC Heartland Partners VII, LLC ("CMCVII") Southern Pines, North Carolina 100% (3)
CMC Heartland Partners VIII, LLC ("CMCVIII") Not Applicable 100% (3)
Lifestyle Construction Company,Inc. ("LCC") Not Applicable 100% (4)
Lifestyle Communities, Ltd. ("LCL") Not Applicable 100% (4)
(1) Stock wholly owned by Heartland.
(2) HDC owns a 1% General Partnership interest and CMC owns a 99% Limited
Partnership interest.
(3) Membership interest owned by CMC.
(4) Stock wholly owned by CMC.
21
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
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.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, 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.
Subject to the limitations described in the preceding paragraph, the General
Partner has the discretion to cause Heartland to make distributions of
Heartland's available cash in an amount equal to 98.5% to the Unitholders, 0.5%
to the holder of the Class B Interest and 1% to the General Partner. Liquidating
distributions, upon dissolution of the partnership, are made pro rata to each
partner in accordance with its positive Capital Account balance after certain
adjustments set out in the Partnership agreement. There can be no assurance as
to the amount or timing of Heartland's cash distributions or whether the General
Partner will cause Heartland to make a cash distribution if cash is available.
On December 4, 1997, Heartland's partnership agreement was amended to allow the
General Partner in its discretion to establish a record date for distributions
on the last day of any calendar month. No cash distribution was made in 2001.
On August 22, 2001, Heartland announced that it had been authorized by its
General Partner to purchase up to 50,000 of its outstanding Class A partnership
units. As of December 31, 2001, the Company had repurchased 47,360 Class A
partnership units at a total cost of $794,000. These repurchases are shown as a
reduction of Partners' Capital.
As of December 31, 2001, Heartland and CMC loaned HTI an aggregate of
$8,186,000. The loans are collateralized by a security interest in the Class B
limited partner interest and bear interest at 13%. The Company has also received
as compensation for the loans a Series C Warrant that entitles Heartland to
purchase 320,000 shares of HTI common stock at an exercise price of $1.05 per
share. HTI and the Company have provided loans, on market terms, to each other
from time to time, as provided in the agreements between them. The initial terms
of the loan were based on the collateral of the Class B interest and prevailing
borrowing rates. When HTI raised capital through the issuance of subordinated
debentures at 13% interest and the grant of warrants, the loan terms were
changed to reflect HTI's cost of capital.
At December 31, 2001, HTI owed Heartland and CMC approximately $8,186,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,186,000 is
recoverable through the Company's security interest in the Class B limited
partner interest.
22
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
At December 31, 2001, land held for sale consisted of approximately 13,993 acres
of scattered land parcels. States in which large land holdings are located are
Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota, Washington, and
Wisconsin. The remaining acreage is located in Idaho, Indiana, Michigan and
Missouri. Most of the properties are former railroad rights-of-way, located in
rural areas, comprised of long strips of land approximately 100 feet in width.
Also included in these scattered land parcels are former station grounds and
rail yards. Certain air rights and fiber optics development rights are also
owned. The land is typically unimproved. Some of the properties are improved
with structures (such as grain elevators and sheds) erected and owned by
lessees. Other properties are improved with Heartland-owned buildings that are
of little or no value.
At December 31, 2001, property available for development, including housing
inventories, consisted of 12 sites comprising approximately 522 acres. The book
value of this land is approximately $8,294,000 or an average of $15,900 per
acre. Heartland reviews these properties to determine whether to hold, develop,
either solely or with a third party joint venture, or sell them. Heartland's
objective for these properties is to maximize unitholder value over a period of
years.
Heartland has a 1.23 acre site in Chicago, Illinois known as Kinzie Station
Phase I that is substantially complete. Phase I consists of 163 units in a Tower
and 24 units in a Plaza Building. Kinzie Station Phase II is a 1.45 acre site
adjacent to Phase I on which the Company has zoning to construct a 267 unit
residential tower building. Heartland is also selling and building single family
homes in the Longleaf Country Club in Southern Pines, North Carolina. Heartland
also owns homes and lots in Osprey Cove located in St. Marys, Georgia. These
sites are classified as housing inventories. Heartland decided to cease building
operations in Osprey Cove in 1999.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCLP, 1%
general partnership interest owned by HDC and 99% owned by CMC; CMCI, CMCII,
CMCIII, CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCC and LCL, each 100% owned by
CMC. All intercompany transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The cash and cash
equivalents of the Company are held at two financial institutions.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, cash in escrow, accounts
receivable, accounts payable and accrued expenses are reasonable estimates
of their fair values because of the short maturity of these financial
instruments. The carrying value of the Company's notes payable approximate
fair value at December 31, 2001 due to the short duration and variable nature
of the financial instruments.
Revenue Recognition
Residential sales are recognized at closing when title to the home has passed to
the buyer. The Company's homes are generally offered for sale in advance of
their construction. To date, most of the Company's homes have been sold pursuant
to standard sales contracts entered into prior to commencement of construction.
The Company's standard sales contracts generally require the customer to make an
earnest money deposit. This deposit may range from 5% to 10% of the purchase
price for a buyer using conventional financing.
Land sales are recognized when the Company has received an adequate cash down
payment and all other conditions necessary for profit recognition have been
satisfied.
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.
23
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
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. Significant estimates used in the preparation of the
financial statements include the value of the Class B limited partner interest
which represents the collateral of the Heartland Technology, Inc. note
receivable owed to the Company and CMC, estimated costs to complete long term
development projects, the recoverability of the total cost of properties and the
estimates used in determining the Company's environmental liabilities. Actual
results could differ from those estimates.
Properties
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 real estate taxes that are directly
identified with a specific development project are capitalized. Interest and
related debt issuance costs are capitalized to qualifying real estate
inventories as incurred, in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest Costs", and charged to cost of
sales as revenue from residential and land sales are recognized. Repairs and
maintenance are charged to expense as incurred. Depreciation is provided for
financial statement purposes over the estimated useful life of the respective
assets ranging from 7 years for office equipment and fixtures to 40 years for
building and improvements using the straight-line method.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the particular development property may not be
recoverable. If these events or changes in circumstances are present, the
Company estimates the sum of the expected future cash flows (undiscounted) to
result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss the Company would
measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property. No event occurred
during the year 2001 that resulted in an impairment loss being recognized.
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. No event occurred during the year 2001 that
resulted in an impairment loss being recognized.
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. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units closed
in relation to the total anticipated units in the related development project;
such allocation approximates the relative sales value method. Direct
construction costs are allocated to the specific units closed for purposes of
determining costs of sales. Selling and marketing costs, not including those
costs incurred related to furnishing and developing the models and sales office,
are expensed in the period incurred. Costs incurred in the construction of the
model units and related furnishings are capitalized at cost. The Company intends
to offer these units for sale at the completion of a project and, accordingly,
no amortization of direct construction costs is provided. Housing inventories
are reviewed for impairment whenever events or circumstances indicate the fair
value less the cost to dispose of the inventories, is less than the capitalized
costs. If these events or changes in circumstances are present, the Company then
writes down the inventory to its fair value. No event occurred during the year
2001 that resulted in an impairment loss being recognized.
24
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Housing inventories consisted of the following at December 31, 2001:
Land under development.................. $ 3,487
Direct construction costs............... 4,117
Capitalized project costs............... 3,243
----------
$ 10,847
==========
Income Taxes
A publicly-traded partnership generally is not liable for Federal income taxes,
provided that for each taxable year at least 90% of its gross income consists of
certain passive types of income. In such case, each partner includes its
proportionate share of partnership income or loss in its own tax return.
Accordingly, no provision for income taxes is reflected in Heartland's financial
statements.
Heartland's assets are carried at historical cost. At December 31, 2001, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
Segment Reporting
The Company has two primary reportable business segments, which consist of land
sales and property development (See Note 10 to the Consolidated Financial
Statements).
3. Restricted Cash
At December 31, 2001, CMC has a line of credit agreement in the amount of
$5,000,000 with LaSalle National Bank ("LNB") pursuant to which CMC has pledged
cash in the amount of $1,150,000 as an interest reserve. Restricted cash also
includes purchasers' earnest money escrow deposits of $46,000 at December 31,
2001. The total restricted cash at December 31, 2001 was $1,196,000.
4. Notes Payable
At December 31, 2001, CMC has a line of credit agreement in the amount of
$5,000,000 with LNB, pursuant to which CMC pledged cash in the amount of
$1,150,000 as an interest reserve. The net worth requirement per the line of
credit agreement is $5,500,000. Heartland has pledged as additional collateral
its interest in the Goose Island Joint Venture which had a carrying value of
$166,000 as of December 31, 2001. Also, pursuant to the line of credit
agreement, Heartland has granted LNB a first lien on certain parcels of land in
Chicago, Illinois, Milwaukee, Wisconsin and Fife, Washington which had carrying
values of $4,594,000, $5,799,000 and $5,063,000, respectively, at December 31,
2001. Advances against the line of credit bear interest at the prime rate of LNB
plus 1.5% (6.25% at December 31, 2001). At December 31, 2001, $3,500,000 had
been advanced to the Company by LNB against the line of credit. The loan matured
February 28, 2002. The Company is currently in negotiations with LNB to increase
the loan amount and extend the maturity date of the revolving line of credit.
25
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
At Osprey Cove in St. Marys, Georgia the First National Bank of St. Marys
("FNB") in Georgia has made two loans on the two homes of $153,000 and $235,000
to the Company. The carrying value of these two homes was $512,000 at December
31, 2001. The loans will mature on November 7, 2002 and July 5, 2002,
respectively. The loans bear interest at 7%. At December 31, 2001, $388,000 had
been advanced to Heartland on the two loans. As of March 19, 2002, these two
loans had been paid in full.
As of December 8, 2000, Heartland had obtained an agreement for a $3,000,000
revolving line of credit for the construction of homes in Longleaf with Bank One
of Illinois ("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 (4.75% at December 31, 2001). At December 31, 2001,
$1,358,000 had been advanced by Bank One to Heartland on these two loans. The
carrying value of the collateral for both these loans at December 31, 2001 is
$2,938,000. The Company is currently in negotiations with Bank One to extend the
maturity dates of the revolving line of credit and $250,000 loan.
On October 20, 1999, the Company executed loan documents with Bank One for a
loan of $5,250,000 to construct the Kinzie Station Plaza building. The loan is
collateralized by real estate contained in the project. 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
$1,500,000 remains outstanding at December 31, 2001, and changed the maturity
date of the loan to February 23, 2002. Effective February 23, 2002, the maturity
date of this loan was extended to June 23, 2002. The loan bears interest at the
prime rate (4.75% at December 31, 2001).
During the year ended December 31, 2001, the Company incurred and paid interest
on loans in the amount of $1,028,000, of which $837,000 was capitalized.
As of December 31, 2001, Heartland's total consolidated indebtedness was
$6,746,000. This amount is due within one year from January 1, 2002. 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.
5. Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, 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
evaluated 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 an allowance
in the minimum amount of the range is established. If the Company were to use a
different approach, the reserve could be materially higher. However, estimates
can be affected by various uncertainties including future changes in technology,
changes in regulations or requirements of local governmental authorities, third
party claims, the scope and cost to be performed at each site, the portion of
costs that may be shared and the timing of the remediation work. Environmental
costs which are incurred in connection with Heartland's development activities
are expensed or capitalized as appropriate. (See Note 8.)
26
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives. As additional information becomes
available, the Company will reassess its reserves which may then be modified and
related charges/credits against earnings may then be made.
At December 31, 2001, there is not sufficient information to reasonably estimate
all the environmental liabilities of which management is aware. Accordingly,
management is unable to determine whether environmental liabilities which
management is unable to reasonably estimate will or will not have a material
effect on Heartland's results of operations or financial condition.
6. Related Party Transactions
CMC had a management agreement with HTI, pursuant to which CMC was required to
pay HTI an annual management fee in the amount of $425,000. On October 19, 2000,
this management agreement was extended from June 26, 2000 to June 27, 2005. The
management fee for the year 2001 of $425,000 was credited against amounts owed
CMC. On January 7, 2002, this management agreement was assigned to HTII, the new
General Partner.
Under a management services agreement, HTI reimburses Heartland for reasonable
and necessary costs and expenses for services. These totaled $837,000 for the
year ended December 31, 2001. Heartland and CMC also made loans to HTI. At
December 31, 2001, HTI owed the Company and CMC an aggregate of $8,186,000
related to these expenses and loans. On December 29, 2000, HTI executed a line
of credit promissory note that is due on demand, payable to Heartland and CMC 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. As of December 31, 2001, no value has been ascribed to the warrant in
the Consolidated Financial Statements. 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 and CMC
a senior lien and a senior security interest in the Heartland Class B Limited
Partnership Interest owned by HTI Class B, LLC, a wholly owned subsidiary of
HTI.
At December 31, 2001, HTI owed Heartland and CMC approximately $8,186,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,186,000
is recoverable through the Company's security interest in the Class B limited
partner interest.
27
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
A senior partner of a law firm who provides services to the Company owns
approximately 7.5% of the stock of HTI.
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.
7. Leases
Heartland is a lessor under numerous property operating lease arrangements with
varying lease terms. The majority of the leases are cancelable by either party
upon thirty to sixty days notice and 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. Heartland has a lease on a parcel of land in Chicago, Illinois
which accounts for over half of Heartland's annual rental income. The land had a
net carrying value of $1,072,000 at December 31, 2001.
Heartland leases equipment under various capital and operating leases. Future
minimum lease commitments under non-cancellable capital and operating leases are
as follows:
2002 2003 2004 2005 Total
---------- ---------- ---------- ---------- ----------
Capital leases $ 47,000 $ 25,000 $ -- $ -- $ 72,000
Operating leases 34,000 20,000 9,000 3,000 66,000
Model home rent - two
officers of Heartland 79,000 79,000 20,000 -- 178,000
---------- ---------- ---------- ---------- ----------
Total $ 160,000 $ 124,000 $ 29,000 $ 3,000 $ 316,000
========== ========== ========== ========== ==========
Rent expense for the year ended December 31, 2001 was $165,000.
