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, 2005
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 (IRS Employer Indemnification No.)
of Incorporation or Organization)
53 West Jackson Blvd., Suite 1150
Chicago, Illinois 60604
-----------------------
(Address of Principal Executive Offices)
312-834-0592
------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Class A Limited Partnership Units American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 June 30, 2005 was approximately $5,411,000. As of March 15, 2006,
there were 2,092,438 units outstanding. For the purposes of this computation,
the registrant has assumed that non-affiliates of the registrant include all
holders of the Class A Limited Partnership Units other than directors and
officers of Heartland Technology, Inc. and CMC/Heartland Partners Holdings, Inc.
and managers of HTI Interests, LLC.
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business...........................................................................................1
Item 1A. Risk Factors.......................................................................................3
Item 1B. Unresolved Staff Comments..........................................................................6
Item 2. Properties.........................................................................................6
Item 3. Legal Proceedings..................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders...............................................10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.................................................10
Item 6. Selected Financial Data...........................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................21
Item 8. Financial Statements and Supplementary Data.......................................................22
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..............22
Item 9A. Controls and Procedures...........................................................................22
Item 9B. Other Information.................................................................................22
PART III
Item 10. Directors and Executive Officers of the Registrant................................................23
Item 11. Executive Compensation............................................................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....27
Item 13. Certain Relationships and Related Transactions....................................................28
Item 14. Principal Accountant Fees and Services............................................................29
PART IV
Item 15. Exhibits and Financial Statement..................................................................30
i
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements intended to qualify
for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can be
identified by phrases such as Heartland or the Company, as defined below, or its
management "believes," "expects," "anticipates," "foresees," "forecasts,"
"estimates," or other words or phrases of similar import. Similarly, statements
in this report that describe the Company's plans, outlook, objectives,
intentions or goals are also forward-looking statements. Forward-looking
statements are not guarantees of future performance. They involve risks and
uncertainties that are difficult to predict. The Company's actual future
results, actions, performance or achievement of results and the value of the
partnership Units may differ materially from what is forecasted in any
forward-looking statements. We caution you not to put undue reliance on any
forward-looking statement in these documents. The Company does not undertake any
obligation to update or publicly release any revisions to forward-looking
statements to reflect events, circumstances or changes in expectations after the
date of this report.
PART I
ITEM 1. BUSINESS.
ORGANIZATION AND PURPOSE
Heartland Partners, L.P., a Delaware limited partnership (together
with its subsidiaries, "Heartland" or the "Company"), 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 originally organized to engage in the ownership,
purchasing, development, leasing, marketing, construction and sale of real
estate properties. Heartland is now attempting to sell its remaining saleable
real estate holdings with a view towards dissolving the partnership. The Company
is undertaking to resolve its remaining liabilities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidation of Assets and/or Bankruptcy." The Company has engaged a consultant
and a law firm to advise it on procedures for dissolution and expects to begin
that process in the second quarter of 2006. Heartland's most significant
liabilities are environmental liabilities. Heartland is also a party to
litigation involving its former Chief Executive Officer. The amount and timing
of future cash distributions, if any, to the Company's Unitholders will depend
on generation of cash from sales of real estate holdings and the resolution of
liabilities and associated costs. The Company does not plan to distribute cash
to Unitholders before entering dissolution.
CMC/Heartland Partners Holdings, Inc., a Delaware corporation and
sole general partner of Heartland (the "General Partner" or "Holdings"), is
owned by the four current members of Holdings board of directors. Previously,
HTI Interests LLC, a Delaware limited liability company ("HTII"), was the sole
general partner of the Company. HTII is owned 99.9% by Heartland Technology,
Inc. ("HTI"), a Delaware corporation that filed for bankruptcy on June 15, 2005,
and 0.1% by HTI Principals, Inc., a Delaware corporation owned by Lawrence S.
Adelson, Richard Brandstatter, George Lightbourn, Thomas Power, Jr. and one
former member of HTI's board of directors. HTII also owned 0.01% of CMC. On
November 14, 2005, HTII transferred its general partnership interests in the
Company and CMC to Holdings making Holdings the sole general partner of the
Company. Lawrence S. Adelson, Richard Brandstatter, George Lightbourn and Thomas
Power, Jr. each own 25% of Holdings, and each paid $25 for their interests.
CMC Heartland Partners, a Delaware general partnership ("CMC"), is an
operating general partnership owned 99.99% by Heartland and 0.01% by Holdings.
The following table sets forth certain entities formed by Heartland
or CMC since their inception that currently hold real estate and other assets,
the 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 III, LLC ("CMCIII") 1997 Previously owned Kinzie Station Phase I and Phase II
1
COMPANY DEVELOPMENT LOCATION OWNERSHIP
------- -------------------- ---------
HDC Not Applicable 100% (1)
CMCIII Chicago, Illinois 100% (2)
(1) Stock wholly owned by Heartland.
(2) Membership interest owned by CMC.
PARTNERSHIP AGREEMENT AND CASH DISTRIBUTIONS
Heartland's partnership agreement previously provided generally that
Heartland's net income (loss) would 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 interest (the "Class B Interest"). Following the cancellation
of the Class B Interest in connection with the settlement of claims by and
against HTI (see "HTI Settlement" below), the partnership agreement was amended
to provide that net income (loss) will be allocated 1% to the General Partner
and 99% to the Unitholders. The partnership agreement provides that certain
items of deduction, loss, income and gain may be specially allocated to the
Unitholders or the General Partner. The Company has never made any special
allocation of deduction, income, loss or gain and does not have any plan to do
so. 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 respective capital accounts, such net loss shall be allocated only among
partners having positive balances in their respective capital accounts. Under
the partnership agreement, if a partner's capital account is reduced to zero and
there are additional losses allocable to that partner those additional losses
will have to be made up by subsequent gains allocable to that partner before
gains will increase that partner's capital account. As of December 31, 2005, the
Unitholders' capital account balance was $424,000, and the General Partner's
capital account balance was $0.
The General Partner has the discretion to cause Heartland to make
distributions of Heartland's available cash in an amount equal to 99% to the
Unitholders and 1% to the General Partner. Upon a dissolution of the
partnership, liquidating distributions will be made pro rata to each partner in
accordance with its positive capital account balance after certain adjustments
set forth in the partnership agreement. There can be no assurance as to the
amount or timing of any future cash distributions or whether the General Partner
will cause Heartland to make cash distributions in the future if cash is
available. The General Partner in its discretion may establish a record date for
distributions on the last day of any calendar month.
The Company did not make any cash distributions in 2005 or 2004.
HTI SETTLEMENT
Heartland Technology, Inc. ("HTI"), through a subsidiary, owned the
general partner interests in Heartland and CMC and the Class B Interest in
Heartland. In June 2005, HTI filed for liquidation under Chapter 11 of the
federal bankruptcy law. On November 15, 2005, a settlement approved by the
bankruptcy court was closed. CMC and Heartland made a payment to HTI and forgave
outstanding claims against HTI. HTI transferred the general partner interests to
CMC/Heartland Partners Holdings, Inc. HTI transferred the Class B Interest to
Heartland and Heartland cancelled it. These transactions are discussed in more
detail in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation" and the Notes to Financial Statements.
REAL ESTATE SALE ACTIVITIES
Property sales during 2005 totaled approximately $5,513,000. Major
2005 sales included Kinzie Station Phase II, Chicago, IL for $4,200,000, Lite
Yard, Minneapolis, MN for $490,000 and Glendale Yard, Glendale, WI for $650,000.
When the Company conveyed its property in Menomonee Valley located in Milwaukee,
Wisconsin to the Redevelopment Authority of the City of Milwaukee ("RACM") in
connection with a July 2003 condemnation proceeding, it retained the right to
2
appeal the purchase price and to seek additional consideration. In April 2004,
the Company filed suit against RACM in the Milwaukee County Circuit Court
appealing the amount paid by RACM. The appeal was settled in January 2006 with
RACM making an additional payment of $3.25 million on March 2, 2006. The RACM
settlement will be reflected in the Company's first quarter 2006 financial
statements.
The Company also donated a property in Deer Lodge, Montana to a local
government in 2005. The Company did not receive any cash for the donation, but
the local government assumed responsibility for any environmental liabilities
associated with the property. This property was carried at historical cost, as
adjusted for net realizable value. The transaction resulted in the Company
reducing the recorded environmental liability of $119,000 to $0.
The Company also realized $430,000 from the sale of 4,000 square feet
of office space in Kinzie Station Phase I. The sale of the office space is
treated as gain on sale of assets as it was formerly used by the Company for its
offices.
The Company's remaining properties consist of approximately 3 acres
located at Kinzie Station in Chicago, Illinois, along with associated air
rights, and approximately 131 acres of land and easements scattered over 9
states.
The Company also owns rights to lease or sell easements for fiber
optics lines on a 70-mile commuter rail system in the Chicago area. The Company
receives 2/3 of any consideration from such easements. The owner of the right of
way receives the other third.
OTHER ACTIVITIES
At December 31, 2005, the allowance for claims and liabilities
established by Heartland for environmental and other contingent liabilities
totaled approximately $2,128,000. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Given the
uncertainty inherent in litigation and environmental remediation, resolution of
these matters could require funds greater or less than the $2,128,000 allowance
for claims and liabilities. Heartland engages outside counsel to defend it in
connection with most of these claims. Significant claims are summarized in "Item
3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
REGULATORY AND ENVIRONMENTAL MATTERS
For a discussion of regulatory and environmental matters, see "Item
1A. Risk Factors - Environmental Liabilities" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Summary of Significant Accounting Estimates - Reserve for Environmental
Liabilities".
EMPLOYEES
At December 31, 2005, Heartland employed 2 people.
ITEM 1A. RISK FACTORS.
REAL ESTATE INVESTMENT RISKS; GENERAL ECONOMIC CONDITIONS AFFECTING REAL ESTATE
INDUSTRY
The Company faces risks associated with local real estate conditions in areas
where the Company owns properties. These risks include, but are not limited to:
liability for environmental hazards; changes in general or local economic
conditions; changes in real estate and zoning laws; changes in income taxes,
real estate taxes, or federal or local taxes; floods, earthquakes, and other
acts of nature; and other factors beyond the Company's control. The illiquidity
of real estate investments generally may impair the Company's ability to respond
promptly to changing circumstances. The inability of management to respond
promptly to changing circumstances could adversely affect the Company's
financial condition and ability to make distributions to the Unitholders.
The real estate industry generally 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. Sellers of real estate are
subject to various risks, many of which are outside the control of the seller,
including real estate market conditions, changing demographic conditions,
adverse weather conditions and natural disasters, such as hurricanes and
tornadoes, changes in government regulations or requirements and increases in
real estate taxes and other local government fees. The occurrence of any of the
foregoing could have a material adverse effect on the financial condition of
Heartland.
3
ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances, and regulations, the
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances located on or in, or emanating
from, such property, as well as costs of investigation and property damages.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner or operator's ability
to sell or lease a property or borrow using the property as collateral. Other
statutes may require the removal of underground storage tanks. Noncompliance
with these and other environmental, health or safety requirements may result in
substantial costs to us or may result in the need to cease or alter operations
on the property and may reduce the value of the property or our ability to sell
it.
In addition, the Company acquired its real estate portfolio from the successors
to the Chicago, Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee Road")
under a Conveyance Agreement dated June 27, 1990 (the "Conveyance Agreement").
The Milwaukee Road emerged from reorganization in 1985. Under the Conveyance
Agreement, the Company agreed to assume certain environmental liabilities of the
Milwaukee Road that survived the Milwaukee Road's reorganization proceedings.
Environmental laws may impose liability on a previous owner or operator of a
property that owned or operated the property at a time when hazardous or toxic
substances were disposed on, or released from, the property. A conveyance of the
property, therefore, does not relieve the owner or operator from liability. The
Company cannot provide any assurance that additional environmental liability
claims will not arise in the future.
Heartland is subject to federal and state requirements for protection of the
environment, including those for discharge of hazardous materials and
remediation of contaminated sites. Heartland is in the process of assessing its
environmental exposure, including obligations and commitments for remediation of
contaminated sites and assessments of ranges and probabilities of recoveries
from other responsible parties. Because of the regulatory complexities and risk
of unidentified contaminants on its properties, the potential exists for
remediation costs to be materially different from the costs Heartland has
estimated. Some of the property owned by the Company consists of land formerly
used for railroad purposes. Other properties were leased to tenants that used
hazardous materials in their businesses. Any contamination of that property may
affect adversely the Company's ability to sell such property.
For a discussion of the amount and methodology used to determine the amount of
the Company's reserve for environmental liabilities and claims and certain risks
associated therewith, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Summary of Significant
Accounting Estimates - Reserve for Environmental Liabilities".
PENDING LITIGATION
The Jacobson litigation, as well as the other litigation disclosed in
"Item 3. Legal Proceedings", may not be resolved in the Company's favor, and the
Company may incur significant costs associated therewith. If the Company is
required to pay substantial amounts with respect to litigation, the Company may
not be left with any cash or other property to distribute to the Unitholders.
As discussed in "Item 3. Legal Proceedings--Miles City Yard", a state
court in Montana issued an order requiring the Company to escrow cash, post a
bond, or provide another guarantee, of $2,500,000 to cover possible remediation
and clean-up costs on land formerly owned by the Company, or its
predecessor-in-interest, in Miles City, Montana. The Company is considering an
appeal of this order and has posted a letter of credit to comply with the terms
of such order.
4
ACCESS TO FINANCING
As of December 31, 2005, Heartland's total consolidated debt was
zero. There can be no assurance that the amounts available from internally
generated funds, cash on hand and sale of assets will be sufficient to fund
Heartland's anticipated operations and meet existing and future liabilities.
Heartland may be required to seek additional capital in the form of bank
financing. 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
liquidation strategy and for other expenditures, properties might be sold for
far less than their market value. Any such discounted sale could adversely
affect Heartland's future results of operations and future cash flows. However,
the Company's management at this time does not anticipate selling the Company's
remaining properties at substantial discounts from their market value.
The Company has obtained a $2.5 million letter of credit from LaSalle
Bank, NA to comply with an order of a state court in Montana in connection with
litigation over the Miles City Yard. See "Item 3. Legal Proceedings--Miles City
Yard" for more information.