8. Legal Proceedings and Contingencies
At December 31, 2001, Heartland's allowance for claims and liabilities was
approximately $4,337,000. During the year ended December 31, 2001, $103,000 was
recorded as cost and expenses in respect to environmental matters. Significant
legal matters are discussed below.
Canadian Pacific Railroad Matters
The Canadian Pacific Railroad ("CPRR"), formerly the Soo Line Railroad Company,
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 CPRR. The Company has
denied liability for each of these claims based on a prior settlement with CPRR.
CPRR 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.
28
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
The occupational and environmental claims are all currently being handled by the
CPRR, and the Company understands the CPRR has paid settlements on many of these
claims. As a result of CPRR'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 January 9, 2002 in which the Port released all
claims and the Company agreed either to, (a) pay $1,100,000 on or before
December 31, 2002, plus interest quarterly from January 1, 1999, or (b) to
convey to the Port real property to be agreed upon at a later date. At December
31, 2001, Heartland's allowance for claims and liabilities for this site was
$1,110,000. At December 31, 2001, interest owed to the Port had been paid to
date.
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.
Wheeler Pit, Janesville, Wisconsin
In November, 1995, the Company settled an environmental claim with respect to
the Wheeler Pit site near Janesville, Wisconsin. The settlement calls for the
Company to pay General Motors $800,000 at $200,000 annually for four years, 32%
of the monitoring costs for twenty-five years beginning in 1997 and 32% of
governmental oversight costs; the oversight costs not to exceed $50,000. Annual
payments of $200,000 were made in 1995, 1996, 1997 and 1998. A payment of
$50,000 for past government oversight costs was made in October, 1998. At
December 31, 2001, Heartland's allowance for claims and liabilities for this
site was $212,000.
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.
In February, 2002, the Company filed suit against the Southeast Wisconsin
Professional Baseball District to enforce a provision of a contract between the
District and Heartland providing for the construction of an additional two lane
bridge to the Company's Menomonee Valley project.
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.
29
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
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 were
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 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.
The Company has a long term monitoring program at Miles City, Montana. At
December 31, 2001, Heartland's allowance for claims and liabilities for this
site is $20,000.
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.
Heartland owns a 5.95 acre parcel in Minneapolis, Minnesota. Environmental
sampling in 1995 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. At December 31,
2001, Heartland's aggregate allowance for claims and liabilities for this 5.95
acre parcel in Minneapolis, Minnesota is $2,325,000.
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, these matters should
not be material to the Company's results of operations or financial condition.
30
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
9. Compensation and Benefits
Heartland sponsors a Group Savings Plan, which is a salary reduction plan
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986.
All full-time permanent employees of Heartland are eligible to participate in
the plan. A participating employee can authorize contributions to the plan in
the form of salary reductions of up to the maximum allowed by the Internal
Revenue Code in any plan year. In 2001, Heartland made matching contributions of
25% of each participant's contribution to the plan. Participating 1998 employees
were fully vested with respect to salary reduction and Heartland's
contributions. For all future participants, they are fully vested with respect
to salary reduction immediately, but the matching contribution vests at 20% per
year. Benefits are normally distributed upon retirement (on or after age 65),
death or termination of employment, but may be distributed prior to termination
of employment upon showing of financial hardship. Heartland contributed to the
plan approximately $30,000 in 2001 on behalf of all employees.
Under an agreement with Edwin Jacobson as the President and Chief Executive
Officer of CMC he was entitled to receive commencing January 1, 2000 and
continuing thereafter during the time he was 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 twelve months ended December 31, 2001, $96,000 had been accrued as
compensation expense under this plan. As of December 31, 2001, $113,000 had been
paid to the President and Chief Executive Officer by CMC. On October 18, 2000,
the President and Chief Executive Officer of CMC borrowed $375,000 from CMC, of
which $330,000 remains outstanding at December 31, 2001 and is included as part
of accounts receivable at December 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 authorized CMC to deduct from any
incentive payment made to him 40% of that payment and apply it to his
outstanding note due to CMC. As a result of this amendment, $45,000 of the above
described payment of $113,000 was applied to the outstanding note balance. On
February 25, 2002, Edwin Jacobson retired as the President and Chief Executive
Officer of CMC.
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 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 year 2001 by the net proceeds from the sale
of certain real estate during that year. For the twelve months ended December
31, 2001, $440,000 had been accrued as compensation expense under the plans. As
of December 31, 2001, $267,000 had been paid to the officers by the Company.
31
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
10. Reportable Segments
The following tables set forth the reconciliation of net income and total assets
for Heartland's reportable segments for the year ended December 31, 2001 (See
Note 2 to the Consolidated Financial Statements).
Property
2001 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
-------------------------------------- --------------- --------------- --------------- ---------------
Revenues:
Property sales $ 1,031 $ 29,440 $ 0 $ 30,471
Less: Cost of property sales 182 19,726 0 19,908
--------------- --------------- --------------- ---------------
Gross profit on property sales 849 9,714 0 10,563
--------------- --------------- --------------- ---------------
Operating expenses:
Selling expenses 700 3,221 0 3,921
General and administrative expenses 0 0 1,888 1,888
Real estate taxes 115 110 0 225
Environmental expense 103 0 0 103
--------------- --------------- --------------- ---------------
Total operating expenses 918 3,331 1,888 6,137
--------------- --------------- --------------- ---------------
Net operating income (loss) (69) 6,383 (1,888) 4,426
Other Income and (Expenses):
Portfolio income 0 0 1,176 1,176
Rental income 378 0 0 378
Other income 0 122 0 122
Depreciation (10) (245) (64) (319)
Management fee 0 0 (425) (425)
--------------- --------------- --------------- ---------------
Total other income and (expenses) 368 (123) 687 932
--------------- --------------- --------------- ---------------
Net income (loss) $ 299 $ 6,260 $ (1,201) $ 5,358
=============== =============== =============== ===============
Properties, net of accumulated
Depreciation $ 723 $ 27,114 $ 364 $ 28,201
=============== =============== =============== ===============
Total assets $ 1,153 $ 27,567 $ 9,700 $ 38,420
=============== =============== =============== ===============
(1) The Land Sales business segment consists of approximately 13,993 acres of
land located throughout 12 states for sale as of December 31, 2001, and the
related rentals, sales and marketing and operating expenses.
(2) The Property Development business segment consists of approximately 522
acres representing 12 sites that Heartland is in the process of developing
or homebuilding communities in which the Company is currently selling and
building homes on lots it owns. The related selling and operating expenses
are also reported for this business segment.
(3) The Corporate level consist of portfolio income from investments, salaries
and general and administrative expenses for the employees and occupied
commercial office space in Kinzie Station Phase I located in Chicago,
Illinois.
32
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Year Ended December 31, 2001
(amounts in thousands)
Additions
Balance at charged Balance
Beginning to at end
Description of year costs and Payments of year
expenses
----------- --------- --------- --------- --------
Allowance for claims and liabilities $ 4,478 $ 103 $ (244) $ 4,337
========= ========= ========= ========
33
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(amounts in thousands)
Cost Capitalized Gross Amount at Which
Description Initial Cost to Subsequent Carried
Land, Buildings and Other Heartland to Acquisition (1) at Close of Period (1)
--------------------------- ----------------------------- --------------------------------------------
Building,
Buildings & Carrying Improvement and
Land Improvements Improvements(3) Costs(4) Land Carrying Costs Total
------------ ------------ --------------- ------------ ------------ -------------- ------------
Chicago, IL ....... (6) $ 661 $ -- $ 142 $ 269 $ 661 $ 411 $ 1,072
Corporate and other (5) -- -- 1,630 -- -- 1,630 1,630
------------ ------------ --------------- ------------ ------------ -------------- ------------
TOTAL $ 661 $ -- $ 1,772 $ 269 $ 661 $ 2,041 $ 2,702
============ ============ =============== ============ ============ ============== ============
Life on
Which
Depreciation
Date of In Latest Income
Description Accumulated Completion of Date Statement
Land, Buildings and Other Depreciation Construction Acquired Is Computed
----------- ------------- ------------ ----------------
Chicago, IL (6) $ -- Various Various (2)
Corporate and other 1,144 Various Various (2)
-----------
TOTAL $ 1,144
===========
(1) See Attachment A to Schedule III for reconciliation of beginning of period
total to total at end of period.
(2) Reference is made to Note 2 to the Consolidated Financial Statements for
information related to depreciation.
(3) Improvements include all costs which increase the net realizable value of
the property except carrying costs.
(4) Carrying costs consists primarily of legal fees, real estate taxes and
interest.
(5) This amount includes furniture, equipment and other fixed assets that are
included in Land, buildings and other on the Consolidated Balance Sheet.
(6) Includes a parcel of land encumbered by a $5,000,000 short term loan (See
Note 4 to the Consolidated Financial Statements).
34
HEARTLAND PARTNERS, L.P.
ATTACHMENT A TO SCHEDULE III
RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING
OF YEAR WITH TOTAL AT END OF YEAR
DECEMBER 31, 2001
(amounts in thousands)
2001
----------
Balance at January 1 $ 2,683
----------
Additions during year:
Other acquisitions 19
----------
Total additions 19
----------
Deductions during year:
Cost of real estate sold --
----------
Total deductions --
----------
Balance at December 31 $ 2,702
==========
Reconciliation of Real Estate Accumulated Depreciation
At Beginning of Year with Total at End of Year
(amounts in thousands)
2001
----------
Balance at January 1 $ 137
----------
Additions during year:
Charged to expense 319
Write off Kinzie Station
fixed assets 688
----------
Total additions 1,007
----------
Deductions during year:
Cost of real estate sold --
----------
Total deductions --
----------
Balance at December 31 1,144
==========
35
REPORT OF INDEPENDENT AUDITORS
To the Partners and Unitholders of Heartland Partners, L.P.
We have audited the accompanying consolidated balance sheets of Heartland
Partners, L.P. (the "Partnership") as of December 31, 2000 and 1999 and the
related consolidated statements of operations, partners' capital and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Heartland Partners, L.P. at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
March 18, 2001, except as to the second
paragraph of Note 11, as to which the date
is March 28, 2001.
This report has been reproduced for the purpose of the inclusion in the 2001
Form 10-K filing and has not been reissued by Ernst & Young.
36
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(amounts in thousands)
ASSETS:
Cash ..................................................... $ 150 $ 230
Restricted cash .......................................... 2,699 4,182
Accounts receivable (net of allowance of $416 in 2000
and 1999) .............................................. 582 373
Due from affiliate ....................................... 4,581 1,093
Prepaid and other assets ................................. 279 217
Investment in joint venture .............................. 377 410
--------- ---------
Total ............................................... 8,668 6,505
--------- ---------
Property:
Land, buildings and other ................................ 2,683 4,049
Less accumulated depreciation .......................... 137 1,065
--------- ---------
Net land, buildings and other ............................ 2,546 2,984
Land held for sale ....................................... 740 766
Housing inventories ...................................... 20,354 34,263
Land held for development ................................ 5,497 5,287
Capitalized predevelopment costs ......................... 9,779 7,451
--------- ---------
Net Properties ......................................... 38,916 50,751
--------- ---------
Total Assets ............................................. $ 47,584 $ 57,256
========= =========
LIABILITIES:
Notes payable ............................................ $ 14,675 $ 32,770
Accounts payable and accrued expenses .................... 7,267 10,330
Accrued real estate taxes ................................ 776 893
Allowance for claims and liabilities ..................... 4,478 2,804
Unearned rents and deferred income ....................... 1,632 1,733
Other liabilities ........................................ 3,260 3,074
--------- ---------
Total Liabilities ................................... $ 32,088 $ 51,604
--------- ---------
PARTNERS' CAPITAL:
General Partner .......................................... 27 --
Class A Limited Partners - 2,142 units authorized,
issued and outstanding ................................. 5,906 --
Class B Limited Partner .................................. 9,563 5,652
--------- ---------
Total Partners' Capital ............................. 15,496 5,652
--------- ---------
Total Liabilities and Partners' Capital .................. $ 47,584 $ 57,256
========= =========
See accompanying notes to Consolidated Financial Statements
37
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2000, 1999, and 1998
(amounts in thousands)
Unrealized
Holding
Gain
Class A Class B (Loss) on
General Limited Limited Marketable
Partner Partners Partner Securities Total
---------- ---------- ---------- ---------- ----------
Balances at January 1, 1998 ........... $ 28 $ 5,902 $ 9,563 $ (2) $ 15,491
Net loss .............................. (28) (5,902) (154) -- (6,084)
Marketable securities fair value
adjustment .......................... -- -- -- 2 2
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 ......... $ -- $ -- $ 9,409 $ -- $ 9,409
Net Loss .............................. -- -- (3,757) -- (3,757)
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1999 ......... $ -- $ -- $ 5,652 $ -- $ 5,652
Net income ............................ 27 5,906 3,911 -- 9,844
---------- ---------- ---------- ---------- ----------
Balances at December 31, 2000 ......... $ 27 $ 5,906 $ 9,563 $ -- $ 15,496
========== ========== ========== ========== ==========
See accompanying notes to Consolidated Financial Statements
38
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
(amounts in thousands, except for per unit data)
2000 1999 1998
--------- --------- --------
Income:
Property sales ................................. $ 61,009 $ 11,548 $ 6,231
Less: Cost of property sales ................... 45,612 9,772 4,405
--------- --------- --------
Gross profit on property sales ................... 15,397 1,776 1,826
--------- --------- --------
Operating Expenses:
Selling expenses ............................... 2,700 3,570 3,845
General and administrative expenses ............ 2,359 2,659 3,119
Real estate taxes .............................. 67 179 399
Environmental expense .......................... 1,835 378 1,461
--------- --------- --------
Total operating expenses ......................... 6,961 6,786 8,824
--------- --------- --------
Operating income (loss) .......................... 8,436 (5,010) (6,998)
Other Income and (Expense):
Portfolio income ............................... 390 123 63
Rental income .................................. 743 772 886
Other income ................................... 970 917 514
Depreciation ................................... (270) (134) (124)
Management fee ................................. (425) (425) (425)
--------- --------- --------
Total other income and (expense) ................. 1,408 1,253 914
--------- --------- --------
Net income (loss) ................................ $ 9,844 $ (3,757) $ (6,084)
========= ========= ========
Net income (loss) allocated to General Partner ... $ 27 $ -- $ (28)
========= ========= ========
Net income (loss) allocated to Class B limited
partner ....................................... $ 3,911 $ (3,757) $ (154)
========= ========= ========
Net income (loss) allocated to Class A limited
partners ...................................... $ 5,906 $ -- $ 5,902)
========= ========= ========
Net income (loss) per Class A limited partnership
unit .......................................... $ 2.76 $ -- $ (2.76)
========= ========= ========
Average number of Class A limited partnership
units outstanding ............................. $ 2,142 $ 2,142 $ 2,142
========= ========= ========
See accompanying notes to Consolidated Financial Statements
39
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999, and 1998
(amounts in thousands)
2000 1999 1998
--------- ---------- --------
Cash Flow from Operating Activities:
Net income (loss) ............................................. $ 9,844 $ (3,757) $ (6,084)
Adjustments reconciling net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense .............................................. -- -- 211
Depreciation .................................................. 270 134 124
Net change in allowance for claims and liabilities ............ 1,674 42 593
Net change in assets and liabilities:
(Increase) decrease in accounts receivable .................. (209) (20) 129
Increase in due from affiliate .............................. (3,488) (651) (442)
Decrease (increase) in housing inventories .................. 13,909 (20,285) (4,852)
Decrease in land held for sale .............................. 26 164 233
(Increase) decrease in land held for development ............ (210) 203 790
Increase in capitalized predevelopment costs ................ (2,328) (2,429) (818)
(Decrease) increase in accounts payable and accrued
liabilities ............................................... (3,063) 7,694 1,895
Decrease in management fee due affiliate .................... -- (283) (142)
Net change in other assets and liabilities .................. (61) 980 1,656
--------- ---------- --------
Net cash provided by (used in) operating activities ........... 16,364 (18,208) (6,707)
--------- ---------- --------
Cash Flow from Investing Activities:
Sales of (additions to) land, buildings and other,net ......... 168 (486) (333)
Net sales and maturities (purchases) of marketable
securities .................................................. -- 149 (6)
--------- ---------- --------
Net cash provided by (used in) investing activities ........... 168 ( 337) (339)
--------- ---------- --------
Cash Flow from Financing Activities:
(Payoffs) advances on notes payable, net ...................... (18,095) 19,278 9,742
Decrease (increase) in restricted cash ........................ 1,483 (1,618) (1,840)
Distribution paid to unitholders .............................. -- -- (1,631)
--------- ---------- --------
Net cash (used in) provided by financing activities . (16,612) 17,660 6,271
--------- ---------- --------
Net decrease in cash .......................................... (80) (885) (775)
Cash at beginning of year ..................................... 230 1,115 1,890
--------- ---------- --------
Cash at end of year ........................................... $ 150 $ 230 $ 1,115
========= ========== ========
Supplemental Disclosure of Non Cash Operating
Activities:
Net land held for development and capitalized
predevelopment costs transferred to housing inventories ....... $ -- $ -- $ 5,034
========= ========== ========
See accompanying notes to Consolidated Financial Statements
40
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
1. Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, 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 and CMC, formed CMC Heartland Partners I, Limited Partnership
("CMCI"), 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 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"). 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 in Chicago, IL. CMC IV 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 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, CMCI, CMCII, CMCIII, CMCIV, CMCV, CMCVI,
CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net
income (loss) will be allocated 1% to the General Partner, 98.5% to the Class
A limited partners (the "Unitholders") and 0.5% to the Class B limited
partner. In addition, the partnership agreement provides that certain items
of deduction, loss, income and gain may be specially allocated to the Class A
Unitholders or to the holder of the Class B Interest or the General Partner.
Also, 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.
The General Partner has the discretion to cause Heartland to make
distributions of Heartland's available cash in an amount equal to 98.5% to
the Unitholders, 0.5% to the holder of the Class B Interest and 1% to the
General Partner. There can be no assurance as to the amount or timing of
Heartland's cash distributions or whether the General Partner will cause
Heartland to make a cash distribution if cash is available. On
November 24, 1997, Heartland declared a cash distribution in the amount of
$1.6 million to Unitholders and Partners of record on December 29, 1997, that
was paid on January 7, 1998. On December 4, 1997, Heartland's partnership
agreement was amended to allow the General Partner in its discretion to
establish a record date for distributions on the last day of any calendar
month.
41
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
At December 31, 2000, land held for sale consisted of approximately 14,249
acres of scattered land parcels. States in which large land holdings are
located are Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota,
Washington, and Wisconsin. The remaining acreage is located in Idaho,
Indiana, Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprised of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. Certain air rights and
fiber optics development rights are also owned.
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees.
Other properties are improved with Heartland-owned buildings that are of
little or no value.
Improved properties of value to Heartland were a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin and a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records. These improved properties and land were sold and closed
during the year 2000.
At December 31, 2000, property available for development, including housing
inventories, consisted of 14 sites comprising approximately 776 acres. The
book value of this land is approximately $10.7 million or an average of
$13,800 per acre. Heartland reviews these properties to determine whether to
hold, develop, either solely or with a third party joint venturer, or sell
them. Heartland's objective for these properties is to maximize unitholder
value over a period of years.
Heartland has a 1.23 acre site in Chicago, Illinois known as Kinzie Station
Phase I under development. Phase I consists of 163 units in a Tower, 24
units in a Plaza Building and 5 Townhomes. Kinzie Station Phase II is a
2.65 acre site adjacent to Phase I on which the Company intends to construct
242 units in a Tower and 8 Townhomes. The Company is also selling and
building single family homes in the Longleaf Country Club in Southern Pines,
North Carolina. Heartland also owns homes and lots in Osprey Cove located in
St. Marys, Georgia as well as undeveloped acreage in the Bloomfield community
in Rosemount, Minnesota. These sites, except Bloomfield, are classified as
housing inventories. Heartland decided to cease building operations in
Osprey Cove and Bloomfield in 1999. The homes, lot inventories, and
undeveloped acreage will be sold in the ordinary course of business.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCI,
1% general partnership interest owned by HDC and 99% owned by CMC; CMCII,
CMCIII, CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC, each 100% owned by
CMC. All intercompany transactions have been eliminated in consolidation.
42
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Revenue Recognition
Revenues from housing and land sales are recognized in the period in 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.
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.
Properties
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. Depreciation is provided for financial statement purposes over the
estimated useful life of the respective assets ranging from 7 years for
office equipment and fixtures to 40 years for building and improvements
primarily using the straight-line method.
Properties held for development, including capitalized predevelopment costs,
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the particular development property may
not be recoverable. If these events or changes in circumstances are present,
the Company estimates the sum of the expected future cash flows
(undiscounted) to result from the development operations and eventual
disposition of the particular development property, and if less than the
carrying amount of the development property, the Company will recognize an
impairment loss based on discounted cash flows. Upon recognition of any
impairment loss the Company would measure that loss based on the amount by
which the carrying amount of the property exceeds the estimated fair value of
the property.
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.
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. Land,
land development, and indirect costs are allocated to cost of sales on the
basis of units sold in relation to the total anticipated units in the related
development project; such allocation approximates the relative sales value
method. Direct construction costs are allocated to the specific units sold
for purposes of determining costs of sales. Selling and marketing costs, not
including those costs incurred related to furnishing and developing the
models and sales office, are expensed in the period incurred. Costs incurred
in the construction of the model units and related furnishings are
capitalized at cost. The Company intends to offer these units for sale at the
completion of a project and, accordingly, no amortization of direct
construction costs is provided. Housing inventories are reviewed for
impairment whenever events or circumstances indicate the fair value less the
cost to dispose of the inventories, is less than the capitalized costs. If
these events or changes in circumstances are present, the Company then writes
down the inventory to its fair value.
43
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Housing inventories consisted of the following at December 31, 2000, and 1999:
2000 1999
---------- ----------
Land under development.................. $ 5,240 $ 4,690
Direct construction costs............... 10,892 19,381
Capitalized project costs............... 4,222 10,192
---------- ----------
$ 20,354 $ 34,263
========== ==========
Fair Value of Financial Instruments
For cash and cash equivalents, the carrying amounts approximate fair value.
For variable rate debt that reprices frequently, fair values approximate
carrying values. For all remaining financial instruments, carrying value
approximates fair value due to the relatively short maturity of these
instruments.
Income Taxes
A publicly-traded partnership generally is not liable for Federal income
taxes, provided that for each taxable year at least 90% of its gross income
consists of certain passive types of income. In such case, each partner
includes its proportionate share of partnership income or loss in its own tax
return. Accordingly, no provision for income taxes is reflected in
Heartland's financial statements.
Heartland's assets are carried at historical cost. At December 31, 2000, the
tax basis of the properties and improvements for Federal income tax purposes
was greater than their carrying value for financial reporting purposes.
Segment Reporting
The Company has two primary reportable business segments, which consist of
land sales and property development (See Note 10 to the Consolidated
Financial Statements).
Reclassification
Certain reclassifications have been made to the previously reported 1999 and
1998 statements in order to provide comparability with the 2000 statements.
These reclassifications have not changed the 1999 and 1998 results.
3. Restricted Cash
On May 14, 1997, CMC established a line of credit agreement in the amount of
$5 million with LaSalle National Bank ("LNB") pursuant to which CMC pledged
cash in the amount of $500,000 as an interest reserve. During 1998, LNB
increased the line of credit to $8.5 million and extended the maturity date
of the loan to April 30, 1999, pursuant to which CMC pledged additional cash
in the amount of $350,000 as an interest reserve. In April, 1999, LNB
increased the credit facility to $11,500,000 and extended the maturity date
of the loan to April 29, 2000. At that time, CMC pledged an additional
$300,000 as an interest reserve. On November 30, 1998, CMCI executed an
agreement for a $2,500,000 loan with Bank One relating to the Bloomfield
project pursuant to which CMCI has pledged $500,000 in cash as an interest
reserve. On October 4, 2000, the developed acreage in the Bloomfield project
was sold and this $500,000 was released. Restricted cash also includes
purchasers' earnest money escrow deposits of $1,549,000 and $2,522,000 at
December 31, 2000, and 1999, respectively and a $10,000 construction
improvement bond held by the Osprey Cove Homeowners Association that was
released in the year 2000. The total restricted cash at December 31, 2000,
and 1999, was $2,699,000 and $4,182,000, respectively.
44
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
4. Notes Payable
On May 14, 1997, CMC signed a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB"), pursuant to which CMC granted LNB
a first lien on certain parcels of land in Chicago, IL which had a carrying
value of $2,706,000 and $6,065,000 as of December 31, 2000, and 1999,
respectively. Also, pursuant to the line of credit agreement, CMC pledged
cash in the amount of $500,000 as an interest reserve. The agreement
terminated on May 1, 1998, but was extended through June 30, 1998. On
June 30, 1998, the loan was amended extending the maturity date to
April 30, 1999, and increasing the line to $8.5 million. The Company has
subsequently pledged additional cash in the amount of $350,000 bringing the
total interest reserve to $850,000. On October 23, 1998, CMC amended the
loan temporarily increasing the line to $9,500,000 and reducing net worth
requirements to $8,500,000. The $1,000,000 temporary increase was paid back
in December, 1998. In April, 1999, the Company extended the maturity of the
loan to April 29, 2000, increased the amount of the credit facility from
$8,500,000 to $11,500,000, reduced the net worth requirement form $8,500,000
to $5,500,000 and granted LNB a first lien on a property in Milwaukee,
Wisconsin which had a carrying value of $4,108,000 and $3,035,000 at
December 31, 2000, and 1999, respectively. The Company has subsequently
pledged additional cash in the amount of $300,000 bringing the total interest
reserve to $1,150,000. In November, 1999, the Company increased the amount of
the credit facility to $13,300,000 and pledged as additional collateral its
interest in the Goose Island Joint Venture which had a carrying value of
$377,000 and $410,000 as of December 31, 2000, and 1999, respectively. On
March 20, 2000, the Company executed documents with LNB that increased the
credit facility to $15,300,000 and extended the maturity date of the loan to
December 31, 2000. Heartland also granted LNB a first lien on 177 acres,
located in Fife, Washington which had a carrying value of $4,514,000 and
$3,891,000 at December 31, 2000, and 1999, respectively. On June 29, 2000,
Heartland closed on a parcel of land it owned at Kinzie Station in Chicago,
Illinois at a sales price of $2,457,000. At that time, $1,800,000 of the
sales proceeds was used to permanently reduce the line of credit amount from
$15.3 million to $13.5 million. On August 3, 2000, the Company closed on the
last parcel of land it owned at Galewood in Chicago, Illinois at a sales
price of $5,500,000. At that time, $3,500,000 of the sales proceeds was used
to permanently reduce the line of credit amount from $13.5 million to $10
million. On October 15, 2000, LNB increased the line of credit agreement
amount from $10,000,000 to $11,000,000. On December 31, 2000, the Company
executed an amendment to the LNB line of credit that extended the maturity
date to March 31, 2001 and required the permanent reduction in the principal
amount of the line to $9,600,000 on February 28, 2001 and to $8,100,000 on
March 28, 2001. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.5% (11.0% at December 31, 2000). At
December 31, 2000, and 1999, $9,000,000 and $11,800,000, 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.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with Bank of America ("B of A"), formerly NationsBank,
N.A., to acquire lots and construct homes in the Osprey Cove subdivision, St.
Marys, Georgia, pursuant to which CMC granted a first mortgage to B of A on
specific lots in said subdivision with a carrying value of $1,803,000 at
December 31, 1999. On December 30, 1999, Heartland entered into a
modification agreement to its December 30, 1996, revolving line of credit
agreement in the amount of $3 million for Osprey Cove to extend the maturity
date to June 30, 2000. At December 31, 1999, B of A had advanced $1,514,000
against the revolving line of credit. During the year 2000, the Company paid
off the line of credit in full. All lots securing the line of credit were
released. The Company has one loan outstanding with B of A in the amount of
$209,000. The carrying value of the home is $257,000 at December 31, 2000.