PERIOD-TO-PERIOD FLUCTUATIONS
Heartland's sales activity varies from period to period, and the
ultimate success of this sales activity cannot always be determined from results
in prior periods. Thus, the timing and amount of revenues arising from this
sales activity are subject to considerable uncertainty. The inability of
Heartland to manage effectively its cash flows from operations would have an
adverse effect on its ability to service any future debt, and to meet working
capital requirements.
LIQUIDATION OF ASSETS
The Company's management expects to sell to unrelated third parties
the remainder of its saleable properties with a view towards dissolving the
partnership. The Company has engaged a consultant and a law firm to advise it on
procedures for dissolution and expects to begin the process in the second
quarter of 2006. The Company may soon be required to use a liquidation basis of
accounting in light of the foregoing. As part of any dissolution and
liquidation, the Company will need to make reasonable provisions to pay all
claims and obligations, which include contingent and conditional claims as well
as unknown claims that may arise after dissolution. The consequence is that
Unitholders may not receive any distributions, or if they do, the distributions
may be lower than the true value of the Units. Because the amount of reserve
required is uncertain, the Company may reserve a higher amount than necessary.
The Company does not plan on distributing cash to Unitholders before entering
dissolution. Its ability to make cash distributions during dissolution will
depend on resolution of claims and liabilities. Alternatively, the Company may
determine to dissolve and liquidate in the context of a bankruptcy proceeding if
the Company believes that such a proceeding would likely serve to maximize value
for the Company's Unitholders by providing greater certainty with respect to the
satisfaction of, or provision for, the Company's known and contingent
liabilities. However, even in the context of a bankruptcy proceeding, the
Company will still face uncertainty, especially with respect to the
environmental claims. Additionally, under any liquidation scenario, the
Unitholders will not have control over the divestiture of the Company's
remaining assets or the liquidation process. The Company cannot make any
assurance that changes in its policies will serve fully the interests of all
Unitholders or that under any liquidation scenario the Unitholders will receive
any liquidating distributions of cash or other property, or if they do, that the
distributions will reflect the true value of the Units.
The Company is working to resolve its remaining liabilities which
primarily consist of environmental matters and Edwin Jacobson's claim against
the Company. Significant estimates are used in the preparation of financial
statements to value the Company's environmental liabilities. The amount and
timing of future cash distributions, if any, to the Company's Unitholders will
depend on generation of cash from sales of real estate holdings and the
resolution of liabilities and associated costs. The Company has experienced
recurring operating losses for the years ended December 31, 2005, 2004, 2003 and
2002 and there can be no assurance that the amounts available from internally
generated funds, cash on hand, and sale of the remaining assets of the Company
will be sufficient to fund Heartland's anticipated operations and meet existing
and future liabilities. These losses, and the uncertainty surrounding such
environmental liabilities and other claims, particularly the Edwin Jacobson
lawsuit, create uncertainties about the Company's ability to meet existing and
future liabilities as they become due. The Company has taken certain steps,
including the reduction of fixed overhead and conservation of cash, in light of
these uncertainties. The Company may be required to seek additional capital in
the form of bank financing, however, there is no assurance that such bank
financing will be available or, if available, will be on terms favorable to the
Company.
5
RISKS RELATED TO THE CLASS A UNITS
The market value of the Class A units could decrease based on the
Company's performance, market perception and conditions. The market value of the
Class A units may be based primarily upon the market's perception of the
Company's future cash distributions, and may be secondarily based upon the real
estate market value of the Company's underlying assets. The market price of the
Class A units may be influenced by the distributions on the Class A units
relative to market interest rates. Rising interest rates may lead potential
buyers of the Class A units to expect a higher distribution rate, which would
adversely affect the market price of the Class A units. In addition, if the
Company were to borrow, rising interest rates could result in increased expense,
thereby adversely affecting the cash flow and the Company's ability to service
its indebtedness and make distributions.
The Class A units have been traded since June 20, 1990. The Company
believes that factors such as (but not limited to) announcements of developments
related to the Company's business, fluctuations in the Company's quarterly or
annual operating results, failure to meet expectations, and general economic
conditions, could cause the price of the Company's units to fluctuate
substantially. In recent years the stock market has experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
the underlying companies. Such fluctuations could adversely affect the market
price of the Class A units.
The Class A units are currently traded on the American Stock Exchange
under the symbol "HTL". The Class A units are thinly traded. There are no
assurances that the Company will maintain its listing on the exchange. If the
Class A units should be delisted from the exchange, it is likely that it could
materially and/or adversely affect any future liquidity in the Class A units.
CONFLICTS OF INTEREST OF GENERAL PARTNER AND ITS OFFICERS AND DIRECTORS
The officers and directors of CMC/Heartland Partners Holdings, Inc.,
including Lawrence S. Adelson, President and a director of CMC/Heartland
Partners Holdings, Inc., 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. 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. The General Partner has
sole authority over the timing and amount of distributions as well as
dissolution of the partnership.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
A discussion of certain significant properties of the Company is
included in "Item 1. Business." Properties designated for sale include holdings
that were previously designated for development, and approximately 131 acres of
scattered land parcels. The Company's holdings are located in Illinois, Indiana,
Iowa, Michigan, Minnesota, Missouri, Montana, Washington, and Wisconsin. The
Company also owns certain air rights in Chicago, Illinois.
6
Heartland's headquarters occupies approximately 500 square feet of
leased office space located at 53 West Jackson Blvd, Suite 1150, Chicago,
Illinois. The lease for this office space is month to month.
ITEM 3. LEGAL PROCEEDINGS.
Krachtt Litigation
------------------
The surviving spouse of an employee of a contractor demolishing
buildings on what was then Company owned property filed suit against the
Company, the contractor and the contractor's insurer in Milwaukee County,
Wisconsin Circuit Court alleging wrongful death of the employee and other
damages. The Company was dismissed from the litigation on August 8, 2005.
Maples
------
Under the terms of a lot agreement with the Longleaf Associates
Limited Partnership ("LALP"), a Company subsidiary was required to make certain
payments to Maples, the owner and operator of the golf course and club house
located at the Longleaf Country Club in Southern Pines, North Carolina. Maples
joined a Company subsidiary as a defendant in a lawsuit Maples filed against
LALP in the North Carolina General Court of Justice Superior Court Division of
Moore County for breach of contract. The suit against the Company subsidiary was
dismissed on February 15, 2005.
Edwin Jacobson Lawsuit
----------------------
On August 19, 2002, the former President and Chief Executive Officer
of CMC, Edwin Jacobson, filed two lawsuits against the Company, CMC and certain
officers and/or managers of the General Partner in Circuit Court, Cook County,
Illinois. One of the lawsuits alleges CMC breached the terms of his employment
contract and that the officers and/or board members wrongfully interfered with
his contract. Jacobson is seeking compensatory and punitive damages ($1,000,000
in salary and $11,000,000 in incentive compensation). Jacobson asked the court
to enforce his contract and enjoin the Company from selling property or making
distributions to the Unitholders until the Company has appraised its properties
and paid him according to the terms of his employment contract. Jacobson's
second lawsuit was for defamation. On January 31, 2003, the Company filed
motions to dismiss the amended lawsuits. On May 29, 2003, the court dismissed,
with prejudice, the defamation lawsuit against the Company, CMC and certain
officers and/or managers of the General Partner. At the same time, the court
dismissed, with prejudice, Jacobson's motion to enjoin the Company from selling
its real estate properties. Jacobson also filed a motion for summary judgment on
his contract claims which the court denied. Jacobson filed a motion for
reconsideration, which was denied on April 8, 2005. CMC has filed a counterclaim
alleging breach of fiduciary duty and a motion to dismiss the claim for tortious
interference with a contract. Jacobson filed a motion for summary judgment on
CMC's counterclaim alleging breach of fiduciary duty, which was denied on April
8, 2005.
On February 28, 2003, the Company filed suit against Jacobson in
Delaware state court to collect a note from Jacobson to the Company in the
amount of $332,000, which includes $16,000 of interest that has not been
recorded in the Company's consolidated financial statements. On July 8, 2003,
the Delaware Court stayed that action pending resolution of Jacobson's action
against the Company.
CMC is vigorously defending itself against Jacobson's lawsuit and, in
the opinion of management, has valid defenses against the remaining lawsuit
relating to the Company's alleged breach of Jacobson's employment contract. At
this time, the probability that a liability will be incurred and the amount of
any potential liability cannot be determined. However, this litigation may not
be resolved in the Company's favor, and the Company may incur significant costs
associated therewith. If the Company is required to pay substantial amounts with
respect to the Jacobson litigation, the Company may not be left with any cash or
other property to distribute to the Unitholders. The parties have agreed to
voluntary, non-binding mediation. If mediation is unsuccessful, this matter is
expected to go to trial in the second half of 2006.
7
RACM
----
On July 30, 2003, the Company conveyed 142 acres of property in
Milwaukee, Wisconsin to the Redevelopment Authority of the City of Milwaukee
("RACM") in consideration of $3.55 million in lieu of condemnation. The Company
reserved the right to appeal the fair market value of the property and filed
that appeal on April 6, 2004, in Milwaukee County, Wisconsin Circuit court. In
January 2006, the appeal was settled with RACM making an additional payment of
$3.25 million on March 2, 2006. The RACM settlement will be reflected in the
Company's first quarter 2006 financial statements.
Lite Yard
---------
CMC owned a 5 acre site in Minneapolis, Minnesota ("Lite Yard") that
was impacted with arsenic and lead. On April 29, 2004, a Response Action Plan
for the site was approved by the Minnesota Department of Agriculture. US Borax
Inc. ("Borax"), which discontinued operations in 1968, is a former operator of a
pesticide/herbicide facility on the property. Under a Confidential Settlement
Agreement and Release dated September 27, 2004, between the Company and Borax,
Borax has agreed to pay a portion of the Company's past and future response
costs at the site. At December 31, 2005 and 2004, the Company's aggregate
allowance for claims and liabilities for this site was $20,000 and $1,588,000,
respectively. The allowance was reduced because remediation of the site has been
substantially completed. At December 31, 2005, the Company has recorded a
$12,000 receivable for the portion of these amounts due from Borax under the
settlement agreement.
The Lite Yard was sold in August 2005. The sale does not affect CMC's
obligations under the Response Action Plan.
On September 3, 2004, the United States Environmental Protection
Agency ("USEPA") issued an order ("Order") requiring the Company and Borax to
remediate arsenic in the soils of a nearby residential neighborhood on an
emergency basis. On January 24, 2005, the USEPA issued a general notice letter
("Letter") to the Company and Borax requesting that the Company and Borax
perform a remedial investigation and feasibility study on the soils of the same
nearby residential neighborhood on a non-emergency basis for matters not covered
by the Order. Neither the Order nor the Letter are covered by the Confidential
Settlement Agreement and Release between the Company and Borax.
The Company offered the USEPA $300,000 to settle the Company's
obligations under the Order and Letter. The USEPA has not yet responded to the
Company's offer. The Company believes, based on USEPA publications and a
newspaper article, that the USEPA has provided $1,500,000 to $2,200,000 for past
and future remediation activities in the residential neighborhood. This amount
does not necessarily represent the entire cost of the cleanup being under taken
by the USEPA. The entire cost could be higher or lower. The USEPA could seek
substantial penalties against the Company in addition to remediation costs. The
Company engaged an environmental engineering consultant to review information
available regarding the possible scope and cost of USEPA activities. The
consultant projected a range of possible costs of $3,083,000 to $3,946,000.
However, this estimate was based on limited data available to the consultant.
The Company has reserved $1,293,000 in connection with the Order and Letter.
This reserve amount takes into consideration the estimated range of possible
costs and the allocation of costs among potentially responsible parties ("PRPs")
for the on-site remediation at the Lite Yard.
Exponent
--------
A former consultant for the Company at the Lite Yard, Exponent, Inc.,
filed suit against the Company in Minnesota state court on January 27, 2005. The
complaint alleged that the Company owes Exponent $361,000 in unpaid consultant
fees. The suit was settled on August 3, 2005. CMC paid $140,000 in connection
with the settlement.
Miles City Yard
---------------
By letter dated June 10, 2004, the Montana Department of
Environmental Quality ("DEQ") demanded that the Company or Trinity Railcar
Repair, Inc. ("Trinity") perform a remedial investigation of a railyard in Miles
City, Montana. The yard was previously owned and operated by the Chicago,
Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee Road") and is now owned
by Trinity. The Company has, for many years, been conducting a clean-up of a
8
substantial diesel fuel release at this site. On September 7, 2004, Trinity
filed suit against the Company and CMC in Custer County, Montana state court,
for contribution under state environmental law, for indemnification under sale
agreements between the Company's predecessors-in-interest and Trinity's alleged
predecessors and for injunctive relief prohibiting the Company from dissolving
or making any distributions to its Unitholders. The DEQ intervened in the
litigation and filed a complaint asking, among other things, that both Trinity
and CMC be held jointly and severally liable for remediation of the facility.
On September 14, 2004, Trinity filed a motion for a preliminary
injunction to prohibit the Company from liquidating or making distributions to
its Unitholders. On January 10, 2005, the court held a hearing at which the
Company's engineering witness testified that the maximum cost of investigation
and remediation could be as much as $1,250,000. However, this estimate was not
based on any direct investigation of conditions at the site. On March 24, 2005,
the court ordered the Company to escrow cash, post a bond, or provide another
guarantee, of $2,500,000 to cover possible remediation and clean-up costs for
the site. The court did not make a determination as to the requirement for any
remediation, the costs of remediation or liability for any costs. The Company is
considering an appeal of this order and has posted a letter of credit to comply
with the terms of such order. At December 31, 2005, a letter of credit was
secured with $1.1 million of the Company's restricted cash and a mortgage lien
of $1.4 million on the Company's Kinzie Station Parcel B property. The Company,
based on current review of the site, believes that the range of costs of
investigation and remediation under the June 10, 2004 DEQ letter and completion
of the ongoing diesel fuel remediation could be between $174,000 and $1,740,000.
At December 31, 2005, the Company's aggregate allowance for claims and
liabilities for this site (including costs of investigation, remediation and
legal fees relating to the litigation) is $309,000.
Bozeman
-------
In 2001, the Company sold a 14 acre property to the City of Bozeman,
Montana that was known to be contaminated with asbestos ore. As part of the
sale, the City of Bozeman released the Company from all environmental liability.