This loan bears interest at the prime rate of B of A plus 1% (10.5% at
December 31, 2000). At December 31, 2000, $179,000 had been advanced by B of
A against the loan. This loan matured September 29, 2000. The Company
refinanced this loan on January 5, 2001 with the First National Bank of St.
Marys ("FNB") in Georgia. The amount advanced by FNB was $235,000. The loan
matures January 5, 2002 and bears interest at the three month London
Interbank Offering Rate ("LIBOR") plus 3.85%.
45
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
In the fourth quarter of 1999, FNB made two loans totaling $588,374 to build
two inventory homes in Osprey Cove. The carrying value of these two homes was
$557,000 at December 31, 1999. FNB had advance $463,000 on these two loans
at December 31, 1999. The loan terms were for one year and bear interest at
the LIBOR rate plus 3.35% (9.8% at December 31, 2000). One home sold and
closed in May, 2000. At December 31, 2000, FNB had advanced $172,000 to the
Company on the one remaining loan. The carrying value of this home was
$211,000 at December 31, 2000. This loan was renewed on December 12, 2000
and will be due on October 12, 2001.
In December, 1998, the Company signed a commitment letter for a $3,000,000 line
of credit with B of A to finance the construction of homes in the Longleaf
community. B of A provided individual loans on each home as construction
commenced. The developer subordinated its lot to B of A's construction loan. The
term of each loan was one year and interest accrued at the B of A prime rate
plus 1%. On December 9, 1999, Heartland executed an agreement for a $5,000,000
revolving credit line for the construction of homes in Longleaf with Bank One of
Illinois ("Bank One"). The first draw from Bank One on December 9, 1999 was used
to purchase 22 lots (of which 3 closed in 1999 and 13 closed in 2000) from the
developer for $690,500 and repaid B of A all outstanding principal and accrued
interest. As new homes to be built were added to the revolving credit line, the
developer would subordinate its lot to Bank One's revolving credit line. On
December 12, 2000, Heartland executed a purchase agreement whereby it purchased
the balance of lots owned by the developer, 207 lots, by the assumption of
certain liabilities owed by the developer to other unrelated parties and the
payment of $250,000. The purchase price of $2,209,000, which includes the
$250,000 paid on December 12, 2000, for these 207 lots was determined by
calculating the net present value of the payments to be paid over a ten year
period using a discount rate of 10%. Also, per the purchase agreement, the
Company is obligated to pay the developer 49% of the Net Cash Flow, as defined,
each year for the period January 1, 2001 to December 31, 2005. As part of the
December 8, 2000 loan amendment described below, the Company borrowed $250,000
on December 12, 2000 from Bank One to purchase these lots, which remains
outstanding at December 31, 2000. This note is due April 12, 2001 and bears
interest at the prime rate (9.5% at December 31, 2000). The revolving credit
line is for a term of 1 year and bears interest at the prime rate (9.5% at
December 31, 2000). On December 8, 2000, Heartland executed an amendment to the
Bank One loan that extended the maturity date of the line of credit to April 12,
2001 and reduced the maximum revolving credit line from $5,000,000 to
$3,000,000. At December 31, 2000, and 1999, $1,383,000 and $1,441,000,
respectively, had been advanced on the line of credit by Bank One to the
Company. The carrying value of the collateral for both these loans at December
31, 2000, and 1999, is $3,577,000 and $1,815,000, respectively.
On November 30, 1998, Heartland executed an agreement for a $2,500,000 loan
from Bank One relating to the Bloomfield project. As a condition of the loan,
$500,000 was placed in an interest reserve. The loan has a two year term and
bears interest at the prime rate (9.5% at December 31, 2000). On December 1,
2000, this loan was extended and will mature April 1, 2001. Also, the
principal balance was reduced to $450,000. The outstanding loan balance is
$450,000 and $2,470,000 at December 31, 2000, and 1999, respectively. In
addition, Bank One was providing a $1,750,000 development loan, letters of
credit for $204,500 to the City of Rosemount and a $4,000,000 revolving
credit line for the construction of homes; these credit facilities were
executed on February 1, 1999. At December 31, 1999, $506,000 had been
advanced against the development loan and $1,175,000 against the revolving
line of credit. The loans bear interest at the prime rate (9.5% at December
31, 2000). The loans were to mature on January 31, 2001 and December 31,
2000, respectively. The Company closed on the sale of all of its developed
acreage in Bloomfield on October 4, 2000 and paid off the development loan
and line of credit at that time. The total outstanding Bank One debt was
reduced to $450,000. Also, the Bank One $500,000 interest reserve and all
letters of credit were released. The carrying value of the collateral for
these loans is $3,000,000 and $4,302,000 at December 31, 2000, and 1999,
respectively.
46
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
On January 6, 1999, the Kinzie Station 2.5 year loan agreement in the amount
of $29,812,000 was signed with Corus Bank N.A ("CB"). The loan bears
interest at the prime rate plus 1% (10.5% at December 31, 2000). This loan
is collateralized by the real estate contained in the project. In
conjunction with the loan, a Construction Contract with the guaranteed
maximum price of $24,710,000 was entered into with a general contractor. At
December 31, 2000, the outstanding loan balance of the CB loan was
$3,123,000. At December 31, 1999, $13,287,000 had been advanced by CB to the
Company.
On October 20, 1999, the Company executed loan documents with Bank One for a
loan of $5,250,000 to construct the Kinzie Station Plaza building. The loan
is for a term of 3 years and bears interest at the prime rate (9.5% at
December 31, 2000). The loan is collateralized by real estate contained in
the project. On September 7, 1999, a construction contract with the
guaranteed maximum price of $4,864,022 was entered into with a general
contractor. At December 31, 2000, the outstanding loan balance of the Bank
One loan was $118,000. At December 31, 1999, $114,000 had been advanced by
Bank One to the Company.
During the years ended December 31, 2000, 1999, and 1998, the Company
incurred and paid interest on loans in the amount of $3,362,000, $2,062,000
and $802,000, respectively, of which $3,354,000 $2,062,000, and $802,000 was
capitalized.
5. Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated
with its properties on a regular basis. An allowance is provided with regard
to potential environmental liabilities, including remediation, legal and
consulting fees, 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 evaluated 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 an allowance in the minimum amount of the range is
established. Environmental costs which are incurred in connection with
Heartland's development activities are expensed or capitalized as
appropriate. (See Note 8.)
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs
for that site made by independent consultants. These evaluations are
estimates based on professional experience but necessarily rely on certain
significant assumptions including the specific remediation standards and
technologies which may be required by an environmental agency as well as the
availability and cost of subcontractors and disposal alternatives.
There is not sufficient information to reasonably estimate all the
environmental liabilities of which management is aware. Accordingly,
management is unable to determine whether environmental liabilities which
management is unable to reasonably estimate will or will not have a material
effect on Heartland's results of operations or financial condition.
47
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
6. Related Party Transactions
CMC has a management agreement with HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On October 19,
2000, this management agreement was extended from June 26, 2000 to June 27,
2005. In February, 1998, CMC paid HTI the $425,000 1997 deferred management
fee. $142,000 of the 1998 management fee was paid in 1999. In 1999, the balance
of the 1998 fee of $283,000 was paid as well as 100% of the 1999 fee. The
management fee for the year 2000 of $425,000 was credited against amounts
owed CMC.
Under a management services agreement, HTI reimburses Heartland for
reasonable and necessary costs and expenses for services totaling $410,000
for the year ended December 31, 2000, $368,000 for the year ended December
31, 1999, and $300,000 for the year ended December 31, 1998. Heartland also
makes cash advances to HTI. HTI owes CMC $4,581,000 as of December 31, 2000
and $1,093,000 as of December 31, 1999 related to these expenses and cash
advances. Included in this amount owed CMC is $294,000 and $56,000 of
interest accrued on outstanding amounts owed during the years 2000 and 1999,
respectively. Interest was computed using the prime rate plus 2 1/4% (11.75%
at December 29, 2000). As collateral for the amount owed CMC, 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 December 29, 2000, HTI executed a line of credit
promissory note that is due on demand, payable to CMC in the amount of
$6,000,000. At that time, HTI granted CMC a Series C Warrant that entitles
CMC to purchase 320,000 shares at an exercise price of $1.05. The warrant is
exercisable on or before February 16, 2006. HTI has borrowed $4,581,000
against this line of credit at December 31, 2000. This $6,000,000 note bears
interest at 13% on December 31, 2000.
7. Leases
Heartland is a lessor under numerous property lease arrangements with varying
lease terms. The majority of the leases are cancelable by either party upon
thirty to sixty days notice and 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. Heartland has several major leases on buildings
and land in Chicago, Illinois and Milwaukee, Wisconsin (this property was
sold and closed December 30, 2000) which account for over half of Heartland's
annual rental income. The land, buildings and other improvements had a net
carrying value of $2,546,000 and $2,984,000 at December 31, 2000 and 1999,
respectively. These amounts are net of depreciation and include corporate
furniture and fixtures as well as other buildings and improvements.
Heartland had one non-cancellable operating lease for $114,401 per year. CMC
sold and closed this property in the year 2000.
Heartland leases its offices at certain development sites and certain
equipment under various operating leases. Future minimum lease commitments
under non-cancellable operating leases are as follows:
2001.................................................... $120,000
2002.................................................... 69,000
2003.................................................... 38,000
2004.................................................... 5,000
--------
Total................................................. $232,000
========
Rent expense for the years ended December 31, 2000, 1999, and 1998 was
$159,000, $213,000, and $294,000, respectively.
48
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
8. Legal Proceedings and Contingencies
At December 31, 2000, and 1999, Heartland's allowance for claims and
liabilities was approximately $4.5 million and $2.8 million, respectively.
During the years ended December 31, 2000, 1999, and 1998, $1,835,000,
$378,000, and $1,461,000, respectively, was recorded as cost and expenses in
respect to environmental matters. Significant 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 quarterly from
January 1, 1999, or (b) to convey to the Port real property to be agreed upon
at a later date. At December 31, 2000, and 1999, 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.
Wheeler Pit, Janesville, Wisconsin
In November, 1995 the Company settled an environmental claim with respect to
the Wheeler Pit site near Janesville, Wisconsin. The settlement calls for the
Company to pay General Motors $800,000 at $200,000 annually for four years,
32% of the monitoring costs for twenty-five years beginning in 1997 and 32%
of governmental oversight costs; the oversight costs not to exceed $50,000.
Payments of $200,000 were made in 1995, 1996, 1997 and 1998. A payment of
$50,000 for past government oversight costs was made in October, 1998. At
December 31, 2000, and 1999, Heartland's allowance for claims and liabilities
for this site was $215,000 and $189,000, respectively.
49
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Rosemount, Minnesota
Two suits had been filed with regard to the Company's Bloomfield project in
Rosemount, Minnesota. On April 5, 2000, Richard Knutson, Inc. filed suit
against CMC Heartland Partners I, Limited Partnership in Dakota County
District Court to enforce a mechanic's lien of $401,000. On June 30, 2000,
the City of Rosemount filed suit against CMC Heartland Partners I, Limited
Partnership in Dakota County District Court alleging that the City has
incurred $110,000 in unreimbursed engineering fees for which the Company has
the obligation to pay. These two suits were resolved by payment of the
claims with the sale of the Bloomfield developed acreage on October 4, 2000.
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
access. 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
were 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 be material.
50
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
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. At
December 31, 2000, and 1999, Heartland's aggregate allowance for claims and
liabilities for these sites were $20,000 and $14,000, respectively.
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 July, 1999, suit was filed against the Company in Minnesota District Court
by a buyer under an expired real estate sale contract originally entered into
in 1995, and extended to June 20, 1999. The plaintiff demanded specific
performance by conveyance to it of the vacant 5.95 acre parcel in
Minneapolis, Minnesota originally to be sold to the buyer for $562,000
pursuant to the real estate contract. By Findings of Fact and Conclusions of
Law, dated April 13, 2000, the court ruled in favor of the Company's motion
for summary judgement. Environmental sampling in 1995 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. At December 31, 2000
and 1999, Heartland's aggregate allowance for claims and liabilities for the
5.95 acre parcel in Minneapolis, Minnesota sites were $2,270,000 and
$653,000, respectively.
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, these matters
should not be material to the Company's results of operations or financial
condition.
51
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
9. Compensation and Benefits
Heartland sponsors a Group Savings Plan, which is a salary reduction plan
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of
1986. All full-time permanent employees of Heartland are eligible to
participate in the plan. A participating employee can authorize contributions
to the plan in the form of salary reductions of up to the maximum allowed by
the Internal Revenue Code in any plan year. In 2000 and 1999 Heartland made
matching contributions of 25% of each participant's contribution to the
plan. Participating 1998 employees were fully vested with respect to salary
reduction and Heartland's contributions. For all future participants, they
are fully vested with respect to salary reduction immediately, but the
matching contribution vests at 20% per year. Benefits are normally
distributed upon retirement (on or after age 65), death or termination of
employment, but may be distributed prior to termination of employment upon
showing of financial hardship. Heartland contributed to the plan
approximately $40,000 in 2000, $58,000 in 1999, and $80,000 in 1998 on behalf
of all employees.
The President and Chief Executive Officer of CMC 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, $73,000 had been earned
under this plan. No payments were made during the year 2000. On October 18,
2000, the President and Chief Executive Officer of CMC borrowed $375,000 from
CMC, which remains outstanding at December 31, 2000 and is included as part
of accounts receivable at December 31, 2000. The note is due October 17,
2005 and interest is payable quarterly (first interest payment was made
December 31, 2000) 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 CMC.
Four officers of CMC have a bonus plan. 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 CMC. 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, $533,000 had been earned under the plans. No payments to
the officers were made during the year 2000.
52
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
10. Reportable Segments
The following tables set forth the reconciliation of net income and total
assets for Heartland's reportable segments for the years ended December 31,
2000, 1999 and 1998 (See Note 2 to the Consolidated Financial Statements).
Property
2000 (amounts in thousands) Land Sales(1) Development(2) Corporate (3) Consolidated
--------------------------- -------------- -------------- -------------- --------------
Revenues:
Property sales ..................$ 3,188 $ 57,821 $ 0 $ 61,009
Less: cost of property sales..... 1,135 44,477 0 45,612
-------------- -------------- -------------- --------------
Gross profit on property sales 2,053 13,344 0 15,397
-------------- -------------- -------------- --------------
Operating Expenses:
Selling expenses ................ 788 1,912 0 2,700
General and administrative
expenses...................... 0 125 2,234 2,359
Real estate taxes ............... 0 67 0 67
Environmental Expense ........... 1,835 0 0 1,835
-------------- -------------- -------------- --------------
Total Operating Expenses ..... 2,623 2,104 2,234 6,961
-------------- -------------- -------------- --------------
Operating Income (loss) ...... (570) 11,240 (2,234) 8,436
Other Income and (Expenses):
Portfolio income ................ 0 0 390 390
Rental income ................... 743 0 0 743
Other income .................... 0 970 0 970
Depreciation .................... 0 (162) (108) (270)
Management fee .................. 0 0 (425) (425)
-------------- -------------- -------------- --------------
Total Other Income and
(Expense) .................... 743 808 (143) 1,408
-------------- -------------- -------------- --------------
Net Income (Loss) ...............$ 173 $ 12,048 $ (2,377) $ 9,844
============== ============== ============== ==============
Properties, net of
accumulated depreciation......$ 740 $ 37,708 $ 468 $ 38,916
============== ============== ============== ==============
Total assets .................$ 1,322 $ 40,063 $ 6,199 $ 47,584
============== ============== ============== ==============
53
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Property
1999 (amounts in thousands) Land Sales(1) Development(2) Corporate (3) Consolidated
--------------------------- -------------- -------------- -------------- --------------
Revenues:
Property sales ................. $ 1,485 $ 10,063 $ 0 $ 11,548
Less: cost of property sales ... 261 9,511 0 9,772
-------------- -------------- -------------- --------------
Gross profit on property sales 1,224 552 0 1,776
-------------- -------------- -------------- --------------
Operating Expenses:
Selling expenses ............... 806 2,764 0 3,570
General and administrative
expenses ..................... 0 480 2,179 2,659
Real estate taxes .............. 164 15 0 179
Environmental Expense .......... 94 284 0 378
-------------- -------------- -------------- --------------
Total Operating Expenses .... 1,064 3,543 2,179 6,786
-------------- -------------- -------------- --------------
Operating Income (loss) ..... 160 (2,991) (2,179) (5,010)
Other Income and (Expenses):
Portfolio income ............... 0 0 123 123
Rental income .................. 772 0 0 772
Other income ................... 0 917 0 917
Depreciation ................... 0 (89) (45) (134)
Management fee ................. 0 0 (425) (425)
-------------- -------------- -------------- --------------
Total Other Income and
(Expense) ................... 772 828 (347) 1,253
-------------- -------------- -------------- --------------
Net Income (Loss) .............. $ 932 $ (2,163) $ (2,526) $ (3,757)
============== ============== ============== ==============
Properties, net of
accumulated depreciation .... $ 783 $ 49,171 $ 797 $ 50,751
============== ============== ============== ==============
Total assets ................ $ 1,156 $ 53,060 $ 3,040 $ 57,256
============== ============== ============== ==============
54
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Property
1999 (amounts in thousands) Land Sales(1) Development(2) Corporate (3) Consolidated
--------------------------- -------------- -------------- -------------- --------------
Revenues:
Property sales ..................$ 1,814 $ 4,417 $ 0 $ 6,231
Less: cost of property sales .... 215 4,190 0 4,405
-------------- -------------- -------------- --------------
Gross profit on property sales. 1,599 227 0 1,826
-------------- -------------- -------------- --------------
Operating Expenses:
Selling expenses ................ 969 2,876 0 3,845
General and administrative
expenses ...................... 0 327 2,792 3,119
Real estate taxes ............... 209 190 0 399
Environmental Expense ........... 248 25 1,188 1,461
-------------- -------------- -------------- --------------
Total Operating Expenses ..... 1,426 3,418 3,980 8,824
-------------- -------------- -------------- --------------
Operating Income (loss) ...... 173 (3,191) (3,980) (6,998)
Other Income and (Expenses):
Portfolio income ................ 0 0 63 63
Rental income ................... 886 0 0 886
Other income .................... 0 514 0 514
Depreciation .................... 0 (84) (40) (124)
Management fee .................. 0 0 (425) (425)
-------------- -------------- -------------- --------------
Total Other Income and
(Expense) .................... 886 430 (402) 914
-------------- -------------- -------------- --------------
Net Income (Loss) ...............$ 1,059 $ (2,761) $ (4,382) $ (6,084)
============== ============== ============== ==============
(1)The Land Sales business segment consists of approximately 14,249 acres
of land located throughout 12 states for sale as of December 31, 2000, and
the related rentals, sales and marketing and general and administrative
expenses.
(2)The Property Development business segment consists of approximately 776
acres representing 14 sites that Heartland is in the process of developing
or homebuilding communities in which the Company 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 consist of portfolio income from investments,
salaries and general and administrative expenses for the employees and
occupied commercial office space in Kinzie Station Phase I located in
Chicago, Illinois.
55
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
11. Subsequent Events
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 and changed the maturity date of the loan to February
23, 2002. Bank One advanced the $3,000,000 on February 28, 2001.
$1,400,000 of these funds were used to permanently reduce the LNB line of
credit from $11,000,000 to $9,600,000.
On March 28, 2001, the Company closed on the 113 acres it owned in
Rosemount, Minnesota. At that time, the final principal and interest
payment on the $450,000 note to Bank One was made.
56
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 2000, 1999 AND 1998
(amounts in thousands)
Additions
Balance at charged Balance
Beginning to at end
Description of year costs and Payments of year
expenses
---------- --------- -------- ---------
Year Ended December 31, 2000:
Allowance for claims and liabilities $ 2,804 $ 1,835 $ (161) $ 4,478
========== ========= ======== =========
Year Ended December 31, 1999:
Allowance for claims and liabilities $ 2,762 $ 378 $ (336) $ 2,804
========== ========= ======== =========
Year Ended December 31, 1998:
Allowance for claims and liabilities $ 2,169 $ 1,461 $ (868) $ 2,762
========== ========= ======== =========
57
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(amounts in thousands)
Cost Capitalized Gross Amount at Which
Description Initial Cost to Subsequent Carried
Land, Buildings and Other Heartland to Acquisition (1) at Close of Period (1)
--------------------------- ----------------------------- --------------------------------------------
Building,
Buildings & Carrying Improvement and
Land Improvements Improvements(3) Costs(4) Land Carrying Costs Total
------------ ------------ --------------- ------------ ------------ -------------- ------------
Chicago, IL ....... (6) $ 661 $ -- $ 142 $ 269 $ 661 $ 411 $ 1,072
Corporate and other (5) -- -- 1,611 -- -- 1,611 1,611
------------ ------------ --------------- ------------ ------------ -------------- ------------
TOTAL $ 661 $ -- $ 1,753 $ 269 $ 661 $ 2,022 $ 2,683
============ ============ =============== ============ ============ ============== ============
Life on
Which
Depreciation
Date of In Latest Income
Description Accumulated Completion of Date Statement
Land, Buildings and Other Depreciation Construction Acquired Is Computed
----------- ------------- ------------ ----------------
Chicago, IL (6) $ -- Various Various (2)
Corporate and other 137 Various Various (2)
-----------
TOTAL $ 137
===========
(1) See Attachment A to Schedule III for reconciliation of beginning of
period total to total at end of period.
(2) Reference is made to Note 2 to the Consolidated Financial Statements for
information related to depreciation.
(3) Improvements include all costs which increase the net realizable value
of the property except carrying costs.
(4) Carrying costs consists primarily of legal fees, real estate taxes and
interest.
(5) This amount includes furniture, equipment and other fixed assets that are
included in Land, buildings and other on the Consolidated Balance Sheet.
(6) Includes a parcel of land encumbered by a $9,000,000 short term loan (See
Note 4 to the Consolidated Financial Statements).
58
HEARTLAND PARTNERS, L.P.
ATTACHMENT A TO SCHEDULE III
RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING
OF YEAR WITH TOTAL AT END OF YEAR
(amounts in thousands)
2000 1999 1998
-------- -------- --------
Balance at January 1......................... $ 4,049 $ 3,563 $ 3,230
Additions during year:
Other acquisitions........................ 699 357 299
Improvements.............................. -- 129 104
-------- -------- --------
Total Additions....................... 699 486 333
-------- -------- --------
Deductions during year:
Cost of real estate sold................... 2,065 -- --
-------- -------- --------
Total deductions......................... 2,065 -- --
-------- -------- --------
Balance at December 31....................... $ 2,683 $ 4,049 $ 3,563
======== ======== ========
Reconciliation Of Real Estate Accumulated Depreciation
At Beginning of Year with Total At End of Year
(amounts in thousands)
2000 1999 1998
-------- -------- --------
Balance at January 1......................... $ 1,065 $ 931 $ 807
-------- -------- --------
Additions during year:
Charged to Expense......................... 270 134 124
-------- -------- --------
Total Additions.......................... 270 134 124
-------- -------- --------
Deductions during year:
Cost of real estate sold................... 1,198 --- --
-------- -------- --------
Total deductions......................... 1,198 --- --
-------- -------- --------
Balance at December 31....................... $ 137 $ 1,065 $ 931
======== ======== ========
59
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
At a meeting held on December 18, 2001, the Board of Directors of the
Heartland's General Partner, HTI, approved the engagement of
PricewaterhouseCoopers LLP as its independent auditors for the fiscal year
ending December 31, 2001 to replace the firm of Ernst & Young LLP, who were
dismissed as auditors of the Company effective December 18, 2001. The audit
committee of the Board of Directors approved the change in auditors on December
18, 2001.
The reports of Ernst & Young LLP on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to audit scope or accounting
principles.
In connection with the audits of the Company's financial statements for each of
the two fiscal years ended December 31, 2000, and 1999, there were no
disagreements with Ernst & Young LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young LLP would have
caused Ernst & Young LLP to make reference to the matter in their report. The
Company requested Ernst & Young LLP to furnish it a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements. A copy of that letter dated December 18, 2001 was filed as Exhibit
16 to the Form 8-K filed December 18, 2001 by Heartland.
The Company engaged PricewaterhouseCoopers LLP as its new independent
accountants as of December 18, 2001. During the two most recent fiscal years and
through December 17, 2001, the Company has not consulted with
PricewaterhouseCoopers LLP regarding either, (i) the application of accounting
principles to a specified transaction, either completed or propose; or the type
of audit opinion that might be rendered on the Company's financial statements,
and neither a written report nor oral advice was provided to the Company that
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement, as that term is defined in Item 304
(a) (1) (iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item 304 (a)
(1) (v) of Regulation S-K.
There have been no disagreements with the accountants.
60
PART III
Item 10. Directors and Executive Officers.
Heartland does not have a Board of Directors.
Set forth below is information for each director of HTI, each manager of HTI
Interests, LLC and each executive officer of HTI and Heartland. Directors of HTI
and managers of HTII are not compensated by Heartland.
Name and Age Principal Occupation, Business
Experience and Directorships
Lawrence S. Adelson, 52 Chairman of the Board and Chief Executive
Officer of HTI since February , 2002; Chief
Executive Officer of the Company since February,
2002; Manager of HTI Interests, LLC. since
February, 2002; Vice President and General
Counsel of the Company June, 1990 - February,
2002; Vice President and General Counsel of HTI
October, 1988 - February, 2002.
Richard P. Brandstatter, 46 Vice President - Finance, Treasurer and Secretary
of the Company since August, 1995;
Vice President - Finance, Treasurer
and Secretary of HTI since February, 1999.
Robert S. Davis, 87 Director of HTI (Class I) (since October, 1988);
Member of the compensation committee and
chairman of the audit committee of HTI; Manager
of HTI Interests, LLC.; self-employed consultant
(for more than the past five years); Senior Vice
President (1978-79), St. Paul Companies
(insurance), St. Paul, Minnesota.
Edwin Jacobson, 72 President and Chief Executive Officer of the
Company (since September, 1990) retired February
25, 2002; Manager of HTI Interests, LLC;
Director of HTI (Class III) (since November,
1985); Member of the investment committee of
HTI. Formerly President (from February
1994-February 1997) and Chief Executive Officer
(from February 1994-July 1997) of Avatar
Holdings, Inc. (Real estate, water and
wastewater utilities operations), Coral Gables,
Florida. Mr. Jacobson also served as a director
of JCC Holdings, Inc. during 2000 until JCC
Holdings, Inc. emerged from bankruptcy
proceedings.
John Torell III, 62 Director of HTI (Class III) (since September,
1997); Member of the audit committee of HTI;
Manager of HTI Interests, LLC; Chairman (since
1990), Torell Management, Inc. (financial
advisory), New York, New York; Director of
Wyeth, Inc.; Partner (since 2000), Core Capital
Group, (Merchant Banking).
Ezra K. Zilkha, 76 Director of HTI (Class II) (since October,
1988); Retired as Chairman of the Board of the
Company on February 25, 2002; Chairman of the
compensation committee of HTI; Manager of HTI
Interests, LLC; President and Director (since
1956), Zilkha & Sons, Inc. (private
investments), New York, New York. Mr. Zilkha
also serves as a director of the Newhall Land
and Farming Company.
61
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires certain officers
and directors of Heartland Technology, Inc., managers of HTI Interests, LLC and
any persons who own more than ten-percent of the Units to file forms reporting
their initial beneficial ownership of Units and subsequent changes in that
ownership with the Securities and Exchange Commission and the American Stock
Exchange. Officers and directors of Heartland Technology, Inc., managers of HTI
Interests, LLC and greater than ten-percent beneficial owners are also required
to furnish the Company with copies of all such Section 16(a) forms they file.