The City of Bozeman performed a clean-up of the north half of the property. The
Company understands that the clean up cost of the north half of the site cost
between $912,000 and $920,000. In September 2003, the Company received a letter
from the DEQ requesting an investigation of possible asbestos ore on the south
half of the property sold to the City of Bozeman and a neighboring property. The
City of Bozeman conducted studies indicating that no remediation is required for
the south half of the site. By letter dated November 3, 2004, the Company was
notified by the DEQ that the City of Bozeman, Montana had initiated a proceeding
under the Montana Controlled Allocation of Liability Act ("CALA") with regard to
the sold property. In the administrative proceeding, the DEQ will allocate
environmental liability among potentially liable parties. The estimated range of
costs for the neighboring property is $111,000 to $176,000. The Company believes
it has valid defenses to any CALA allocated liability for the clean-up of the
north half of the property and could assert a claim against the City of Bozeman
for liabilities for any clean-up of the south half of the property. The Company
has reserved an aggregate of $126,000 for all claims and liabilities associated
with this property and the neighboring property. This reserve amount reflects
the ranges of costs for both on-site and off-site remediation and the Company's
limited liability to the City of Bozeman under the terms of the sale of the
property to the City of Bozeman.
Other
-----
Under environmental laws, liability for hazardous substance
contamination is imposed on the current owners and operators of the contaminated
site, as well as the owner or the operator of the site at the time the hazardous
substance was disposed or otherwise released. In most cases, this liability is
imposed without regard to fault. Currently, the Company has known environmental
liabilities associated with certain of its properties arising out of the
activities of the Milwaukee Road or certain of the Milwaukee Road'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 the Milwaukee Road's lessees.
The DEQ has asserted that the Company is liable for some or all of
the investigation and remediation of certain properties in Montana sold by the
Milwaukee Road's reorganization trustee prior to the consummation of its
reorganization. The Company has denied liability at certain of these sites based
on the reorganization bar of the Milwaukee Road bankruptcy proceeding. The
Company's potential liability for the investigation and remediation of these
sites was discussed in detail at a meeting with the DEQ in April 1997. While the
DEQ has not formally changed its position, the DEQ has not elected to file suit.
9
At two 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 Canadian Pacific Railroad, formerly known as the Soo Line
Railroad Company, has asserted that the Company is liable for, among other
things, the remediation of releases of petroleum or other regulated materials at
six different sites located in Iowa, Minnesota and Wisconsin that Canadian
Pacific acquired from the Company. The Company has denied liability based on the
underlying sale agreement. The environmental claims are all currently being
handled by Canadian Pacific, and the Company understands that Canadian Pacific
has paid settlements on certain of these claims. Because Canadian Pacific has
been handling these matters exclusively, the Company has made no determination
as to the merits of the claims and is unable to determine their materiality.
Therefore, there is no accrual recorded in the financial statements for these
sites.
In November 1995, the Company settled a claim with respect to the
so-called "Wheeler Pit" site near Janesville, Wisconsin. The Company's only
outstanding obligation under the settlement is to pay 32% of the monitoring
costs for twenty-five years beginning in 1997. At December 31, 2005, Heartland's
allowance for claims and liabilities for this site is $191,000. By letter dated
April 6, 2005, the lead PRP at this site offered to settle the Company's future
obligations for approximately $266,000. Additionally, the lead PRP at this site
previously made a demand for monitoring costs of $53,000 incurred through March
of 2004. The Company has not paid any amounts to the PRP in respect of
monitoring costs for this site to date.
In addition to the environmental matters set forth above, there may
be other properties with environmental liabilities not yet known to the Company,
with potential environmental liabilities for which the Company has no reasonable
basis to estimate, or for which the Company believes it is not reasonably likely
to ultimately bear responsibility for 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 insurers, which issued policies to
the Milwaukee Road 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Unitholders of Heartland
during the year ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
HISTORICAL TRADING PRICES FOR UNITS
The Class A limited partnership 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, 2005
and 2004.
10
2005 HIGH LOW
First quarter $ 4.33 $ 3.66
Second quarter 4.30 2.50
Third quarter 2.76 1.67
Fourth quarter 1.67 0.55
2004
First quarter $ 8.15 $ 6.55
Second quarter 7.95 6.00
Third quarter 6.69 4.10
Fourth quarter 5.21 3.99
Based on records maintained by Heartland's transfer agent and
registrar, there were approximately 500 record holders of Heartland's units as
of March 15, 2006.
CASH DISTRIBUTIONS TO UNITHOLDERS
The amount of Heartland's cash available to be distributed, if any,
to Unitholders 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 the General Partner 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 contingencies
and environmental liabilities.
Heartland's Available Cash Flow will be derived from CMC. When, and
if, available and appropriate, the General Partner expects to cause Heartland to
make distributions of Heartland's Available Cash Flow in an amount equal to 99%
to the Unitholders 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.
The Company does not plan to distribute cash to Unitholders before entering
dissolution. Its ability to make cash distributions during dissolution will
depend on resolution of claims and liabilities. See "Item 1A. Risk Factors -
Liquidation of Assets" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital Resources"
for more information. If the partnership were dissolved, liquidating
distributions, if any, would be made pro rata to each partner in accordance with
its positive capital account balance after certain adjustments set out in the
partnership agreement. As of December 31, 2005, the Unitholders' capital account
balance was $424,000 and the General Partner's capital account balance was $0.
Future lenders to Heartland may impose restrictions on Heartland's ability to
make cash or other property distributions. 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 distributions were made during 2004 or 2005.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the consolidated financial statements and the notes thereto contained
herein in "Item 8. Financial Statements and Supplementary Data," the information
contained herein in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the information contained herein in
"Item 1. Business." Historical results are not necessarily indicative of future
results.
11
Following is a summary of Heartland's selected financial data for the
years ended and as of December 31, 2005, 2004, 2003, 2002 and 2001 (amounts in
thousands except per Unit data):
STATEMENT OF OPERATIONS DATA: 2005 2004 2003 2002 2001
----------------------------- ---- ---- ---- ---- ----
Property Sales $ 5,513 $ 4,035 $ 32,680 $ 6,766 $ 30,471
Operating (loss) income (5,231) (4,491) (3,402) (2,455) 4,426
Other income 519 136 1,047 1,397 932
----------- ----------- ------------ ----------- -----------
Net (loss) income $ (4,712) $ (4,355) $ (2,355) $ (1,058) $ 5,358
=========== =========== ============ =========== ===========
Net income (loss) allocated
to General Partner $ (1) $ 2 $ -- $ (11) $ 54
=========== =========== ============ =========== ===========
Net (loss) income allocated
to Class B Interest $ (4,570) $ (4,357) $ (56) $ (5) $ 26
=========== =========== ============ =========== ===========
Net (loss) income allocated
to Class A Units $ (141) $ -- $ (2,299) $ (1,042) $ 5,278
=========== =========== ============ =========== ===========
Net (loss) income per Class A Unit $ (0.07) $ -- $ (1.10) $ (0.50) $ 2.48
=========== =========== ============ =========== ===========
Cash distributions declared per Class A Unit $ -- $ -- $ 3.35 $ -- $ --
=========== =========== ============ =========== ===========
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
BALANCE SHEET DATA 2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net Properties $ 1,952 $ 6,416 $ 7,730 $ 28,699 $ 28,201
Total assets 4,375 11,673 16,991 38,855 38,420
Allowance for claims
and liabilities 2,128 4,228 3,970 4,050 4,337
Total liabilities 3,951 6,537 7,500 19,893 18,360
Partners' capital 424 5,136 9,491 18,962 20,060
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See "Item 1A. Risk Factors."
SUMMARY OF SIGNIFICANT ACCOUNTING ESTIMATES
The Company's most significant accounting estimates relate to the net
realizable value of assets, potential environmental liabilities, the treatment
of certain loans from Heartland to HTI and pending litigation.
Net Realizable Value of Assets
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. Historically this would occur when a
property that had been held for development was placed under contract for sale.
The Company did not recognize any impairment loss in 2005. It recognized
impairment losses in 2004 and 2003 as indicated in the Consolidated Statements
of Cash Flows and described in Note 2 to the consolidated financial statements.
RESERVE FOR ENVIRONMENTAL LIABILITIES
Estimation of Amount of Reserve for Environmental Claims and Liabilities:
The Company evaluates the environmental liabilities associated with
its properties on a regular basis. The Company records an allowance, or reserve,
for known potential environmental claims and liabilities, including remediation,
legal and consulting fees, to the extent it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated. The
reserve amount does not include any estimated amounts for unknown claims and
liabilities. The Company estimates its reserve for known environmental claims
and liabilities independent from any claims the Company may have for recovery
against third parties, including from governmental sponsored clean-up funds and
insurers. If the Company cannot reasonably estimate the amount of an
environmental claim or liability, but (i) the Company's management is able to
determine that the amount of the liability is likely to fall within a range and
(ii) no amount within that range can be determined to be a better estimate than
any other amount, then the Company records the reserve at the minimum amount of
the range. At December 31, 2005, the Company recorded a receivable for the
estimated amount due for future costs at the Lite Yard under the Borax
settlement agreement of $12,000. At December 31, 2005, the reserve for
environmental claims and liabilities was $2,128,000, which represents the
minimum amount of the range of the Company's estimate of environmental claims
and liabilities. The upper range of the Company's known environmental claims and
liabilities is estimated to be approximately $9,404,000 based on an estimate by
outside consultants.
12
Actual Costs Likely to Exceed Amount of Reserve:
If the Company were to use a different approach than that described
above, the amount of the reserve could be materially higher. Additionally, the
Company believes it is likely that the actual amount of the Company's
environmental claims and liabilities, when fully resolved or provided for, will
be higher than the reserve amount because it is unlikely that, as a whole, such
claims and liabilities will be less expensive to resolve than the amount of the
low end of such range. Also, as noted above, the Company does not include in the
amount of the reserve any estimated amounts for unknown claims and liabilities.
This means that as new claims arise, the amount of the reserve will generally
need to be increased. For example, as the Company incurs environmental
remediation and other costs for new environmental claims, the Company pays for,
and records as an operating expense, the amount of such costs and accrues an
environmental reserve if necessary. However, because new environmental claims
arise periodically, the amount of the Company's reserve for environmental claims
and liabilities has not historically declined, but rather has remained flat or
increased over time. The major exception to this was in connection with the Lite
Yard site, discussed below, where the Company recovered some of the reserved
amounts from a third party.
The reserve has declined significantly in the past year primarily due
to expenditures on the Lite Yard and contributions to the clean up of the Lite
Yard by Borax. The donation of a property in Deer Lodge, Montana to a local
government and updated and lower estimates for Bozeman, Montana environmental
costs also factored into the reduction of the reserve.
The Company's management expects to sell to unrelated third parties
the remainder of its saleable properties with a view towards dissolving the
partnership. The Company has engaged a consultant and a law firm to advise it on
procedures for dissolution and expects to begin the process in the second
quarter of 2006. As part of any dissolution and liquidation, the Company will
need to make reasonable provisions to pay all claims and obligations, which
include contingent and conditional claims as well as unknown claims that may
arise after dissolution. In connection with the dissolution and liquidation of
the Company, the Company may determine it to be in the best interests of the
Company and the Unitholders to purchase environmental liability insurance or to
pay a third party to assume the Company's environmental liabilities if it
appears that the cost to do so will likely be less than the cost of maintaining
the Company's overhead to resolve and manage the environmental claims and
remediation process going forward. The Company has had preliminary discussions
with environmental claims management firms regarding the potential cost at which
such firms would agree to assume the Company's known and unknown environmental
liabilities. At this time, however, the Company does not expect to purchase
environmental liability insurance.
Factors and Properties Affecting the Amount of the Company's Environmental
Liabilities:
Under environmental laws, liability for hazardous substance
contamination is imposed on the current owners and operators of the contaminated
site, as well as the owner or the operator of the site at the time the hazardous
substance was disposed or otherwise released. In most cases, this liability is
imposed without regard to fault. Currently, the Company has known environmental
liabilities associated with certain of its properties arising out of the
activities of the Milwaukee Road or certain of the Milwaukee Road'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 the Milwaukee Road's lessees.
From time to time contaminants are discovered on property the Company
now owns. Some of these may have resulted from the historical activities of the
Milwaukee Road. In other cases the property was leased to a tenant who released
contaminants onto the property. The Company's property may also be polluted by a
release or migration of contaminants onto the Company's property by unrelated
third parties.
The Company's practice when it sells land is to sell the property "as
is, where is" without any representation or indemnification for environmental
conditions. The Company has one active site, however, Miles City, Montana, where
the Milwaukee Road and its successor may have issued certain limited indemnities
to the buyer for specified environmental concerns. There are other cases in
which the Company has had a claim arising out of alleged contamination on sold
property. In some, but not all, of these instances, the Company has been
successful in asserting that such liabilities were discharged in the bankruptcy
proceedings of the Milwaukee Road.
13
The Company may be responsible for certain liabilities that arise
from the historical operations of the Milwaukee Road railroad that have nothing
to do with the ownership of property. The Company has been, for example, named
as a "potentially responsible party" or had claims asserted by private parties
in landfill-clean-up cases in which there is an allegation that the Milwaukee
Road generated or transported materials to the landfill. Additional claims may
arise in the future. In certain of these cases, the Company has asserted that
such liabilities were discharged in the bankruptcy proceedings of the Milwaukee
Road.
The DEQ has asserted that the Company is liable for some or all of
the investigation and remediation of certain properties in Montana sold by the
Milwaukee Road's reorganization trustee prior to the consummation of its
reorganization. The Company has denied liability at certain of these sites based
on the reorganization bar of the Milwaukee Road bankruptcy proceeding. The
Company's potential liability for the investigation and remediation of these
sites was discussed in detail at a meeting with the DEQ in April 1997. While the
DEQ has not formally changed its position, the DEQ has not elected to file suit.
At two 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.
Lite Yard
---------
CMC owned a 5 acre site in Minneapolis, Minnesota ("Lite Yard") that
was impacted with arsenic and lead. On April 29, 2004, a Response Action Plan
for the site was approved by the Minnesota Department of Agriculture. US Borax
Inc. ("Borax"), which discontinued operations in 1968, is a former operator of a
pesticide/herbicide facility on the property. Under a Confidential Settlement
Agreement and Release dated September 27, 2004, between the Company and Borax,
Borax has agreed to pay a portion of the Company's past and future response
costs at the site. At December 31, 2005 and 2004, the Company's aggregate
allowance for claims and liabilities for this site was $20,000 and $1,588,000,
respectively. The allowance was reduced because remediation of the site has been
substantially completed. At December 31, 2005, the Company has recorded a
$12,000 receivable for the portion of these amounts due from Borax under the
settlement agreement.