Based solely on a review of the copies of the forms furnished to the Company, or
written representations from certain reporting persons that no Forms 5 were
required, the Company believes that during the 2001 fiscal year all section
16(a) filing requirements were complied with.
Item 11. Executive Compensation
The following information is furnished as to all compensation awarded to, earned
by or paid to the Chief Executive Officer of CMC and the three other executive
officers with 2001 compensation greater than $100,000.
Name And Annual Compensation All Other
Principal Position Year Salary Bonus Compensation
-------------------------- ------ --------- ------------ ------------
Edwin Jacobson 2001 $ 350,000 $ 95,700 $ 1,700
President and Chief 2000 333,000 73,200 1,700
Executive Officer 1999 275,000 --- 2,500
Lawrence S. Adelson 2001 $ 87,200 $ 136,400 $ 1,300
Vice President and 2000 76,700 146,400 1,300
General Counsel 1999 82,500 --- 1,300
Richard P. Brandstatter 2001 $ 97,300 $ 136,400 $ 1,300
Vice President-Finance, 2000 127,100 146,400 1,300
Treasurer and Secretary 1999 90,000 --- 1,900
Susan Tjarksen Roussos 2001 $ 171,000 $ 136,400 $ 2,300
Vice President-Sales 2000 171,000 146,400 1,900
and Marketing 1999 190,400 --- 1,500
"All Other Compensation" is comprised of CMC's contribution on behalf of the
officers to a salary reduction plan qualified under Sections 401(a) and (k) of
the Internal Revenue Code of 1986. Columns for "Other Annual Compensation",
"Restricted Stock Awards", "Options/SARS" and "Payout-LTIP Payout" are omitted
since there was no compensation awarded to, earned by or paid to any of the
above named executives required to be reported in such columns in any fiscal
year covered by the table.
Under a deferred salary arrangement available to all employees, Mr. Adelson
deferred approximately $17,000 of his 1999 salary into 2000, $40,000 of his 2000
salary into 2001 and $27,000 of his 2001 salary into 2002.
A new employment agreement signed on December 20, 1999, then amended April 11,
2000 and amended again October 17, 2000 with Edwin Jacobson, as the President
and Chief Executive Officer of CMC, provided for a base salary of $350,000 from
August 16, 1995 through May 30, 2005, all or a portion of which could have been
deferred at his election.
62
He was also entitled to receive commencing January 1, 2000 and continuing
thereafter during the time he was 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 each of the twelve months ended December 31, 2000 and 2001,
$73,000 and $96,000, respectively, had been accrued as compensation expense
under this plan. As of December 31, 2001, $113,000 had been paid to the
President and Chief Executive Officer by the Company. The contract provides
incentive compensation equal to 10% of the value of all amounts distributed to
the Unitholders and the holder of the Class B Interest in excess of the "Capital
Amount" as defined. The Capital Amount is $26,789,044, subject to adjustment as
set forth in the contract (this amount is $22,870,234 at December 31, 2001).
During or after the term of employment, incentive payments will be made with
respect to distributions by Heartland during Heartland's term of existence, and
if distributions are made subsequent to such Officer's death, payments will be
made to his designee or estate. In the event of death, disability or termination
without cause of the President and Chief Executive Officer of CMC, he or his
estate has the right to have the incentive payments valued and paid. The
contract also provides that in the event of a "change of control of Heartland"
during or after the term of employment, the officer shall receive a lump sum
payment of $1,250,000. On October 18, 2000, the President and Chief Executive
Officer of CMC borrowed $375,000 from CMC, of which $330,000 remains outstanding
at December 31, 2001 and is included as part of accounts receivable at December
31, 2001. The note is due October 17, 2005 and interest is payable quarterly at
the rate of 11% per year. The October 17, 2000 amendment to the employment
agreement authorized 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. On February 25, 2002,
Edwin Jacobson retired as the President and Chief Executive Officer of the
Company.
Heartland does not maintain any pension, profit-sharing, or similar plan for its
employees. Insurance benefit programs are non-discriminatory. CMC sponsors a
Group Savings Plan, which is a salary reduction plan qualified under Sections
401(a) and (k) of the Internal Revenue Code of 1986. All full-time permanent
employees of CMC are eligible to participate in the plan. In 1999, 2000 and
2001, CMC made matching contributions of 25% of each participant's contribution
plan. Participating 1998 employees were fully vested with respect to salary
reduction and CMC's contributions. For all future participants, they are fully
vested with respect to salary reduction immediately, but the matching
contribution vests at 20% per year. Benefits are normally distributed upon
retirement (on or after age 65), death or termination of employment, but may be
distributed prior to termination of employment upon a showing of financial
hardship.
Four officers of CMC have a bonus plan. 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 CMC. 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 each of the twelve months ended December 31, 2000
and 2001, $533,000 and $440,000, respectively, had been accrued as compensation
expense under the plans. As of December 31, 2001, $267,000 had been paid to the
officers by the Company.
63
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
Set forth below is certain information concerning persons who are known by
Heartland to be beneficial owners of more than 5% of Heartland's outstanding
Units at March 29, 2002:
Number of
Name and Address of Beneficial Owner (i) Units Owned Percent
----------------------------------------- ----------- -------
Lehman Brothers Holdings, Inc. (ii)
American Express Tower 187,400 8.9%
3 World Financial Center
New York, New York 10285..................
Cowen & Company (iii)
Financial Square 183,100 8.7%
New York, New York 10005-3597.............
Edwin Jacobson (iv)
330 North Jefferson Court, Suite 305 139,400 6.6%
Chicago, Illinois 60661...................
Waveland Partners, L.P. (v)
227 West Monroe, Suite 4800 309,338 14.8%
Chicago, IL 60606.........................
GEM Value Fund, L.P. (vi)
900 North Michigan Avenue, Suite 1900 123,045 5.9%
Chicago, IL 60611..........................
(i) Nature of ownership is direct, except as otherwise indicated herein.
(ii) Based on Amendment No. 3 to Schedule 13G, filed on February 3, 1995,
Lehman Brothers Holdings Inc., through its subsidiary, Lehman Brothers
Inc., a registered broker/dealer, has sole voting and dispositive power
with respect to such Units.
(iii) Based on Amendment No. 2 to Schedule 13G, filed on February 12, 1998,
Cowen & Company, a registered broker/dealer and investment adviser, Cowen
Incorporated and Joseph Cohen have shared voting power of 132,900 Units,
and shared dispositive power of 183,100 Units.
(iv) Included in the table are 9,400 units held by Mr. Jacobson's wife as to
which Mr. Jacobson shares voting and dispositive power.
(v) Based on Form 4 filed on December 10, 2001, Waveland Partners, L.P.,
Waveland Capital Management, L.P., Waveland Capital Management, L.L.C.,
Waveland Partners, Ltd. and Waveland International, Ltd. Share voting and
dispositive power with respect to such Units.
(vi) Based on Amendment No. 1 to Schedule 13D, filed on October 26, 2001,
GEM Value Fund, L.P. a private investment partnership, and GEM Value
Partners LLC, its General Partner, have shared voting and dispositive
power with respect to such units
64
Security Ownership of Management
Set forth below is certain information concerning the beneficial ownership of
Units by each current director of HTI, each manager of HTI Interest, LLC, by
each named executive officer of CMC and by all directors and executive officers
of HTI and all executive officers of CMC as a group, as of March 28, 2002:
Name of Beneficial
Owner and Number of Number of
Persons in Group (i) Units Owned Percent
------------------------------------- ----------- -------
Lawrence S. Adelson 15,000 .7%
Richard P. Brandstatter --- ---%
Robert S. Davis --- ---%
Edwin Jacobson (ii) 139,400 6.7%
Susan Tjarksen Roussos --- ---%
John R. Torell III --- ---%
Ezra K. Zilkha (iii) 80,500 3.9%
All directors and executive officers
as a group (7 persons) 234,900 11.3%
(i) Nature of ownership is direct, except as otherwise indicated herein.
Unless shown, ownership is less than 1% of class.
(ii) Included in the table are 9,400 units held by Mr.Jacobson's wife as to
which Mr. Jacobson shares voting and dispositive power.
(iii) Included in the table are 24,500 Units owned by Zilkha & Sons, Inc.,
with respect to which Mr. Zilkha may be deemed to be the beneficial
owner.
Item 13. Certain Relationships and Related Transactions
CMC had a management agreement with HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On October 19, 2000,
this management agreement was extended from June 26, 2000 to June 27, 2005. In
1999, the balance of the 1998 fee of $283,000 fee was paid as well as 100% of
the 1999 fee. The management fees for the years 2000 and 2001 of $425,000 each
were credited against amounts owed CMC. On January 7, 2002, this management
agreement was assigned to HTII, the new General Partner.
Under a management services agreement, HTI reimburses Heartland for reasonable
and necessary costs and expenses for services. These totaled $837,000 for the
year ended December 31, 2001, $410,000 for the year ended December 31, 2000 and
$368,000 for the year ended December 31, 1999. Heartland and CMC also made loans
to HTI. HTI owes Heartland and CMC in the aggregate $8,186,000 as of December
31, 2001, $4,581,000 as of December 31, 2000 and $1,093,000 as of December 31,
1999 related to these expenses and loans. Included in this amount owed Heartland
and CMC is $882,000, $294,000 and $56,000 of interest accrued on outstanding
amounts owed during the years 2001, 2000 and 1999, respectively. Interest was
computed using the prime rate plus 2 1/4% (11.75% at December 29, 2000) until
December 31, 2000 when the interest rate was changed to 13%. As collateral for
the amount owed Heartland and CMC, HTI Class B, LLC pledged, on December 14,
2000, to Heartland and CMC a senior lien and a senior security interest in the
Heartland Class B Limited Partnership Interest owned by HTI Class B, LLC. On
December 29, 2000, HTI executed a line of credit promissory note that is due on
demand, payable to Heartland and CMC in the amount of $6,000,000. At that time,
HTI granted the Company a Series C Warrant that entitles the Company to purchase
320,000 shares 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 not 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.
65
HTI and the Company have provided loans, on market terms, to each other from
time to time, as provided in the agreements between them. The initial terms of
the loan were based on the collateral of the Class B interest and prevailing
borrowing rates. When HTI raised capital through the issuance of subordinated
debentures at 13% interest and the grant of warrants, the loan terms were
changed to reflect HTI's cost of capital.
At December 31, 2001, HTI owed Heartland and CMC approximately $8,186,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,186,000
is recoverable through the Company's security interest in the Class B limited
partner interest.
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.
The officers and directors of HTI, the officers Heartland and the managers of
HTII; including Lawrence S. Adelson, Chairman of the Board, President and Chief
Executive Officer of HTI and Chief Executive Officer of Heartland, will not
devote their entire business time to the affairs of Heartland. The Heartland
Partnership Agreement provides that (i) whenever a conflict of interest exists
or arises between the General Partner or any of its affiliates, on the one hand,
and Heartland, or any Unitholder on the other hand, or (ii) whenever the
Heartland Partnership Agreement or any other agreement contemplated therein
provides that the General Partner shall act in a manner which is, or provide
terms which are, fair and reasonable to Heartland, or any Unitholder, the
General Partner shall resolve such conflict of interest, take such action or
provide such terms, considering in each case the relative interests of each
party (including its own interest) to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interests, any customary
or accepted industry practices, and any applicable generally accepted accounting
practices or principles. Thus, unlike the strict duty of a fiduciary who must
act solely in the best interests of his beneficiary, the Heartland Partnership
Agreement permits the General Partner to consider the interests of all parties
to a conflict of interest, including the General Partner (although it is not
clear under Delaware law that such provisions would be enforceable). The
Heartland Partnership Agreement also provides that, in certain circumstances,
the General Partner will act in its sole discretion, in good faith or pursuant
to other appropriate standards.
66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed or incorporated by reference as part of
this report:
1. Financial statements - PricewaterhouseCoopers LLP
-------------------------------------------------
The financial statements of Heartland Partners, L.P. are included in Part II,
Item 8:
REPORT OF INDEPENDENT ACCOUNTANTS................................... 16
CONSOLIDATED BALANCE SHEET
December 31, 2001................................................ 17
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001............................. 18
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
For the Year Ended December 31, 2001............................. 19
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001............................. 20
Notes to Consolidated Financial Statements.......................... 21
2. Financial statement schedules - PricewaterhouseCoopers LLP
----------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS................................... 33
REAL ESTATE AND ACCUMULATED DEPRECIATION............................ 34
Attachment A to Schedule III........................................ 35
67
3. Financial statements - Ernst & Young LLP
----------------------------------------
The financial statements of Heartland Partners, L.P. are included in Part II,
Item 8:
REPORT OF INDEPENDENT AUDITORS...................................... 36
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999....................................... 37
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2000, 1999, and 1998............ 38
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998............. 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999, and 1998............ 40
Notes to Consolidated Financial Statements.......................... 41
4. Financial statement schedules - Ernst & Young LLP
-------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS................................... 57
REAL ESTATE AND ACCUMULATED DEPRECIATION............................ 58
Attachment A to Schedule III........................................ 59
68
3. Exhibits
3.1 Certificate of Limited Partnership, dated as of October 4, 1988,
incorporated by reference to Exhibit 3.1 to Heartland's Current Report
on Form 8-K dated January 5, 1998.
3.2 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by reference to
Exhibit 3.2 to Heartland's Current Report on Form 8-K dated January 5,
1998.
3.3 Amendment, dated as of December 4, 1997, to the Amended and Restated
Agreement of Limited Partnership of Heartland Partners, L.P.,
incorporated by reference to Exhibit 3.3 to Heartland's Current report
on Form 8-K dated January 5, 1998.
4. Unit of Limited Partnership Interest in Heartland Partners, L.P.,
incorporated by reference to Exhibit 4 to Heartland's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.1 Conveyance Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Milwaukee Land Company, CMC Heartland Partners
and Heartland Partners, L.P., incorporated by reference to Exhibit 10.1
to Heartland's Annual Report on Form 10-K for the year ended December
31, 1990.
10.2 Management Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Heartland Partners, L.P. and CMC Heartland
Partners, incorporated by reference to Exhibit 10.2 to Heartland's
Annual Report on Form 10-K for the year ended December 31, 1990.
10.3 Amended and Restated Partnership Agreement of CMC Heartland Partners,
dated as of June 27, 1990, between Heartland Partners, L.P. and
Milwaukee Land Company, incorporated by reference to Exhibit 10.3 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
1990.
10.4 Employment Agreement, dated July 1, 1990, by and between Edwin Jacobson
and CMC Heartland Partners, incorporated by reference to Exhibit 10.4 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
1990.*
10.5 First Amendment to Employment Agreement, dated July 1, 1993, by and
between Edwin Jacobson and CMC Heartland Partners incorporated by
reference to Exhibit 10.5 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 1994.*
10.6 Second Amendment to Employment Agreement, dated as of July 1, 1995,
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.6 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.*
10.7 Employment Agreement, dated July 2, 1995, between CMC Heartland Partners
and Edwin Jacobson, incorporated by reference to Exhibit 10.7 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.*
10.8 First Amendment to Employment Agreement, dated as of January 2, 1998,
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.8 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 1997.*
69
10.9 Loan and Security Agreement dated March 15, 1996, between CMC Heartland
Partners and LaSalle National Bank, incorporated by reference to Exhibit
10.1 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10.10 Amendment to Loan and Security Agreement dated May 14, 1997, by and
between CMC Heartland Partners and LaSalle National Bank, incorporated
by reference to Exhibit 10.2 to Heartland's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
10.11 Amended and Restated Loan Security Agreement dated June 30, 1998 among
CMC Heartland Partners, L.P. and LaSalle National Bank, incorporated by
reference to Exhibit 10.3 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
10.12 Option, Management and Marketing Agreement dated September 9, 1998
between CMC Heartland Partners VII, LLC and Longleaf Associates Limited
Partnership, incorporated by reference to Exhibit 10.4 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
10.13 Settlement Agreement by and between the Port of Tacoma, CMC Real Estate
Corporation, Chicago Milwaukee Corporation, CMC Heartland Partners, and
Heartland Partners L.P. effective October 1, 1998, incorporated by
reference to Exhibit 10.5 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
10.14 Amendment to Amended and Restated Loan and Security Agreement dated
October 23, 1998 among CMC Heartland Partners and LaSalle National Bank,
incorporated by reference to Exhibit 10.6 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
10.15 Loan Agreement, between CMC Heartland Partners I, Limited Partnership, a
Delaware limited partnership, as Borrower and Bank One, Illinois, NA, a
national banking association, as Lender dated November 30, 1998,
incorporated by reference to Exhibit 10.15 to Heartland's Annual Report
Form 10-K for the year ended December 31, 1998.
10.16 Construction Loan Agreement dated January 6, 1999 between CMC Heartland
Partners III, LLC and Corus Bank, N.A., incorporated by reference to
Exhibit 10.16 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.17 The First Amendment of Mortgage and Other Loan documents dated February
1, 1999 between CMC Heartland Partners I, Limited Partnership and Bank
One, Illinois, N.A., incorporated by reference to Exhibit 10.17 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
10.18 Second Amendment to Amended and Restated Loan and Security Agreement
dated April 29, 1999 among CMC Heartland Partners, and Heartland
Partners, L.P. and LaSalle National Bank, incorporated by reference to
Exhibit 10.18 to Heartland's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1999.
10.19 Employment Agreement, dated December 20, 1999, between CMC Heartland
Partners and Edwin Jacobson incorporated by reference to Exhibit 10.19
to Heartland's Annual Report on Form 10-K for the year ended December
31, 1999.*
70
10.20 Construction Loan Agreement dated October 20, 1999 between CMC Heartland
Partners III, LLC, a Delaware limited liability company and Bank One,
Illinois, N.A., a national banking association incorporated by reference
to Exhibit 10.20 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.21 Third amendment to Amended and Restated Loan and Security Agreement
dated November 18, 1999 among CMC Heartland Partners, and Heartland
Partners, L.P. and LaSalle National Association, a national banking
association incorporated by reference to Exhibit 10.21 to Heartland's
Annual Report on Form 10-K for the year ended December 31, 1999.
10.22 Construction Loan Agreement dated December 9, 1999 between CMC Heartland
Partners VII, LLC, a Delaware limited liability company and Bank One,
Illinois, N.A., a national banking association incorporated by reference
to Exhibit 10.22 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.23 Fourth Amendment to Amended and Restated Loan and Security Agreement
dated March 20, 2000 among CMC Heartland Partners, and Heartland
Partners, L.P. and LaSalle Bank National Association, a national banking
association, incorporated by reference to Exhibit 10.23 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
10.24 Second Amendment to Construction Loan Agreement dated March 31, 2000
between CMC Heartland Partners I, Limited Partnership, a Delaware
limited partnership and Bank One, Illinois, N.A., a national banking
association, incorporated by reference to Exhibit 10.24 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
10.25 First Amendment to Employment Agreement, dated December 20, 1999,
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.25 to Heartland's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.*
10.26 CMC Heartland Partners Incentive Plan effective January 1, 2000,
incorporated by reference to Exhibit 10.26 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.
10.27 The Sales Incentive Plan effective January 1, 2000, incorporated by
reference to Exhibit 10.27 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
10.28 Payoff letter dated June 29, 2000 to Near North National Title
Corporation among CMC Heartland Partners and LaSalle Bank National
Association, a national banking association, incorporated by reference
to Exhibit 10.28 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
71
10.29 Payoff letter dated August 1, 2000 to Near North National Title
Corporation among CMC Heartland Partners and LaSalle Bank National
Association, a national banking association, incorporated by reference
to Exhibit 10.29 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
10.30 LaSalle Bank National Association loans to CMC Heartland Partners,
Heartland Partners, L.P. and CMC Heartland Partners, IV increase in
Revolving Credit Commitment letter dated October 15, 2000, incorporated
by reference to Exhibit 10.30 to Heartland's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000.
10.31 Promissory Note dated October 17, 2000 between CMC Heartland Partners
and Edwin Jacobson for $375,000, incorporated by reference to Exhibit
10.31 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.
10.32 Second Amendment to Edwin Jacobson December 20, 1999 Employment
Agreement dated October 17, 2000, incorporated by reference to Exhibit
10.32 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.*
10.33 Amendment Agreement to Management Agreement between CMC Heartland
Partners and Heartland Technology, Inc. dated October 19, 2000,
incorporated by reference to Exhibit 10.33 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
10.34 The Second Amendment of Mortgage and Amendment to Loan Agreement, Note
and Other Loan Documents dated December 1, 2000, by and between CMC
Heartland Partners I, Limited Partnership and Bank One, Illinois, N.A.,
incorporated by reference to Exhibit 10.34 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
10.35 First Amendment of Construction Loan Agreement, Note, Deed of Trust and
Other Loan Documents dated December 8, 2000 between CMC Heartland
Partners VII, LLC and Bank One, Illinois, N.A., incorporated by
reference to Exhibit 10.35 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2000.
10.36 Promissory Note dated December 12, 2000 between CMC Heartland Partners
VII, LLC and Bank One, Illinois, N.A., incorporated by reference to
Exhibit 10.36 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.37 Purchase and Sale Agreement dated December 12, 2000 between CMC
Heartland Partners VII, LLC and Longleaf Associates Limited Partnership,
incorporated by reference to Exhibit 10.37 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
10.38 Line of Credit Promissory Note dated December 29, 2000 between Heartland
Technology, Inc. (Borrower) and CMC Heartland Partners (Payee),
incorporated by reference to Exhibit 10.38 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
72
10.39 Series C Warrant exercisable on or before February 16, 2006 issued to
Heartland Partners, LP by Heartland Technology, Inc. on February 16,
2001, incorporated by reference to Exhibit 10.39 to Heartland's Annual
Report on Form 10-K for the year ended December 31, 2000.
10.40 Fifth Amendment to Amendment Restated Loan and Security Agreement dated
December 31, 2000 between CMC Heartland Partners, Heartland Partners, LP
and CMC Heartland Partners IV, LLC and LaSalle Bank National
Association, incorporated by reference to Exhibit 10.40 to Heartland's
Annual Report on Form 10-K for the year ended December 31, 2000.
10.41 Second Amendment of Construction Loan Agreement, Mortgage, Notes, and
Other Loan Documents dated February 23, 2001 between CMC Heartland
Partners III, LLC and Bank One, Illinois, N.A., incorporated by
reference to Exhibit 10.41 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.42 The Senior Security Agreement dated December 14, 2000 between HTI
Class B, LLC, Heartland Technology, Inc. and Heartland Partners,
L.P. and CMC Heartland Partners, incorporated by reference to
Exhibit 10.42 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.43 The Control Agreement dated December 14, 2000 between Heartland
Partners, L.P. and HTI Class B, LLC and CMC Heartland Partners,
incorporated by reference to Exhibit 10.43 to Heartland's Annual
Report on Form 10-K for the year ended December 31, 2000.
10.44 Line of Credit Promissory Note dated December 14, 2000 between
Heartland Technology, Inc. (borrower) and Heartland Partners, L.P.
and CMC Heartland Partners (collectively, the payee), incorporated by
reference to Exhibit 10.44 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2000.
10.45 The Lien Subordination and Inter-Creditor Agreement between
CMC Heartland Partners and Heartland Partners, L.P. and PG Oldco, Inc.
and Heartland Technology, Inc., incorporated by reference to
Exhibit 10.45 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.46 The Control Agreement dated December 18, 2000 between Heartland
Partners, L.P. and HTI Class B, LLC and PG Oldco, Inc., incorporated by
reference to Exhibit 10.46 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.47 The Subordinated Security Agreement dated December 18, 2000 between HTI
Class B, LLC and Heartland Technology, Inc. and PG Oldco, Inc.,
incorporated by reference to Exhibit 10.47 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
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, incorporated by
reference to Exhibit 10.48 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
73
10.49 First Agreement dated June 28, 1999 effective July 15, 1999 between the
Port of Tacoma and CMC Heartland Partners modifying terms of settlement
agreement and affecting real property in Pierce County, Washington,
incorporated by reference to Exhibit 10.49 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.50 Sixth Amendment to Amended and Restated Loan and Security Agreement
dated March 31, 2001 between CMC Heartland Partners, Heartland
Partners, LP and CMC Heartland Partners IV, LLC and LaSalle Bank
National Association, incorporated by reference to Exhibit 10.50 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.51 Second Amendment of Construction Loan Agreement, Note, Deed of Trust and
Other Loan Documents dated April 12, 2001 between CMC Heartland Partners
VII, LLC and Bank One, Illinois, N.A., incorporated by reference to
Exhibit 10.51 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
10.52 $1,000,000 Line of Credit Promissory Note dated May 11, 2001 between
Heartland Technology, Inc. (borrower) and Heartland Partners, L.P. and
CMC Heartland Partners (collectively, the payee), incorporated by
reference to Exhibit 10.52 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
10.53 $1,500,000 Line of Credit Promissory Note dated July 3, 2001 between
Heartland Technology, Inc. (borrower) and Heartland Partners, L.P. and
CMC Heartland Partners (the payee), incorporated by reference to Exhibit
10.53 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
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), incorporated by
reference to Exhibit 10.54 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
10.55 Seventh Amendment to Amended and Restated Loan and Security Agreement
dated December 31, 2001 between CMC Heartland Partners, Heartland
Partners, LP and CMC Heartland Partners IV, LLC and LaSalle Bank
National Association (filed herewith).
10.56 Third Agreement dated January 9, 2002 between the Port of Tacoma and CMC
Heartland Partners modifying terms of settlement agreement and affecting
real property in Pierce County, Washington (filed herewith).
10.57 Modification Agreement dated February 23, 2002 between CMC Heartland
Partners III, LLC and Bank One Illinois, N.A. (filed herewith).
74
21 Subsidiaries of Heartland Partners, L.P (filed herewith).
* Management contract required to be filed as an exhibit pursuant to item 14(c)
(b) Reports on Form 8-K
-------------------
A Form 8-K was filed by Heartland with the Securities and Exchange Commission on
December 18, 2001, announcing the Board of Directors of the Company's General
Partner, HTI, had approved the engagement of PricewaterhouseCoopers LLP as its
auditors for the fiscal year ending December 31, 2001 to replace the firm of
Ernst & Young LLP, who were dismissed as auditors of Heartland effective
December 18, 2001. The Audit Committee of the Board of Directors of HTI approved
the change in auditors on December 18, 2001.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
--------------------------
(Registrant)
By /s/ Lawrence S. Adelson
--------------------------
Lawrence S. Adelson
(Manager of HTI Interests, LLC,
General Partner)
Date: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the dates indicated.
/s/ Robert S. Davis /s/ Edwin Jacobson
------------------- ------------------
Robert S. Davis Edwin Jacobson
(Manager of HTI Interests, LLC, (Manager of HTI Interests, LLC,
General Partner) General Partner)
April 1, 2002 April 1, 2002
/s/ Lawrence S. Adelson /s/ Ezra K. Zilkha
------------------------ ------------------
Lawrence S. Adelson Ezra K. Zilkha
(Manager of HTI Interests, LLC, (Manager of HTI Interests, LLC,
General Partner) General Partner)
April 1, 2002 April 1, 2002
/s/ John R. Torell III
----------------------
John R. Torell III
(Manager of HTI Interests, LLC,
General Partner)
April 1, 2002
76
HEARTLAND PARTNERS, L.P.
INDEX TO EXHIBITS
Exhibit
Number Description
------- ---------------------------------------------------------------------
3.1 Certificate of Limited Partnership, dated as of October 4, 1988,
incorporated by reference to Exhibit 3.1 to Heartland's Current Report
on Form 8-K dated January 5, 1998.
3.2 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by reference to
Exhibit 3.2 to Heartland's Current Report on Form 8-K dated January 5,
1998.
3.3 Amendment, dated as of December 4, 1997, to the Amended and Restated
Agreement of Limited Partnership of Heartland Partners, L.P.,
incorporated by reference to Exhibit 3.3 to Heartland's Current report
on Form 8-K dated January 5, 1998.