The Lite Yard was sold in August 2005. The sale does not affect CMC's
obligations under the Response Action Plan.
On September 3, 2004, the United States Environmental Protection
Agency ("USEPA") issued an order ("Order") requiring the Company and Borax to
remediate arsenic in the soils of a nearby residential neighborhood on an
emergency basis. On January 24, 2005, the USEPA issued a general notice letter
("Letter") to the Company and Borax requesting that the Company and Borax
perform a remedial investigation and feasibility study on the soils of the same
nearby residential neighborhood on a non-emergency basis for matters not covered
by the Order. Neither the Order nor the Letter are covered by the Confidential
Settlement Agreement and Release between the Company and Borax.
The Company offered the USEPA $300,000 to settle the Company's
obligations under the Order and Letter. The USEPA has not yet responded to the
Company's offer. The Company believes, based on USEPA publications and a
newspaper article, that the USEPA has provided $1,500,000 to $2,200,000 for past
and future remediation activities in the residential neighborhood. This amount
does not necessarily represent the entire cost of the cleanup being under taken
by the USEPA. The entire cost could be higher or lower. The USEPA could seek
substantial penalties against the Company in addition to remediation costs. The
Company engaged an environmental engineering consultant to review information
available regarding the possible scope and cost of USEPA activities. The
consultant projected a range of possible costs of $3,083,000 to $3,946,000.
However, this estimate was based on limited data available to the consultant.
The Company has reserved $1,293,000 in connection with the Order and Letter.
This reserve amount takes into consideration the estimated range of possible
costs and the allocation of costs among potentially responsible parties ("PRPs")
for the on-site remediation at the Lite Yard.
14
Miles City Yard
---------------
By letter dated June 10, 2004, the Montana Department of
Environmental Quality ("DEQ") demanded that the Company or Trinity Railcar
Repair, Inc. ("Trinity") perform a remedial investigation of a railyard in Miles
City, Montana. The yard was previously owned and operated by the Chicago,
Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee Road") and is now owned
by Trinity. The Company has, for many years, been conducting a clean-up of a
substantial diesel fuel release at this site. On September 7, 2004, Trinity
filed suit against the Company and CMC in Custer County, Montana state court,
for contribution under state environmental law, for indemnification under sale
agreements between the Company's predecessors-in-interest and Trinity's alleged
predecessors and for injunctive relief prohibiting the Company from dissolving
or making any distributions to its Unitholders. The DEQ intervened in the
litigation and filed a complaint asking, among other things, that both Trinity
and CMC be held jointly and severally liable for remediation of the facility.
On September 14, 2004, Trinity filed a motion for a preliminary
injunction to prohibit the Company from liquidating or making distributions to
its Unitholders. On January 10, 2005, the court held a hearing at which the
Company's engineering witness testified that the maximum cost of investigation
and remediation could be as much as $1,250,000. However, this estimate was not
based on any direct investigation of conditions at the site. On March 24, 2005,
the court ordered the Company to escrow cash, post a bond, or provide another
guarantee, of $2,500,000 to cover possible remediation and clean-up costs for
the site. The court did not make a determination as to the requirement for any
remediation, the costs of remediation or liability for any costs. The Company is
considering an appeal of this order and has posted a letter of credit to comply
with the terms of such order. At December 31, 2005, a letter of credit was
secured with $1.1 million of the Company's restricted cash and a mortgage lien
of $1.4 million on the Company's Kinzie Station Parcel B property. The Company,
based on current review of the site, believes that the range of costs of
investigation and remediation under the June 10, 2004 DEQ letter and completion
of the ongoing diesel fuel remediation could be between $174,000 and $1,740,000.
At December 31, 2005, the Company's aggregate allowance for claims and
liabilities for this site (including costs of investigation, remediation and
legal fees relating to the litigation) is $309,000.
Bozeman
-------
In 2001, the Company sold a 14 acre property to the City of Bozeman,
Montana that was known to be contaminated with asbestos ore. As part of the
sale, the City of Bozeman released the Company from all environmental liability.
The City of Bozeman performed a clean-up of the north half of the property. The
Company understands that the clean up cost of the north half of the site cost
between $912,000 and $920,000. In September 2003, the Company received a letter
from the DEQ requesting an investigation of possible asbestos ore on the south
half of the property sold to the City of Bozeman and a neighboring property. The
City of Bozeman conducted studies indicating that no remediation is required for
the south half of the site. By letter dated November 3, 2004, the Company was
notified by the DEQ that the City of Bozeman, Montana had initiated a proceeding
under the Montana Controlled Allocation of Liability Act ("CALA") with regard to
the sold property. In the administrative proceeding, the DEQ will allocate
environmental liability among potentially liable parties. The estimated range of
costs for the neighboring property is $111,000 to $176,000. The Company believes
it has valid defenses to any CALA allocated liability for the clean-up of the
north half of the property and could assert a claim against the City of Bozeman
for liabilities for any clean-up of the south half of the property. The Company
has reserved an aggregate of $126,000 for all claims and liabilities associated
with this property and the neighboring property. This reserve amount reflects
the ranges of costs for both on-site and off-site remediation and the Company's
limited liability to the City of Bozeman under the terms of the sale of the
property to the City of Bozeman.
Other
-----
The Canadian Pacific Railroad, formerly known as the Soo Line
Railroad Company, has asserted that the Company is liable for, among other
things, the remediation of releases of petroleum or other regulated materials at
six different sites located in Iowa, Minnesota and Wisconsin that Canadian
Pacific acquired from the Company. The Company has denied liability based on the
underlying sale agreement. The environmental claims are all currently being
handled by Canadian Pacific, and the Company understands that Canadian Pacific
has paid settlements on certain of these claims. Because Canadian Pacific has
been handling these matters exclusively, the Company has made no determination
as to the merits of the claims and is unable to determine their materiality.
Therefore, there is no accrual recorded in the financial statements for these
sites.
15
In November 1995, the Company settled a claim with respect to the
so-called "Wheeler Pit" site near Janesville, Wisconsin. The Company's only
outstanding obligation under the settlement is to pay 32% of the monitoring
costs for twenty-five years beginning in 1997. At December 31, 2005, Heartland's
allowance for claims and liabilities for this site is $191,000. By letter dated
April 6, 2005, the lead PRP at this site offered to settle the Company's future
obligations for approximately $266,000. Additionally, the lead PRP at this site
previously made a demand for monitoring costs of $53,000 incurred through March
of 2004. The Company has not paid any amounts to the PRP in respect of
monitoring costs for this site to date.
In addition to the environmental matters set forth above, there may
be other properties with environmental liabilities not yet known to the Company,
with potential environmental liabilities for which the Company has no reasonable
basis to estimate, or for which the Company believes it is not reasonably likely
to ultimately bear responsibility for 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 insurers, which issued policies to
the Milwaukee Road 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.
TREATMENT OF CERTAIN LOANS FROM HTI TO HEARTLAND
At December 31, 2004, HTI owed Heartland and CMC an aggregate of
$9,734,000 of which $8,464,000 related to promissory notes issued in 2000 and
2001 (the "2000 Notes"). The notes were collateralized by a security interest in
the Class B Interest (the "Collateral") and bore interest at 13% per annum. The
Company also received as additional consideration for the 2000 Notes a Series C
Warrant that entitled Heartland to purchase 320,000 shares of HTI common stock
at an exercise price of $1.05 per share.
PG Oldco, Inc., a creditor of HTI under notes in an aggregate
principal amount of $2,200,000 ("PG Oldco Notes"), also had a security interest
in the Collateral. On May 23, 2003, Heartland purchased from PG Oldco, Inc. the
PG Oldco Notes for approximately $1,270,000. The purchase price of $1,270,000
for the PG Oldco Notes was recorded as an increase in "Due from Affiliate" on
the Company's consolidated financial statements.
On April 16, 2004, the Company purchased the claims that an unrelated
third party maintained against HTI, the former general partner of Heartland, for
$70,000, which was included in general and administrative expense for the year
ended December 31, 2004. The claims included a $500,000 note (the "LZ debt
claim") and a "put" claim of approximately $13 million (the "LZ put claim").
The Company purchased these claims because it believed the value was
reasonable and to preserve an orderly liquidation of HTI given HTI's ownership
of the limited liability companies which held the Company's Class B and General
Partner interests.
On June 15, 2005, HTI filed for liquidation under Chapter 11 of the
federal bankruptcy laws. HTI and the Company had negotiated a proposed
settlement of various disputes between HTI and the Company ("Settlement"). The
Settlement was approved by a committee of independent members of HTII's Board of
Managers and by the other major creditors of HTI, and, in August 2005 by the
bankruptcy court. The transactions comprising the Settlement were closed on
November 15, 2005. CMC paid HTI a total of $669,000 and released its claims
(including the LZ put claim, the LZ debt claim, the PG Oldco Claim and the CMC
loan) consisting of the following: $75,000 was paid for unpaid management fees;
$125,000 was paid in the form of a Debtor in Possession loan ("DIP Loan"), and
the DIP Loan was forgiven in the Settlement and the amount is reflected in bad
debt expense in the fourth quarter of 2005; and $469,000 was paid on November
15, 2005. In addition, HTI transferred the Class B Interest to Heartland, and
the General Partner interests and Management Agreement to CMC/Heartland Partners
Holdings, Inc. ("Holdings"), an entity controlled by CMC's Board of Managers.
16
Heartland had recorded an allowance for doubtful accounts of
approximately $7,334,000 and $7,234,000 on the 2000 Notes and PG Oldco Notes
receivable balance of $9,734,000 at September 30, 2005 and December 31, 2004,
respectively. Heartland began recording an allowance for doubtful accounts
against the 2000 Notes and PG Oldco Notes because HTI indicated to Heartland
that it did not have the means to repay the amounts owed under the 2000 Notes
and PG Oldco Notes. A $5,000,000 allowance for doubtful accounts was recorded in
the fourth quarter of 2003 following the sale of the Company's Fife, Washington
property and the subsequent cash distribution of $2.30 per Unit in December
2003, which reduced the estimated amount of potential future distributions
distributable to the Class B Interest. An additional $2,101,000 was recorded in
the fourth quarter of 2004 based on the Company's continued operating losses,
increased environmental expense and the proposed settlement with HTI. The
remaining $2,500,000 along with the $125,000 DIP Loan was written off in 2005.
JACOBSON LITIGATION
Edwin Jacobson, the former President and C.E.O. of CMC, has sued the
Company claiming that it owes him additional salary and incentive compensation
based on the terms of his employment contract. He has demanded $12,000,000
($1,000,000 salary and $11,000,000 incentive compensation) in damages. The
Company has denied Mr. Jacobson's claims and has countersued to recover past
payments made to him and to collect $332,000 in principal and interest under a
note Jacobson made to the Company. The amount claimed in the lawsuit includes
$16,000 in interest which is not reflected in the financial statements. The
Company offered to settle the lawsuits in exchange for forgiving Jacobson's debt
to the Company. When it made the offer, the Company established an allowance
against the Note Receivable of $316,000. CMC has made no other provision for
this potential liability.
CRITICAL ACCOUNTING POLICIES
The following section is a summary of critical accounting policies
that require management estimates and judgments.
o The Company provides an allowance for doubtful accounts against
the portion of accounts receivable that is estimated to be
uncollectible. Accounts receivable in the consolidated balance
sheets are shown net of an allowance for doubtful accounts of
$354,000 as of December 31, 2005.
o Heartland evaluates 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 the Company may have 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 a better estimate than any other amount,
then an allowance equal to the minimum amount of the range is
established.
o 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.
o Land sales are recognized when the following criteria are met:
persuasive evidence of an agreement exists; risks of ownership
have passed to the buyer; the Company's price to the buyer is
fixed and determinable; and collectibility is reasonably assured.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 11 to the consolidated financial statements for a discussion
of recently issued accounting standards that are not yet effective.
RESULTS OF OPERATIONS
Operations for the year ended December 31, 2005 resulted in a net
loss of ($4,712,000), of which ($141,000) of the loss or ($0.07) per Class A
Unit was allocated to the Unitholders. Through November the allocation
percentages were 98.5% Class A, 0.5% Class B and 1% General Partner, subject to
17
the limitation on allocating losses to partners with positive capital balances.
Effective as the end of November, the percentage allocations were changed to 99%
Class A and 1% General Partner. For the year ended December 31, 2004, operations
resulted in a loss of ($4,355,000). The loss was allocated to the Class B
Interest pursuant to the terms of the partnership agreement. For the year ended
December 31, 2003, operations resulted in a net loss of ($2,355,000) or ($1.10)
per Class A Unit.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
PROPERTY SALES. Property sales increased $1,478,000, or 37% to
$5,513,000 for year ended December 31, 2005 from $4,035,000 for the year ended
December 31, 2004. Sales in 2005 included Kinzie Station Phase II for
$4,200,000; Lite Yard, Minneapolis, MN at $490,000; and the $650,000 sale of
land in Glendale, WI. The Company also closed the sale of its 4,000 square foot
office property in Chicago, IL, but this was reported as a gain on sale of
assets for financial reporting purposes. Property sales that closed in 2004
include 2 acres of industrial land in Kinzie Station, Chicago, IL for
approximately $1,597,000, 6 acres in Milwaukee, WI for approximately $1,155,000,
21 acres in Rockford, IL for approximately $180,000 and 11,777 acres of
non-contiguous land in 12 states for $250,000.
COST OF PROPERTY SALES. Cost of property sales increased $3,358,000,
or 254% to $4,679,000 for year ended December 31, 2005 from $1,321,000 for year
ended December 31, 2004. This increase was primarily the result of high carrying
costs for the Kinzie Station Phase II and Lite Yard properties sold in 2005.
GROSS PROFIT ON PROPERTY SALES. Gross profit on property sales
decreased $1,880,000, or 69% to $834,000 for year ended December 31, 2005 from
$2,714,000 for year ended December 31, 2004. This decrease was primarily the
result of the high carrying costs for the Kinzie Station Phase II and Lite Yard
properties sold in 2005.
SELLING EXPENSES. Selling expenses decreased $45,000, or 6% to
$676,000 for year ended December 31, 2005 from $721,000 for year ended December
31, 2004. This decrease reflected the elimination of the Company's internal
sales function in 2005 offset by commission expenses in connection with 2005
sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $398,000, or 12% to $2,993,000 for year ended December 31,
2005 from $3,391,000 for year ended December 31, 2004. The decrease was
primarily due to lower overhead resulting from having fewer employees in 2005
partially offset by $347,000 of HTI settlement and higher outside accounting
fees.
BAD DEBT EXPENSE. Bad debt expense increased $486,000, or 23% to
$2,625,000 for year ended December 31, 2005 from $2,139,000, for year ended
December 31, 2004. This increase was the result of writing off the remainder of
the HTI note receivable and DIP Loan in connection with the Settlement.
REAL ESTATE TAXES. Real Estate taxes decreased $9,000, or 10% to
$82,000 for year ended December 31, 2005 from $91,000 for year ended December
31, 2004. This decrease was the result of fewer properties being owned by the
Company during 2005.
ENVIRONMENTAL EXPENSES AND OTHER CHARGES. Environmental expenses and
other charges decreased $1,174,000 or 136% to ($311,000) for the year ended
December 31, 2005 from $863,000 for the year ended December 31, 2004. Heartland
spent significant amounts on environmental remediation in 2005, but had reserved
for these expenditures in prior years. The Company also got the benefit of
payments from Borax for costs relating to remediation of the Lite Yard that had
been expensed in prior years, entered into a favorable settlement with an
environmental consultant concerning disputed billing and reduced its reserve for
remediation at Bozeman, MT based on studies done by the City of Bozeman's
consultant.
OTHER INCOME AND (EXPENSES). Total other income increased $383,000,
or 282% to $519,000 for year ended December 31, 2005 from $136,000 for year
ended December 31, 2004. The Company realized $430,000 from the sale of office
space in Kinzie Station Phase I and its management fee expense was $216,000 less
due to the expiration of the management agreement with HTI. However, rental
income declined by $455,000. Of the decline in rental income, $360,000 resulted
from the recognition in the 2004 financial statements of rental income in
connection with the 2004 sale of the Petit Point property in Milwaukee, WI.
18
NET LOSS. Net loss increased $357,000 or 8% to $4,712,000
for year ended December 31, 2005 from $4,355,000 for year ended December 31,
2004. The loss increased despite increased property sales and lower selling, G&A
and environmental expenses as a result of high carrying costs for certain of its
properties sold, payments to HTI and the write off of the HTI note receivable in
connection with the Settlement as well as lower rental income in 2005.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
PROPERTY SALES. Property sales decreased $28,645,000, or 88% to
$4,035,000 for year ended December 31, 2004 from $32,680,000 for the year ended
December 31, 2003. There were several large sales that closed in 2003 including
3 acres of land in Kinzie Station North for $9,850,000, 170 acres of land in
Fife, Washington for $13,250,000 and the conveyance of title to approximately
142 acres of land in Milwaukee, Wisconsin for $3,550,000. Property sales that
closed in 2004 include 2 acres of industrial land in Kinzie Station, Chicago, Il
for approximately $1,597,000, 6 acres in Milwaukee, WI for approximately
$1,155,000, 21 acres in Rockford, Il. for approximately $180,000 and 11,777
acres of non-contiguous land in 12 states for $250,000.
COST OF PROPERTY SALES. Cost of property sales decreased $22,388,000,
or 94% to $1,321,000 for year ended December 31, 2004 from $23,709,000 for year
ended December 31, 2003. This decrease was primarily the result of lower
property sales in 2004.
GROSS PROFIT ON PROPERTY SALES. Gross profit on property decreased
$6,257,000, or 70% to $2,714,000 for year ended December 31, 2004 from
$8,971,000 for year ended December 31, 2003. This decrease was primarily the
result of lower property sales in 2004 partly offset by a book loss of
$4,000,000 on the disposition of the Menomonee Valley property in Milwaukee, WI
in 2003.
SELLING EXPENSES. Selling expenses decreased $1,126,000, or 61% to
$721,000 for year ended December 31, 2004 from $1,847,000 for year ended
December 31, 2003. This decrease reflected lower sales activity in 2004 and the
elimination of sales expense from the Longleaf development which was sold in
2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $42,000, or 1% to $3,391,000 for year ended December 31, 2004
from $3,433,000 for year ended December 31, 2003. The decrease was primarily due
to slightly lower legal and consulting fees. The Company also had incurred large
payments in 2003 and 2004 under a Partnership Insurance program. These payments
will not recur in future years.
BAD DEBT EXPENSE. Bad debt expense decreased $2,861,000, or 57% to
$2,139,000 for year ended December 31, 2004 from $5,000,000, for year ended
December 31, 2003. This decrease was primarily the result of the recording of an
allowance for doubtful accounts on the HTI note receivable of $2,101,000 in 2004
compared to $5,000,000 recorded in 2003.
REAL ESTATE TAXES. Real Estate taxes decreased $353,000, or 80% to
$91,000 for year ended December 31, 2004 from $444,000 for year ended December
31, 2003. This decrease was the result of fewer properties being owned by the
Company during 2004, and the assumption of accrued real estate taxes by the
buyer of 11,777 acres of Heartland's properties in 2004.
ENVIRONMENTAL EXPENSES AND OTHER CHARGES. Environmental expenses and
other charges decreased $786,000 or 48% to $863,000 for the year ended December
31, 2004 from $1,649,000 for the year ended December 31, 2003. Heartland spent
significant amounts on environmental remediation in 2004, but had reserved for
these expenditures in prior years. The Company also got the benefit of payments
from Borax for costs relating to remediation of the Lite Yard that had been
expensed in prior years.
OTHER INCOME AND (EXPENSES). Total other income decreased $911,000,
or 87% to $136,000 for year ended December 31, 2004 from $1,047,000 for year
ended December 31, 2003. Other income for 2003 had included a gain on the
extinguishment of $1,500,000 of debt in connection with the sale of Longleaf in
North Carolina. Interest expense was $328,000 less in 2004 as the company had
minimal outstanding debt during the year.
19
NET LOSS. Net loss increased $2,000,000 or 85% to $4,355,000 for year
ended December 31, 2004 from $2,355,000 for year ended December 31, 2003. The
increase was primarily due to lower property sales not being offset by lower
operating costs as well as an additional allowance of $2,101,000 for doubtful
accounts related to the HTI note receivable.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for operating activities has been derived primarily from
proceeds of property sales. Cash was $1,160,000 (excluding $1,093,000 of
restricted cash) at December 31, 2005 compared to $1,450,000 as of December 31,
2004 and $3,926,000 at December 31, 2003. The decrease in cash from December 31,
2004 to December 31, 2005 was primarily due to the increase in restricted cash
in connection with the letter of credit for the Trinity/Miles City litigation.
(See "Miles City Yard," above.) The Company also expended significant cash on
the remediation of the Lite Yard, which is now substantially complete. The
decrease in cash of $2,476,000 from December 31, 2003 to December 31, 2004 was
primarily due to less cash generated from land sales during 2004 compared to
2003 which was not completely offset by lower cash costs and expenses. (See the
Consolidated Statements of Cash Flows.)
Net cash provided by operating activities was $254,000 for the year
ended December 31, 2005 compared to net cash used in operating activities of
$2,476,000 for the year ended December 31, 2004. The increase of cash provided
by operating activities from 2004 to 2005 is primarily due to increased sales in
2005. Net cash used in operating activities was $2,476,000 for the year ended
December 31, 2004 compared to $19,138,000 of net cash provided by operating
activities for the year ended December 31, 2003. Cash provided by operating
activities from 2004 compared to 2003 decreased by $21,614,000 as a result of
significantly lower sales in 2004 that were not offset by lower operating costs.
(See the Consolidated Statements of Cash Flows).
Gross proceeds from property sales provided $5,513,000 in 2005,
$4,035,000 in 2004, and $32,680,000 in 2003. During 2006, the Company expects
proceeds from property sales to consist primarily of the sales of Kinzie Station
North-Parcel B for $2,850,000 and Kinzie Station North-Jewel and air rights for
$2,850,000, and the receipt of $3,250,000 additional compensation from
settlement the appeal of the RACM condemnation of property in Milwaukee,
Wisconsin.
The cost of property sales in 2005 was $4,679,000 or 85% of sales
proceeds. In 2004, cost of property sales was $1,321,000 or 33% of sales
proceeds; and $23,709,000 or 73% of sales proceeds in 2003.
As of December 31, 2005, Heartland had 2 parcels of land in Chicago,
IL with a book value of approximately $1,900,000, under contract for sale to two
buyers. The contract price for each property is $2,850,000. The contracts call
for the sales to be closed in 2006. The Company also has 131 acres in scattered
land parcels throughout 9 states. The Company intends to dispose of this land in
an orderly fashion; however, the Company anticipates that the disposal of such
properties may extend beyond the year 2006.
Portfolio income is derived principally from interest earned on
certificates of deposit and investment of cash not required for operating
activities in overnight investments. Portfolio income for 2005 was $75,000
compared to $27,000 for 2004 and $30,000 for 2003. Portfolio income increased in
2005 due to higher levels of cash available for investment.
The Company did not make any cash distributions to the Unitholders in
2005 or 2004. On August 11, 2003, Heartland declared a cash distribution of
$1.05 per unit. On September 15, 2003, it distributed approximately $2,231,000
in cash, which was allocated 98.5%, to the Unitholders of record as of August
29, 2003, 1% to the General Partner and 0.5% to the holder of the Class B
Interest. On November 14, 2003, Heartland declared another cash distribution of
$2.30 per unit. On December 9, 2003, it distributed approximately $4,885,000 in
cash, which was allocated 98.5% to the Unitholders of record as of November 28,
2003, 1% to the General Partner and 0.5% to the holder of the Class B Interest.
Unitholders should not expect the 2003 level of distributions on an annual
basis.
In March 2004, the Company obtained a $2,000,000 line of credit with
LaSalle National Bank ("LNB"). The line of credit matured December 1, 2004 and
was not renewed.
20
In March 2005, the Company obtained a $2,500,000 letter of credit
from LaSalle National Bank to comply with an order of a Montana state court. The
letter of credit is secured by $1,093,000 of restricted cash and by a mortgage
on the Company's Kinzie Station North-Parcel B property. If the sale of the
Parcel B property is closed, the Company with have to replace the collateral
with $1,407,000 of the sale proceeds or other collateral.
The Company's management expects to sell to unrelated third parties
the remainder of its saleable properties with a view towards dissolving the
partnership. The Company has engaged a consultant and a law firm to advise it on
procedures for dissolution and expects to begin the process in the second
quarter of 2006. The Company may soon be required to use a liquidation basis of
accounting in light of the foregoing. As part of any dissolution and
liquidation, the Company will need to make reasonable provisions to pay all
claims and obligations, which include contingent and conditional claims as well
as unknown claims that may arise after dissolution. The consequence is that
Unitholders may not receive any distributions, or if they do, the distributions
may be lower than the true value of the Units. Because the amount of reserve
required is uncertain, the Company may reserve a higher amount than necessary.
The Company does not plan to distribute cash to Unitholders before entering
dissolution. Its ability to make cash distributions during dissolution will
depend on resolution of claims and liabilities. Alternatively, the Company may
determine to dissolve and liquidate in the context of a bankruptcy proceeding if
the Company believes that such a proceeding would likely serve to maximize value
for the Company's Unitholders by providing greater certainty with respect to the
satisfaction of, or provision for, the Company's known and contingent
liabilities. However, even in the context of a bankruptcy proceeding, the
Company will still face uncertainty, especially with respect to the
environmental claims. Additionally, under any liquidation scenario, the
Unitholders will not have control over the divestiture of the Company's
remaining assets or the liquidation process. The Company cannot make any
assurance that changes in its policies will serve fully the interests of all
Unitholders or that under any liquidation scenario the Unitholders will receive
any liquidating distributions of cash or other property, or if they do, that the
distributions will reflect the true value of the Units.
The Company is working to resolve its remaining liabilities which
primarily consist of environmental matters and Edwin Jacobson's claim against
the Company. Significant estimates are used in the preparation of financial
statements to value the Company's environmental liabilities. The amount and
timing of future cash distributions, if any, to the Company's Unitholders will
depend on generation of cash from sales of real estate holdings and the
resolution of liabilities and associated costs. The Company has experienced
recurring operating losses for the years ended December 31, 2005, 2004, 2003 and
2002 and there can be no assurance that the amounts available from internally
generated funds, cash on hand, and sale of the remaining assets of the Company
will be sufficient to fund Heartland's anticipated operations and meet existing
and future liabilities. These losses, and the uncertainty surrounding such
environmental liabilities and other claims, particularly the Edwin Jacobson
lawsuit, create uncertainties about the Company's ability to meet existing and
future liabilities as they become due. The Company has taken certain steps,
including the reduction of fixed overhead and conservation of cash, in light of
these uncertainties. The Company may be required to seek additional capital in
the form of bank financing, however, there is no assurance that such bank
financing will be available or, if available, will be on terms favorable to the
Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not historically utilized off-balance sheet financing
arrangements and has no such arrangements as of December 31, 2005.
CONTRACTUAL OBLIGATIONS
The Company had no contractual obligations at December 31, 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 1A. Risk Factors - Real Estate Investment Risks; General
Economic Conditions Affecting Real Estate Industry" and "--Access to Financing."
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and the related
notes, together with the Reports of Independent Registered Public Accounting
Firms thereon, are set forth beginning on page 37 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On September 6, 2005, the Company was advised by its independent
registered public accounting firm, PricewaterhouseCoopers LLP ("PwC"), that PwC
declined to stand for reelection as the Company's independent registered public
accounting firm. BDO Seidman, LLP ("BDO Seidman") was selected to replace PwC as
the Company's independent auditor for the fiscal year ending December 31, 2005.
Except for an explanatory paragraph expressing substantial doubt
about the Company's ability to continue as a going concern included in PwC's
report for the year ended December 31, 2004, the reports of PwC on the Company's
financial statements for the years ended December 31, 2004 and 2003 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principle.
The audit committee of the Company did not participate in the
termination of the client-auditor relationship with PwC.