4. Unit of Limited Partnership Interest in Heartland Partners, L.P.,
incorporated by reference to Exhibit 4 to Heartland's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.1 Conveyance Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Milwaukee Land Company, CMC Heartland Partners
and Heartland Partners, L.P., incorporated by reference to Exhibit 10.1
to Heartland's Annual Report on Form 10-K for the year ended December
31, 1990.
10.2 Management Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Heartland Partners, L.P. and CMC Heartland
Partners, incorporated by reference to Exhibit 10.2 to Heartland's
Annual Report on Form 10-K for the year ended December 31, 1990.
10.3 Amended and Restated Partnership Agreement of CMC Heartland Partners,
dated as of June 27, 1990, between Heartland Partners, L.P. and
Milwaukee Land Company, incorporated by reference to Exhibit 10.3 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
1990.
10.4 Employment Agreement, dated July 1, 1990, by and between Edwin Jacobson
and CMC Heartland Partners, incorporated by reference to Exhibit 10.4 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
1990.*
10.5 First Amendment to Employment Agreement, dated July 1, 1993, by and
between Edwin Jacobson and CMC Heartland Partners incorporated by
reference to Exhibit 10.5 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 1994.*
77
Exhibit
Number Description
------- ---------------------------------------------------------------------
10.6 Second Amendment to Employment Agreement, dated as of July 1, 1995,
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.6 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.*
10.7 Employment Agreement, dated July 2, 1995, between CMC Heartland Partners
and Edwin Jacobson, incorporated by reference to Exhibit 10.7 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.*
10.8 First Amendment to Employment Agreement, dated as of January 2, 1998,
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.8 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 1997.*
10.9 Loan and Security Agreement dated March 15, 1996, between CMC Heartland
Partners and LaSalle National Bank, incorporated by reference to Exhibit
10.1 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10.10 Amendment to Loan and Security Agreement dated May 14, 1997, by and
between CMC Heartland Partners and LaSalle National Bank, incorporated
by reference to Exhibit 10.2 to Heartland's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
10.11 Amended and Restated Loan Security Agreement dated June 30, 1998 among
CMC Heartland Partners, L.P. and LaSalle National Bank, incorporated by
reference to Exhibit 10.3 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
10.12 Option, Management and Marketing Agreement dated September 9, 1998
between CMC Heartland Partners VII, LLC and Longleaf Associates Limited
Partnership, incorporated by reference to Exhibit 10.4 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
10.13 Settlement Agreement by and between the Port of Tacoma, CMC Real Estate
Corporation, Chicago Milwaukee Corporation, CMC Heartland Partners, and
Heartland Partners L.P. effective October 1, 1998, incorporated by
reference to Exhibit 10.5 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
10.14 Amendment to Amended and Restated Loan and Security Agreement dated
October 23, 1998 among CMC Heartland Partners and LaSalle National Bank,
incorporated by reference to Exhibit 10.6 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
10.15 Loan Agreement, between CMC Heartland Partners I, Limited Partnership, a
Delaware limited partnership, as Borrower and Bank One, Illinois, NA, a
national banking association, as Lender dated November 30, 1998,
incorporated by reference to Exhibit 10.15 to Heartland's Annual Report
Form 10-K for the year ended December 31, 1998.
78
Exhibit
Number Description
------- ---------------------------------------------------------------------
10.16 Construction Loan Agreement dated January 6, 1999 between CMC Heartland
Partners III, LLC and Corus Bank, N.A., incorporated by reference to
Exhibit 10.16 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.17 The First Amendment of Mortgage and Other Loan documents dated February
1, 1999 between CMC Heartland Partners I, Limited Partnership and Bank
One, Illinois, N.A., incorporated by reference to Exhibit 10.17 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
10.18 Second Amendment to Amended and Restated Loan and Security Agreement
dated April 29, 1999 among CMC Heartland Partners, and Heartland
Partners, L.P. and LaSalle National Bank, incorporated by reference to
Exhibit 10.18 to Heartland's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1999.
10.19 Employment Agreement, dated December 20, 1999, between CMC Heartland
Partners and Edwin Jacobson incorporated by reference to Exhibit 10.19
to Heartland's Annual Report on Form 10-K for the year ended December
31, 1999.*
10.20 Construction Loan Agreement dated October 20, 1999 between CMC Heartland
Partners III, LLC, a Delaware limited liability company and Bank One,
Illinois, N.A., a national banking association incorporated by reference
to Exhibit 10.20 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.21 Third amendment to Amended and Restated Loan and Security Agreement
dated November 18, 1999 among CMC Heartland Partners, and Heartland
Partners, L.P. and LaSalle National Association, a national banking
association incorporated by reference to Exhibit 10.21 to Heartland's
Annual Report on Form 10-K for the year ended December 31, 1999.
10.22 Construction Loan Agreement dated December 9, 1999 between CMC Heartland
Partners VII, LLC, a Delaware limited liability company and Bank One,
Illinois, N.A., a national banking association incorporated by reference
to Exhibit 10.22 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.23 Fourth Amendment to Amended and Restated Loan and Security Agreement
dated March 20, 2000 among CMC Heartland Partners, and Heartland
Partners, L.P. and LaSalle Bank National Association, a national banking
association, incorporated by reference to Exhibit 10.23 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
10.24 Second Amendment to Construction Loan Agreement dated March 31, 2000
between CMC Heartland Partners I, Limited Partnership, a Delaware
limited partnership and Bank One, Illinois, N.A., a national banking
association, incorporated by reference to Exhibit 10.24 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
79
Exhibit
Number Description
------- ---------------------------------------------------------------------
10.25 First Amendment to Employment Agreement, dated December 20, 1999,
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.25 to Heartland's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.*
10.26 CMC Heartland Partners Incentive Plan effective January 1, 2000,
incorporated by reference to Exhibit 10.26 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.
10.27 The Sales Incentive Plan effective January 1, 2000, incorporated by
reference to Exhibit 10.27 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
10.28 Payoff letter dated June 29, 2000 to Near North National Title
Corporation among CMC Heartland Partners and LaSalle Bank National
Association, a national banking association, incorporated by reference
to Exhibit 10.28 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
10.29 Payoff letter dated August 1, 2000 to Near North National Title
Corporation among CMC Heartland Partners and LaSalle Bank National
Association, a national banking association, incorporated by reference
to Exhibit 10.29 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
10.30 LaSalle Bank National Association loans to CMC Heartland Partners,
Heartland Partners, L.P. and CMC Heartland Partners, IV increase in
Revolving Credit Commitment letter dated October 15, 2000, incorporated
by reference to Exhibit 10.30 to Heartland's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000.
10.31 Promissory Note dated October 17, 2000 between CMC Heartland Partners
and Edwin Jacobson for $375,000, incorporated by reference to Exhibit
10.31 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.
10.32 Second Amendment to Edwin Jacobson December 20, 1999 Employment
Agreement dated October 17, 2000, incorporated by reference to Exhibit
10.32 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.*
10.33 Amendment Agreement to Management Agreement between CMC Heartland
Partners and Heartland Technology, Inc. dated October 19, 2000,
incorporated by reference to Exhibit 10.33 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
10.34 The Second Amendment of Mortgage and Amendment to Loan Agreement, Note
and Other Loan Documents dated December 1, 2000, by and between CMC
Heartland Partners I, Limited Partnership and Bank One, Illinois, N.A.,
incorporated by reference to Exhibit 10.34 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
80
Exhibit
Number Description
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10.35 First Amendment of Construction Loan Agreement, Note, Deed of Trust and
Other Loan Documents dated December 8, 2000 between CMC Heartland
Partners VII, LLC and Bank One, Illinois, N.A., incorporated by
reference to Exhibit 10.35 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2000.
10.36 Promissory Note dated December 12, 2000 between CMC Heartland Partners
VII, LLC and Bank One, Illinois, N.A., incorporated by reference to
Exhibit 10.36 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.37 Purchase and Sale Agreement dated December 12, 2000 between CMC
Heartland Partners VII, LLC and Longleaf Associates Limited Partnership,
incorporated by reference to Exhibit 10.37 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
10.38 Line of Credit Promissory Note dated December 29, 2000 between Heartland
Technology, Inc. (Borrower) and CMC Heartland Partners (Payee),
incorporated by reference to Exhibit 10.38 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
10.39 Series C Warrant exercisable on or before February 16, 2006 issued to
Heartland Partners, LP by Heartland Technology, Inc. on February 16,
2001, incorporated by reference to Exhibit 10.39 to Heartland's Annual
Report on Form 10-K for the year ended December 31, 2000.
10.40 Fifth Amendment to Amendment Restated Loan and Security Agreement dated
December 31, 2000 between CMC Heartland Partners, Heartland Partners, LP
and CMC Heartland Partners IV, LLC and LaSalle Bank National
Association, incorporated by reference to Exhibit 10.40 to Heartland's
Annual Report on Form 10-K for the year ended December 31, 2000.
10.41 Second Amendment of Construction Loan Agreement, Mortgage, Notes, and
Other Loan Documents dated February 23, 2001 between CMC Heartland
Partners III, LLC and Bank One, Illinois, N.A., incorporated by
reference to Exhibit 10.41 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.42 The Senior Security Agreement dated December 14, 2000 between HTI
Class B, LLC, Heartland Technology, Inc. and Heartland Partners,
L.P. and CMC Heartland Partners, incorporated by reference to
Exhibit 10.42 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.43 The Control Agreement dated December 14, 2000 between Heartland
Partners, L.P. and HTI Class B, LLC and CMC Heartland Partners,
incorporated by reference to Exhibit 10.43 to Heartland's Annual
Report on Form 10-K for the year ended December 31, 2000.
10.44 Line of Credit Promissory Note dated December 14, 2000 between
Heartland Technology, Inc. (borrower) and Heartland Partners, L.P.
and CMC Heartland Partners (collectively, the payee), incorporated by
reference to Exhibit 10.44 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2000.
81
Exhibit
Number Description
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10.45 The Lien Subordination and Inter-Creditor Agreement between
CMC Heartland Partners and Heartland Partners, L.P. and PG Oldco, Inc.
and Heartland Technology, Inc., incorporated by reference to
Exhibit 10.45 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.46 The Control Agreement dated December 18, 2000 between Heartland
Partners, L.P. and HTI Class B, LLC and PG Oldco, Inc., incorporated by
reference to Exhibit 10.46 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.47 The Subordinated Security Agreement dated December 18, 2000 between HTI
Class B, LLC and Heartland Technology, Inc. and PG Oldco, Inc.,
incorporated by reference to Exhibit 10.47 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 2000.
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, incorporated by
reference to Exhibit 10.48 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
10.49 First Agreement dated June 28, 1999 effective July 15, 1999 between the
Port of Tacoma and CMC Heartland Partners modifying terms of settlement
agreement and affecting real property in Pierce County, Washington,
incorporated by reference to Exhibit 10.49 to Heartland's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.50 Sixth Amendment to Amended and Restated Loan and Security Agreement
dated March 31, 2001 between CMC Heartland Partners, Heartland
Partners, LP and CMC Heartland Partners IV, LLC and LaSalle Bank
National Association, incorporated by reference to Exhibit 10.50 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.51 Second Amendment of Construction Loan Agreement, Note, Deed of Trust and
Other Loan Documents dated April 12, 2001 between CMC Heartland Partners
VII, LLC and Bank One, Illinois, N.A., incorporated by reference to
Exhibit 10.51 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
10.52 $1,000,000 Line of Credit Promissory Note dated May 11, 2001 between
Heartland Technology, Inc. (borrower) and Heartland Partners, L.P. and
CMC Heartland Partners (collectively, the payee), incorporated by
reference to Exhibit 10.52 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
10.53 $1,500,000 Line of Credit Promissory Note dated July 3, 2001 between
Heartland Technology, Inc. (borrower) and Heartland Partners, L.P. and
CMC Heartland Partners (the payee), incorporated by reference to Exhibit
10.53 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
82
Exhibit
Number Description
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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), incorporated by
reference to Exhibit 10.54 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
10.55 Seventh Amendment to Amended and Restated Loan and Security Agreement
dated December 31, 2001 between CMC Heartland Partners, Heartland
Partners, LP and CMC Heartland Partners IV, LLC and LaSalle Bank
National Association (filed herewith).
10.56 Third Agreement dated January 9, 2002 between the Port of Tacoma and CMC
Heartland Partners modifying terms of settlement agreement and affecting
real property in Pierce County, Washington (filed herewith).
10.57 Modification Agreement dated February 23, 2002 between CMC Heartland
Partners III, LLC and Bank One Illinois, N.A. (filed herewith).
21 Subsidiaries of Heartland Partners, L.P. (filed herewith).
83
Exhibit 21
Subsidiaries of Registrant
The following is a list of all the registrant's direct and indirect
subsidiaries, state of incorporation or organization and the percentage
ownership by Heartland of each.
Name of Subsidiary State Ownership
CMC Heartland Partners N/A 99.99%
Heartland Development Corporation Delaware 100%
CMC Heartland Partners I, Limited Partnership Delaware (a)
CMC Heartland Partners I, LLC Delaware (b)
CMC Heartland Partners II, LLC Delaware (b)
CMC Heartland Partners III, LLC Delaware (b)
CMC Heartland Partners IV, LLC Delaware (b)
CMC Heartland Partners V, LLC Delaware (b)
CMC Heartland Partners VI, LLC Delaware (b)
CMC Heartland Partners VII, LLC Delaware (b)
CMC Heartland Partners VIII, LLC Delaware (b)
Lifestyle Communities, Ltd. Delaware (b)
Lifestyle Construction Company, Inc. Delaware (b)
(a)CMC Heartland Partners I, Limited Partnership is owned by CMC Heartland
Partners as sole limited partner and Heartland Development Corporation as
sole general partner.
(b)CMC Heartland Partners I, II, III, IV, V, VI, VII, VIII and Lifestyle
Communities, Ltd. and Lifestyle Construction Company, Inc. are all
100% owned by CMC Heartland Partners.
84