During the years ended December 31, 2004 and 2003 and through
September 6, 2005, there have been no disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
PwC, would have caused PwC to make a reference thereto in connection with its
reports on the financial statements for such years.
During the years ended December 31, 2004 and 2003 and through
September 6, 2005, there have been no "reportable events," as such term is
defined in Item 304(a)(1)(v) of Regulation S-K, other than, as previously
disclosed, the Company has experienced delays in the completion of its financial
statements for the year ended December 31, 2004 and the accompanying annual
report on Form 10-K and its financial statements for the three months ended
March 31, 2005 and the three and six months ended June 30, 2005 and the
accompanying quarterly reports on Form 10-Q due, in part, to the resignation of
its chief financial officer and the resulting transition of the provision of
accounting services by an independent contractor. Management believes this
reportable event does not rise to the level of a material weakness.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Heartland's Chief Executive Officer has evaluated the Company's
disclosure controls and procedures as of the end of the period covered by this
report and has concluded that these controls and procedures are adequate to
ensure that information required to be disclosed by Heartland in the reports
that it files or submits under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in internal control over financial
reporting that occurred during the fourth quarter of 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. However, the Company worked with new
accounting contractors in connection with the preparation and review of its
financial reporting during 2005.
ITEM 9B. OTHER INFORMATION.
On March 31, 2005, the Company entered into a severance agreement
with Mr. Harrison. Under the agreement, Mr. Harrison will receive $25,000, in
addition to his current compensation, for assisting the outside liquidation
expert and, after the termination of Mr. Harrison's employment, he will receive
$50,000 in ongoing payments for his continued assistance.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company does not have a Board of Directors. Holdings, the general
partner of the Company, has a Board of Directors. Set forth below is information
for each director of Holdings, manager of HTI and each executive officer of
Holdings and the Company.
Principal Occupation, Business
Name and Age Experience and Directorships
------------ ----------------------------
Lawrence S. Adelson, 56........ Chief Executive Officer of CMC since February, 2002; Director and President
of Holdings since November, 2005; Manager of HTII since February, 2002;
Chairman of the Board and Chief Executive Officer of HTI (February, 2002 -
August, 2005); Director of HTI (February, 2002 - August, 2005); Vice
President and General Counsel of the Company (June, 1990 - February, 2002);
Vice President and General Counsel of HTI (October, 1988 - February, 2002).
On June 15, 2005, HTI filed for bankruptcy.
Richard P. Brandstatter, 50.... Director of Holdings since November, 2005; Director of Real Estate of North
American Real Estate Management since August, 2005; Former President of the
Company from March 2003 to December 2004; Chief Financial Officer of the
Company from November 2004 to December 2004; Vice President - Finance,
Treasurer and Secretary of HTI since February, 1999; Director of HTI since
June, 2002, Vice President - Finance, Treasurer and Secretary of the Company
(August, 1995-March, 2003). On June 15, 2005, HTI filed for bankruptcy.
Charles J. Harrison, 48........ Senior Vice President Real Estate, General Counsel and Secretary of the
Company since March, 2002. President of Power Mart Real Estate Corporation
August, 2001, to February, 2002. General Counsel and prior positions with
the Company October 1990 to July 2001.
Thomas F. Power, Jr., 65....... Director of Holdings and Chairman of its audit committee since November,
2005; Manager of HTII since July 2003; Member of the Audit Committee of HTII
since July 2003. Former President and CEO and Director of Wisconsin
Central Transportation Corporation (1999-2001). Director Electro-Motive Diesel,
Inc. since 2005.
George Lightbourn, 54.......... Director of Holdings and member of its audit committee since November, 2005;
Manager of HTII and Member of the Audit Committee of HTII since 2004.
Currently President of Gaming Informatics, LLC; Senior Fellow with the
Wisconsin Policy Research Institute. Served as Secretary of the Wisconsin
Department of Administration (January 2000-January 2003). Deputy Secretary
of the Department of Administration (1995-1999). Currently serving on board
of Madison Cultural Arts District Board, the Monona Economic Development
Committee and SpaceMetrics.
RESIGNATIONS
Ezra K. Zilkha resigned as a director and a member of the audit
committee of Holdings and a Manager of HTII on November 21, 2005.
23
Richard P. Brandstatter, resigned as President of the Company
effective January 1, 2005. Mr. Brandstatter remains a member of the Board of
Directors of Holdings and has a consulting relationship with the Company as
described in "Item 11. Executive Compensation" and "Item 13. Consulting
Arrangement".
IDENTIFICATION OF THE AUDIT COMMITTEE
The General Partner's Board of Directors has designated a standing
audit committee for the Company consisting of Thomas F. Power, Jr. and George
Lightbourn. The listing standards of the American Stock Exchange require at
least 3 members on the audit committee. Thomas Power, Jr. has been designated as
the audit committee financial expert serving on the Company's audit committee.
The Board of Directors has determined that Mr. Power is independent. Refer above
for Mr. Power's qualifications.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires certain
officers of the Company, directors of Holdings (and previously, Heartland
Technology, Inc. and managers of HTII) 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 of the
Company, directors of Holdings (and previously, Heartland Technology, Inc. and
managers of HTII) 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
4 or 5 were required, the Company believes that during the 2005 fiscal year all
section 16(a) filing requirements were complied with.
CODE OF ETHICS
The Company has adopted a code of ethics, which was filed as Exhibit
14 to the Company's Annual Report on Form 10-K for the year ended December 31,
2003, that applies to each of the Company's executive officers.
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 other
executive officers with 2005 compensation greater than $100,000.
Name And Annual Compensation All Other
Principal Position Year Salary Bonus Compensation(1)
------------------ ---- ------ ----- ---------------
Lawrence S. Adelson 2005 $ 200,000 $ -- $ --
Chief Executive Officer 2004 200,000 -- 3,250
2003 200,000 545,000(2) 2,400
Richard P. Brandstatter 2005 $ -- $ 36,281(3) $ 105,000(4)
Former President 2004 168,400 76,600(5) 14,050(6)
2003 134,000 655,000(7) 13,800(8)
Charles J. Harrison 2005 $ 150,000 $ 36,281(3) $ --
Senior Vice President Real Estate, 2004 152,000 25,600(3) 3,000
General Counsel and Secretary 2003 150,000 205,000(9) 3,000
___________________
1) Unless otherwise noted, "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", "Securities
Underlying 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.
24
2) Includes $335,000 payable in respect of 100,000 "phantom" units, or the
economic (but not tax) equivalent of 100,000 Units, awarded under Mr.
Adelson's employment agreement, and $210,000 payable in respect of the CMC
Plan (as defined below).
3) Amounts due under 2002 CMC Plan.
4) Payments under a consulting agreement.
5) Represents $45,000 of special compensation bonus approved by the managers
of the Company's general partner, $25,600 related to the 2002 CMC Plan (as
defined below) and $6,000 other bonus income.
6) Includes $10,800 for an automobile allowance.
7) Includes $621,500 payable in respect of the CMC Plan, the 2002 CMC Plan and
individual merit bonuses, and $33,500 in respect of 10,000 "phantom" units,
or the economic (but not tax) equivalent of 10,000 Units awarded under the
2002 CMC Plan.
8) Includes $10,800 for an automobile allowance.
9) Includes $171,500 payable in respect of the 2002 CMC Plan and $33,500 in
respect of 10,000 "phantom" units, or the economic (but not tax) equivalent
of 10,000 Units, awarded under the 2002 CMC Plan.
Under a deferred salary arrangement available to all employees, Mr.
Adelson deferred approximately $17,000 of his 2003 salary into 2004. Also, Mr.
Adelson, Mr. Brandstatter, Ms. Susan Tjarksen-Roussos and Mr. Harrison deferred
payment of accrued bonuses from 2003 to 2004 in the amounts of $417,000,
$432,000, $265,000 and $42,000, respectively.
Effective March 1, 2002, an employment agreement with Lawrence S.
Adelson, Chief Executive Officer of CMC, was approved by the HTII Board of
Managers. On January 26, 2006, Mr. Adelson's employment agreement was renewed,
and the renewal was approved by the Board of Directors of Holdings. The term of
the employment agreement expires October 31, 2006 and his salary is $200,000 per
year. His incentive compensation is the economic (but not tax) equivalent of
ownership of 100,000 (non-voting) Heartland Class A Partnership Units and is
payable at the time of any distributions to the Unitholders. These "phantom"
Units are accounted for in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.
Compensation expense is recognized when the amount of the underlying
distribution is probable and estimable.
Heartland does not maintain any pension, profit-sharing, or similar
plan for its employees. Insurance benefit programs are non-discriminatory. Until
its termination effective December 31, 2004, CMC sponsored 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 were
eligible to participate in the plan. In 2003 and 2004, CMC 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 CMC's contributions. The Group Savings Plan was terminated effective
December 31, 2004.
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 were computed
by multiplying 3% for the year 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. Effective December 31, 2001, the CMC Plan was amended to vest benefits
earned under the CMC Plan as of December 31, 2001 and provides that earned
benefits shall be paid at the time of a cash distribution to the Unitholders.
The CMC Plan was then terminated effective December 31, 2001. The aggregate
25
benefits payable under the Sales Plan were computed by multiplying 3% for the
year 2001 by the net proceeds from the sale of certain real estate during that
year. During the year ended December 31, 2003, $973,000 had been recorded as
compensation expense under the plans of which $481,000 had been paid to the
officers by the Company in 2003. The outstanding balance owed of $492,000 was
paid on January 5, 2004.
Effective January 1, 2002, the CMC Heartland Partners 2002 Incentive
Plan ("2002 CMC Plan") was approved by the Company. Effective December 22, 2004,
the 2002 CMC Plan was amended to extend to the later of December 31, 2006, or
the conclusion of litigation brought by the Company against the Redevelopment
Authority of the City of Milwaukee ("RACM") for recovery of the fair value of
142 acres of property previously conveyed to RACM. The aggregate benefits
payable under the 2002 CMC Plan shall be computed by multiplying 2% by the net
proceeds from the sale of certain land parcels for the period January 1, 2002 to
December 31, 2006. One current and two former officers of the Company are
eligible for benefits under the 2002 CMC Plan. During the years ended December
31, 2005, 2004, and 2003, compensation expense under the 2002 CMC Plan was
$109,000, $77,000 and $542,000, respectively. Also, the 2002 CMC Plan granted
three officers the economic (but not tax) equivalent of ownership of 10,000
(non-voting) Heartland Class A Partnership Units payable at the time of any
distributions to the Unitholders. These "phantom" Units are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. Compensation expense is
recognized when the amount of the underlying distribution is probable and
estimable. Compensation expense related to these "phantom" Units of $100,500 was
recognized in the consolidated statement of operations, of which $19,500 had
been paid, for the year ending December 31, 2003. The outstanding balance owed
of $81,000 was paid on January 5, 2004. No expense related to the phantom Units
was recognized in 2005.
In 2005, the Company entered into a separation and consulting
agreement with Mr. Brandstatter. Under the agreement, Mr. Brandstatter received
an annual consulting fee of $100,000 for ongoing consulting services during 2005
and can receive $15,000 for assistance with the transition of the business to a
trustee or other person in connection with any plan of dissolution or
liquidation.
Mr. Harrison will receive a $50,000 merit bonus for 2005 that will be
payable in 2006. On March 31, 2005, the Company entered into a severance
agreement with Mr. Harrison. Under the agreement, Mr. Harrison will receive
$25,000, in addition to his current compensation, for assisting the outside
liquidation expert and, after the termination of Mr. Harrison's employment, he
will receive $50,000 in ongoing payments for his continued assistance.
COMPENSATION OF DIRECTORS
Mr. Adelson and Mr. Brandstatter do not receive any compensation for
their service on the Board of Directors of the Company's General Partner. See
above regarding the compensation of Mr. Adelson and Mr. Brandstatter, including
the consulting arrangement for Mr. Brandstatter. The other (non-executive)
members of the board receive an annual director fee of $18,000 (payable in
quarterly installments), $500 per board, or board committee (other than the
audit committee), meeting at which such board member participates in person or
by telephone and $1,000 per audit committee meeting at which such board member
participates in person or by telephone.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The General Partner's Board of Directors (and previously HTII's Board
of Managers) makes all decisions related to the compensation of the Company's
executive officers. The General Partner's Board of Directors Lawrence S.
Adelson, Richard P. Brandstatter, George Lightbourn, and Thomas F. Power, Jr..
HTII's Board of Managers had the same composition plus Ezra K. Zilkha. Lawrence
Adelson participated in board discussions regarding Mr. Brandstatter's 2004
bonus and the terms of Mr. Brandstatter's consulting agreement. Richard P.
Brandstatter participated in discussions regarding Lawrence Adelson's
compensation.
Mr. Adelson served as the Chairman and Chief Executive Officer of
HTI, an affiliate of the general partner of the Company, and Mr. Brandstatter
served as the Vice President - Finance, Treasurer and Secretary of HTI. Mr.
Adelson and Mr. Brandstatter did not receive any compensation in respect of the
positions they held at HTI.
26
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The General Partner's Board of Directors (and previously HTII's Board
of Managers) makes all decisions related to the compensation of the Company's
executive officers. Executive compensation generally consists mainly of base
salary and bonus based either on sales, distributions or merit. The general
philosophy of the General Partner's Board of Directors (and previously HTII's
Board of Managers) and the Company's executive officers, including the Chief
Executive Officer, is to relate compensation to overall corporate performance;
however, in the event that the Company begins liquidation proceedings, the
General Partner's Board of Directors considers retention of the current
executive officers, including the Chief Executive Officer, to be the most
important factor in determining executive compensation. Due to their
institutional knowledge, their understanding of the remaining assets and
potential environmental liabilities associated with those assets, and their
expertise with the transactional requirements related to selling the Company's
property, the current executive officers are in the best position to maximize
the value of the Company and thereby maximize the value of the Units.
Chief Executive Officer compensation during 2005 was fixed by an
Employment Agreement approved in March 2002 by HTII Board of Managers. The
Employment Agreement was extended on the same terms until October 31, 2006. In
determining the Chief Executive Officer's base salary under the Employment
Agreement, the General Partner's Board of Directors (and previously, HTII's
Board of Managers) considered his performance managing and operating the Company
and considered how he might lead the Company in the future.
During 2004, the board of managers of HTI, the Company's general
partner at the time, authorized a $45,000 bonus for Mr. Brandstatter for
achievement of certain performance criteria established by the board.
The members of the Board of Managers of HTII are as follows: Lawrence
S. Adelson, Richard P. Brandstatter, George Lightbourn, Thomas F. Power, Jr.,
and Ezra K. Zilkha. The members of the Board of Directors of Holdings are as
follows: Lawrence S. Adelson, Richard P. Brandstatter, George Lightbourn, and
Thomas F. Power, Jr.
PERFORMANCE TABLE
The following table compares the cumulative total Unitholder return
on the Class A Units of the Company for the last five fiscal years with the
cumulative total return of the S&P 500 Index and the Morgan Stanley REIT Index
(formerly called the AMEX REIT Index) over the same period (assuming the value
of investment in the Class A Units and each index was $100 on December 31, 2000
and all cash distributions on the Class A Units were reinvested).
MSCI SP-500 HTL
12/31/00 $100.00 $100.00 $100.00
12/31/01 $112.83 $88.11 $80.78
12/31/02 $116.94 $68.66 $29.03
12/31/03 $159.91 $88.32 $83.15
12/31/04 $210.26 $97.90 $48.92
12/31/05 $235.78 $102.69 $11.93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance Under Equity Compensation Plans
None.
27
Security Ownership of Certain Beneficial Owners
At March 15, 2006, there are no persons who are known by Heartland to
be beneficial owners of more than 5% of Heartland's outstanding Units.
Security Ownership of Management
Set forth below is certain information concerning the beneficial
ownership of Units by each director of Holdings, each named executive officer of
CMC and by all directors and executive officers of Holdings and all executive
officers of CMC as a group, as of March 15, 2006:
Name of Beneficial
Owner and Number of Number of
Persons in Group (1) Units Owned Percent
-------------------- ----------- -------
Lawrence S. Adelson 95,500 4.6%
Thomas F. Power, Jr. -- ---%
Richard P. Brandstatter -- ---%
George Lightbourn -- ---%
Charles J. Harrison -- ---%
All directors and executive officers 95,500 4.6%
as a group (5 persons)
________________
(1) Nature of ownership is direct, except as otherwise indicated herein. Unless
shown, ownership is less than 1% of class.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CONSULTING ARRANGEMENT
In 2005, the Company entered into a separation and consulting
agreement with Mr. Brandstatter. Under the agreement, Mr. Brandstatter will
receive an annual consulting fee of $100,000 for ongoing consulting services
during 2005 and can receive $15,000 for assistance with any transition to a
trustee for dissolution or liquidation. Additionally, Mr. Brandstatter was paid
a $45,000 bonus during the first quarter of 2005, which was accrued at December
31, 2004, based upon the achievement of certain criteria established by the
General Partner. Mr. Brandstatter is a director of the General Partner.
TREATMENT OF CERTAIN LOANS FROM HTI TO HEARTLAND
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Treatment of Certain Loans from HTI to
Heartland."
MANAGEMENT AGREEMENT
Heartland had a management agreement with HTI pursuant to which
Heartland was required to pay HTI an annual management fee in the amount of
$413,000 for the years ended December 31, 2004 and 2003. The management
agreement terminated on June 27, 2005. Of the $413,000 management fee incurred
during each of the years ended December 31, 2002 and 2003, an aggregate of
$100,000 was paid to outside members of HTII's Board of Managers, in respect of
amounts described in "Item 11. Executive Compensation--Compensation of
Directors," instead of directly to HTI. HTI subsequently took the position that
the offset was improper. The dispute was resolved in the HTI Settlement. In
2005, $197,000 was paid for management fee to HTI. No payments of the management
fee were made to outside directors of HTI in 2005.
28
CONFLICTS OF INTEREST OF GENERAL PARTNER AND ITS OFFICERS AND DIRECTORS
The officers of Heartland and the managers and directors of the
General Partner, including Lawrence S. Adelson, President and a director of
Holdings, former Chairman of the Board, President and Chief Executive Officer of
HTI and Chief Executive Officer of Heartland and Richard P. Brandstatter,
President of the Company from March 2003 to December 2004 and a director of
Holdings, 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. 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. The General Partner has
sole authority over the timing and amount of distributions as well as
dissolution of the partnership.
Ezra Zilkha, a former Member of HTII's Board of Managers was a
creditor of HTI. Edwin Jacobson, Former President and CEO of Heartland and a
former Member of HTII's Board of Managers was a Director of HTI and a creditor
of HTI. Payments under the settlement agreement between HTI and Heartland could
benefit Mr. Zilkha or Mr. Jacobson as creditors of HTI. The settlement with HTI
was approved by a committee composed solely of managers of HTII that do not have
any interest in, or relationship with, HTI.
HTI WARRANT
On December 29, 2000, HTI granted the Company a Series C Warrant that
entitled Heartland to purchase 320,000 shares of HTI common stock at an exercise
price of $1.05. The warrant was exercisable on or before February 16, 2006. HTI
is currently in the process of being liquidated and the warrants are deemed to
have no value.
LEASE OF KINZIE STATION HOMES FROM OFFICERS
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 Richard
Brandstatter and Susan Tjarksen Roussos, who at the time were 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 was $2,350 and on the two bedroom model was $4,200. The
leases contained standard insurance and maintenance clauses as customary in
these types of leases. These leases were paid in full as of December 31, 2003
and expired on April 1, 2004.
OTHER
A senior partner of a law firm who provides services to the Company
owns approximately 7.5% of the stock of HTI. Lawrence S. Adelson, C.E.O. of the
Company, also owned 119,500 shares of HTI. Furthermore, Lawrence S. Adelson,
C.E.O. of the Company, and Richard P. Brandstatter, former President of the
Company, were employees and directors of HTI.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
For the year ended December 31, 2005, fees for audit services
provided by BDO Seidman, LLP ("BDO") for the audit of the Company's annual
financial statements and review of the financial statements included in the
Company's SEC filings were approximately $140,000.
29
For the year ended December 31, 2004, fees for audit services
provided by PricewaterhouseCoopers, LLP ("PwC") for the audit of the Company's
annual financial statements and review of the financial statements included in
the Company's SEC filings were approximately $190,000.
TAX FEES
For the years ended December 31, 2005 and 2004, the Company has paid
$165,000 and $183,000, respectively, to PWC for tax compliance, tax advice, tax
planning, preparation of Heartland's yearly tax returns (state and federal) and
processing of the Unitholders' individual tax forms for use in preparing their
individual tax returns.
HTII's and Holdings' audit committee's pre-approval policies and
procedures are to authorize work subject to receipt of engagement letters.
All audit and tax fees described above have been pre-approved by
HTII's or Holdings' audit committee.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT.
(a) The following documents are filed or incorporated by reference as part of
this report:
1. Financial statements
The financial statements of Heartland Partners, L.P. begin on page 39 below:
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................37, 38
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004.........................................39
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2004 and 2003...............40
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2005, 2004 and 2003...............41
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003...............42
Notes to Consolidated Financial Statements..............................43
2. Financial statement schedules
VALUATION AND QUALIFYING ACCOUNTS.......................................60
REAL ESTATE AND ACCUMULATED DEPRECIATION................................61
Attachment A to Schedule III............................................62
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 to the Amended and Restated Agreement of Limited Partnership
of Heartland Partners, L.P., dated as of December 4, 1997,
incorporated by reference to Exhibit 3.3 to Heartland's Current report
on Form 8-K dated January 5, 1998.
30
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.
10.3 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.
10.11 Amended and Restated Loan and 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.
10.13 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.
10.18 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. (1)
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.
10.25 First Amendment to Edwin Jacobson December 20, 1999 Employment
Agreement dated April 11, 2000, incorporated by reference to Exhibit
10.25 to Heartland's Quarterly Report on form 10-Q for the quarter
ended March 31, 2000.
31
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. (1)
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 Management Agreement, dated as of June 27, 1990, by and among
Heartland Technology, Inc. (f/k/a Chicago Milwaukee Corporation), the
Company and CMC, incorporated by reference to Exhibit 10.2 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
1990; and 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. (1)
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 from CMC Heartland Partners
VII, LLC to 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 from Heartland
Technology, Inc. (Borrower) to Heartland Partners, L.P. 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, Illinois, N.A., incorporated by reference to
Exhibit 10.40 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.
32
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.
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.
33
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, incorporated by reference to Exhibit 10.55 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
2001.
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, incorporated by
reference to Exhibit 10.56 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2001.
10.58 Third Amendment of Construction Loan Agreement, Note, Deed of Trust
and Other Loan Agreements dated April 12, 2002 between CMC Heartland
Partners VII, LLC and Bank One, Illinois, N.A., incorporated by
reference to Exhibit 10.58 to Heartland's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
10.59 Eighth Amendment to Amended and Restated Loan and Security Agreement
dated February 28, 2002 between CMC Heartland Partners and Heartland
Partners, L.P. and LaSalle Bank National Association, incorporated by
reference to Exhibit 10.59 to Heartland's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
10.60 Employment Agreement effective March 1, 2002 for Lawrence S. Adelson,
Chief Executive Officer of CMC Heartland Partners, incorporated by
reference to Exhibit 10.60 to Heartland's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002. (1)
10.63 Memorandum of Amendment and Termination for the CMC Heartland Partners
Incentive Plan, effective December 31, 2001, incorporated by reference
to Exhibit 10.63 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002. (1)
10.64 The CMC Heartland Partners 2002 Incentive Plan effective January 1,
2002, incorporated by reference to Exhibit 10.64 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002. (1)
10.65 Fourth Agreement dated December 19, 2002 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 10.65 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2002.
10.66 First Amendment of Loan Agreement, Note, Deed of Trust, Security
Agreement and Fixture Filing and Other Loan documents between CMC
Heartland Partners IV, LLC and Bank One, NA dated April 30, 2003,
incorporated by reference to Exhibit 10.66 to Heartland's Quarterly
Report on Form 10-Q for the quarter ending June 30, 2003.
10.67 Fourth Amendment of Construction Loan Agreement, Notes, Deed of Trust
and Other Loan Documents dated April 12, 2003 between CMC Heartland
Partners VII, LLC and Bank One, NA, incorporated by reference to
Exhibit 10.67 to Heartland's Quarterly Report on Form 10-Q for the
quarter ending June 30, 2003.
10.68 Fifth Amendment of Construction Loan Agreement, Notes, Deed of Trust
and Other Loan Documents dated June 18, 2003 between CMC Heartland
Partners VII, LLC and Bank One, NA, incorporated by reference to
Exhibit 10.68 to Heartland's Quarterly Report on Form 10-Q for the
quarter ending June 30, 2003.
10.69 Second Amendment of Loan Agreement, Note, Deed of Trust, Security
Agreement and Fixture Filing and Other Loan documents between CMC
Heartland Partners IV, LLC and Bank One, NA dated August 31, 2003,
incorporated by reference to Exhibit 10.69 to Heartland's Quarterly
Report on Form 10-Q for the quarter ending September 30, 2003.
34
10.70 2004 Amendment to the CMC Heartland Partners 2002 Incentive Plan.,
incorporated by reference to Exhibit 10.70 to Heartland's Annual
Report on Form 10-K for the Year Ending December 31, 2004. (1)
10.71 Separation, Release and Consulting Agreement between CMC Heartland
Partners and Richard P. Brandstatter, incorporated by reference to
Exhibit 10.71 to Heartland's Annual Report on Form 10-K for the Year
Ending December 31, 2004. (1)
10.72 Amendment No. 1 to Employment Agreement, dated January 26, 2006,
between CMC Heartland Partners and Lawrence S. Adelson, incorporated
by reference to Exhibit 10.1 to Heartland's Current Report on Form 8-K
dated January 26, 2006. (1)
10.73 Amendment Number 2 to the Amended and Restated Agreement of Limited
Partnership of Heartland Partners, L.P., dated March 7, 2006, by
CMC/Heartland Partners Holdings, Inc., the General Partner,
incorporated by reference to Exhibit 10.1 to Heartland's Current
Report on Form 8-K dated March 13, 2006.
10.74 Severance Agreement, dated March 31, 2006, between CMC Heartland
Partners and Charles Harrison.
14 Heartland Partners, L.P. Code of Ethics adopted March 29, 2004,
incorporated by reference to Exhibit 14 to Heartland's Annual Report
on Form 10-K for the Year Ending December 31, 2003.
16.1 Letter from PricewaterhouseCoopers LLP, dated September 12, 2005,
incorporated by reference to Exhibit 16.1 to Heartland's Current
Report on Form 8-K dated September 6, 2005.
21 Subsidiaries of Heartland Partners, L.P., incorporated by reference to
Exhibit 14 to Heartland's Annual Report on Form 10-K for the Year
Ending December 31, 2003.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
________________
* Attached hereto.
(1) Indicates a management contract or compensatory plan or arrangement.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
(Registrant)
By: CMC/HEARTLAND PARTNERS HOLDINGS, INC.,
its General Partner
By: /s/ Lawrence S. Adelson
-----------------------------
Name: Lawrence S. Adelson
Title: President
Date: March 31, 2006
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/ Lawrence S. Adelson
-----------------------
Lawrence S. Adelson
(Director of CMC/Heartland Partners Holdings, Inc., General Partner)
March 31, 2006
/s/ Thomas F. Power
-----------------------
Thomas F. Power
(Director of CMC/Heartland Partners Holdings, Inc., General Partner)
March 31, 2006
/s/ Richard P. Brandstatter
---------------------------
Richard P. Brandstatter
(Director of CMC/Heartland Partners Holdings, Inc., General Partner)
March 31, 2006
/s/ George Lightbourn
---------------------
George Lightbourn
(Director of CMC/Heartland Partners Holdings, Inc., General Partner)
March 31, 2006
36
Report of Independent Registered Public Accounting Firm
To the Partners and Unitholders of Heartland Partners, L.P.:
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of
Heartland Partners, L.P. as of December 31, 2005 and the related consolidated
statements of operations, partners' capital, and cash flows for the year then
ended. We have also audited the 2005 information in the schedules listed in item
15(a) 2. These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Heartland Partners, L.P. and its subsidiaries at December 31, 2005, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
Also, in our opinion, the 2005 information in the schedules present
fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 10 to
the financial statements, the Company has suffered recurring losses from
operations. Management's plans in regard to these matters are also described in
Note 10. Such uncertainties raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Chicago, Illinois
March 7, 2006
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners and Unitholders of Heartland Partners, L.P.:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 15(a)(1) on page 30, present fairly, in all material
respects, the financial position of Heartland Partners, L.P. and its
subsidiaries (the "Company") at December 31, 2004, and the results of their
operations and their cash flows for each of the two years in the period then
ended in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) on page 30 for the years ended
December 31, 2004 and 2003, presents 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 schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
10 to the consolidated financial statements, the Company has experienced
recurring operating losses. The Company's management has indicated it intends to
sell the remaining assets of the Company and dissolve. The Company is working to
resolve their remaining liabilities, which primarily consist of environmental
and other claims against the Company. The actual costs to resolve these
liabilities may differ from current estimates in an amount that exceed the value
of the Company's assets and prevent the Company to meet their existing and
future obligations as they become due. Such uncertainties raise substantial
doubt about their ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 26, 2005
38
HEARTLAND PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, December 31,
2005 2004
------------- -------------
Assets:
Cash and cash equivalents................................ $ 1,160 $ 1,450
Restricted cash.......................................... 1,093 --
Accounts receivable (net of allowance of $354
at December 31, 2005 and 2004)........................ 33 905
Due from affiliate (net of allowance of $7,234 at
December 31, 2004)....................................... -- 2,500
Prepaid and other assets................................. 137 402
------------- -------------
Total current assets................................ 2,423 5,257
------------- -------------
Property:
Land 383 383
Buildings and improvements............................... -- 141
Less accumulated depreciation......................... -- (20)
------------- -------------
Net land, buildings and improvements..................... 383 504
Land held for sale....................................... 1,569 5,912
------------- -------------
Net properties...................................... 1,952 6,416
------------- -------------
Total assets............................................. $ 4,375 11,673
============= =============
Liabilities:
Accounts payable and accrued
expenses.............................................. $ 1,011 $ 1,420
Allowance for environmental claims and liabilities....... 2,128 4,228
Unearned rents and deferred income....................... 812 888
Other liabilities........................................ -- 1
------------- -------------
Total liabilities................................... 3,951 6,537
------------- -------------
Partners' capital:
General Partner.......................................... -- --
Class A Limited Partners - 2,142 units
authorized and issued and 2,092 outstanding at
December 31, 2005 and 2004........................... 424 --
Class B Limited Partner.................................. -- 5,136
------------- -------------
Total partners' capital............................. 424 5,136
------------- -------------
Total liabilities and partners' capital.................. $ 4,375 $ 11,673
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
39
HEARTLAND PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except for per unit data)
For the Years Ended December 31,
2005 2004 2003
Income:
Property sales $ 5,513 $ 4,035 $ 32,680
Less: Cost of property sales 4,679 1,321 23,709
----------- ----------- -----------
Gross profit on property sales 834 2,714 8,971
----------- ----------- -----------
Operating Expenses:
Selling expense 676 721 1,847
General and administrative expenses 2,993 3,391 3,433
Bad debt expense 2,625 2,139 5,000
Real estate taxes 82 91 444
Environmental (recoveries) expenses and other charges, net (311) 863 1,649
----------- ----------- -----------
Total operating expenses 6,065 7,205 12,373
----------- ----------- -----------
Operating loss (5,231) (4,491) (3,402)
Interest expense -- (33) (361)
Portfolio income-interest 75 27 30
Rental income 81 536 190
Gain (loss) on sale of assets 430 (70) --
Gain on extinguishment of liability -- -- 1,500
Management fee to General Partner (197) (413) (413)
Depreciation expense (2) (34) (69)
Other, net 132 123 170
----------- ----------- -----------
Total other income, net 519 136 1,047
----------- ----------- -----------
Net loss $ (4,712) $ (4,355) $ (2,355)
=========== =========== ===========
Net (loss) income allocated to
General Partner $ (1) $ 2 $ --
=========== =========== ===========
Net loss allocated to Class B
Limited Partner $ (4,570) $ (4,357) $ (56)
=========== =========== ===========
Net loss allocated to
Class A Limited Partners $ (141) $ -- $ (2,299)
=========== =========== ===========
Net loss per Class A
Limited Partnership unit $ (0.07) $ -- $ (1.10)
=========== =========== ===========
Weighted average number of Class A Limited
Partnership units outstanding 2,092 2,092 2,092
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
40
HEARTLAND PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(dollars in thousands)
Class A Limited Class B Limited
General Partner Partners Partner Total
--------------- -------------- -------------- ------------
Balance at December 31, 2002 $ 70 $ 9,308 $ 9,584 $ 18,962
Net loss -- (2,299) (56) (2,355)
Cash distributions to partners (72) (7,009) (35) (7,116)
Balance at December 31, 2003 (2) -- 9,493 9,491
Net income (loss) 2 -- (4,357) (4,355)
--------------- -------------- -------------- ------------
Balance at December 31, 2004 -- -- 5,136 5,136
Net loss (1) (141) (4,570) (4,712)
Cancellation and allocation of Class
B Interest 1 565 (566) --
--------------- -------------- -------------- ------------
Balance at December 31, 2005 $ -- $ 424 $ -- $ 424
=============== ============== ============== ============
The accompanying notes are an integral part of
these consolidated financial statements.
41
HEARTLAND PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Years Ended December 31,
2005 2004 2003
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (4,712) $ (4,355) $ (2,355)
Adjustments reconciling net loss to net cash
provided by (used in) operating activities:
Land write off to cost of sales -- 118 581
(Gain) loss on sale of assets (430) 70 --
Impairment loss on land held for sale -- 57 250
Bad debt expense 2,625 2,139 5,000
Write off of Kinzie Station and Longleaf fixed assets -- -- 117
Depreciation 2 34 69
Gain on extinguishment of liability -- -- (1,500)
Purchaser assumption of Longleaf debt -- -- (705)
Net change in assets and liabilities:
Net change in allowance for environmental claims
and liabilities (2,100) 258 (80)
Decrease (increase) in accounts receivable 747 (710) 463
Decrease in housing inventories, net -- -- 7,671
Decrease in land held for sale 4,343 1,035 12,281
Decrease in accounts payable
and accrued expenses (409) (595) (1,364)
Net change in other assets and liabilities 188 (527) (1,290)
------------ ------------ ------------
Net Cash provided by (used in) operating activities 254 (2,476) 19,138
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of asset 549 -- --
Purchase of PG Oldco notes -- -- (1,270)
------------ ------------ ------------
Net cash provided by (used in) investing activities 549 -- (1,270)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Advances on notes payable -- -- 1,698
Payoffs on notes payable -- -- (9,275)
Distributions to partners -- -- (7,116)
(Increase) decrease in restricted cash (1,093) -- 42
------------ ------------ ------------
Net cash used in financing activities (1,093) -- (14,651)
------------ ------------ ------------
Net (decrease) increase in cash (290) (2,476) 3,217
Cash and cash equivalents at beginning of period 1,450 3,926 709
Cash and cash equivalents at end of period $ 1,160 $ 1,450 $ 3,926
------------ ------------ ------------
NON-CASH ACTIVITIES:
Write off of buildings and improvements and
the related accumulated depreciation -- $ 296 $ --
------------ ------------ ------------
The accompanying notes are an integral part of
these consolidated financial statements.
42
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization
Organization and Purpose; Recent Asset Sales
--------------------------------------------
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 originally
organized to engage in the ownership, purchasing, development, leasing,
marketing, construction and sale of real estate properties. Heartland is now
engaged in selling its remaining real estate holdings, and is working to resolve
its remaining liabilities. Most of the remaining liabilities are environmental
in nature. The amount and timing of future cash distributions, if any, to the
Company's Unitholders will depend on generation of cash from sales of real
estate holdings and the resolution of liabilities and associated costs.
Ownership
---------
CMC/Heartland Partners Holdings Corp., a Delaware corporation and
sole general partner of Heartland (the "General Partner" or "Holdings"), is
owned by the four current members of Holdings board of directors. CMC Heartland
Partners, a Delaware general partnership ("CMC"), is an operating general
partnership owned 99.99% by Heartland and 0.01% by Holdings.
The following table sets forth certain entities formed by Heartland
since its inception that currently hold real estate and other assets, the 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 Dormant limited liability corporation
CMC Heartland Partners II, LLC ("CMCII") 1997 Owned the Goose Island Industrial Park joint venture
CMC Heartland Partners III, LLC ("CMCIII") 1997 Owned Kinzie Station Phase I, owns Kinzie Station
Phase II
CMC Heartland Partners IV, LLC ("CMCIV") 1998 Owned approximately 7 acres in Fife, Washington
CMC Heartland Partners V, LLC ("CMCV") 1996 Owned lots and homes in Osprey Cove
CMC Heartland Partners VI, LLC ("CMCVI") 1997 Dormant limited liability corporation
CMC Heartland Partners VII, LLC ("CMCVII") 1997 Owned lots and homes in the Longleaf Country Club
CMC Heartland Partners VIII, LLC ("CMCVIII") 1998 Dormant limited liability corporation
Lifestyle Construction Company, Inc. ("LCC") 1998 Served as the general contractor in North Carolina
Lifestyle Communities, Ltd. ("LCL") 1996 Served as the exclusive sales agent in the
Longleaf development
43
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COMPANY DEVELOPMENT LOCATION OWNERSHIP
------- -------------------- ---------
HDC Not Applicable 100% (1)
CMCLP Rosemount, Minnesota 100% (2)
CMCI Chicago, Illinois 100% (3)
CMCII Chicago, Illinois 100% (3)
CMCIII Chicago, Illinois 100% (3)
CMCIV Fife, Washington 100% (3)
CMCV St. Marys, Georgia 100% (3)
CMCVI Not Applicable 100% (3)
CMCVII Southern Pines, North Carolina 100% (3)
CMCVIII Not Applicable 100% (3)
LCC Not Applicable 100% (4)
LCL Not Applicable 100% (4)
_________________
(1) Stock wholly owned by Heartland.
(2) HDC owned a 1% general partnership interest and CMC owned a 99% limited
partnership interest.
(3) Membership interest owned by CMC.
(4) Stock was wholly owned by CMC. These corporations were sold on December 31,
2003.
Except as otherwise noted herein, references in this report 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.
Partnership Agreement and Cash Distributions
--------------------------------------------
Heartland's partnership agreement, as amended, provides generally
that Heartland's net income (loss) will be allocated 1% to the General Partner
and 99% to the Class A limited partners (the "Unitholders"). The partnership
agreement provides that certain items of deduction, loss, income and gain may be
specially allocated to the Unitholders or the General Partner. 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 respective capital
accounts, such net loss shall be allocated only among partners having positive
balances in their respective capital accounts. Under the partnership agreement,
if a partner's capital account is reduced to zero and there are additional
losses allocable to that partner, those additional losses will have to be made
up by subsequent gains allocable to that partner before gains will increase that
partner's capital account. As of December 31, 2005, the Unitholders' capital
account balance was $424,000, and the General Partner's capital account balance
was $0.
The General Partner has the discretion to cause Heartland to make
distributions of Heartland's available cash in an amount equal to 99% to the
Unitholders and 1% to the General Partner. Upon a dissolution of the
partnership, liquidating distributions will be made pro rata to each partner in
accordance with its positive capital account balance after certain adjustments
set forth in the partnership agreement. There can be no assurance as to the
amount or timing of any future cash distributions or whether the General Partner
will cause Heartland to make a cash distribution in the future if cash is
available. The General Partner in its discretion may establish a record date for
distributions on the last day of any calendar month.
On August 11, 2003, Heartland declared a cash distribution of $1.05
per unit. On September 15, 2003, it distributed approximately $2,231,000 in
cash, which was allocated 98.5%, to the Unitholders of record as of August 29,
2003, 1% to the General Partner and 0.5% to the Class B Interest. On November
14, 2003, Heartland declared another cash distribution of $2.30 per unit. On
December 9, 2003, Heartland distributed approximately $4,885,000 in cash, which
was allocated 98.5% to the Unitholders of record as of November 28, 2003, 1% to
the General Partner and 0.5% to the Class B Interest. No distributions were
declared during the years ended December 31, 2005 or 2004.
44
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Treatment of Certain Loans from HTI to Heartland
------------------------------------------------
At December 31, 2004, HTI owed Heartland and CMC an aggregate of
$9,734,000 of which $8,464,000 related to promissory notes issued in 2000 and
2001 (the "2000 Notes"). The notes were collateralized by a security interest in
the Class B Interest (the "Collateral") and bore interest at 13% per annum. The
Company also received as additional consideration for the 2000 Notes a Series C
Warrant that entitled Heartland to purchase 320,000 shares of HTI common stock
at an exercise price of $1.05 per share. The HTI shares have no value.
PG Oldco, Inc., a creditor of HTI under notes in an aggregate
principal amount of $2,200,000 ("PG Oldco Notes"), also had a security interest
in the Collateral. On May 23, 2003, Heartland purchased from PG Oldco, Inc. the
PG Oldco Notes for approximately $1,270,000. The purchase price of $1,270,000
for the PG Oldco Notes was recorded as an increase in "Due from Affiliate" on
the Company's consolidated financial statements. On April 16, 2004, the Company
purchased the claims that an unrelated third party maintained against HTI, the
former general partner of Heartland, for $70,000, which was included in general
and administrative expense for the year ended December 31, 2004. The claims
included a $500,000 note (the "LZ debt claim") and a "put" claim of
approximately $13 million (the "LZ put claim"). The Company purchased these
claims because it believed the value was reasonable and to preserve an orderly
liquidation of HTI given HTI's ownership of the limited liability companies
which held the Company's Class B and General Partner interests.
On June 15, 2005, HTI filed for liquidation under Chapter 11 of the
federal bankruptcy laws. HTI and the Company had negotiated a proposed
settlement of various disputes between HTI and the Company ("Settlement"). The
Settlement was approved by a committee of independent members of HTII's Board of
Managers and by the other major creditors of HTI, and, in August 2005 by the
bankruptcy court. The transactions comprising the Settlement were closed on
November 15, 2005. CMC paid HTI a total of $669,000 and released its claims
(including the LZ put claim, the LZ debt claim, the PG Oldco Claim and the CMC
loan) consisting of the following: $75,000 was paid for unpaid management fees;
$125,000 was paid in the form of a Debtor in Possession loan ("DIP Loan") and
the DIP Loan was forgiven in the Settlement and the amount is reflected in bad
debt expense in the fourth quarter of 2005; and $469,000 was paid on November
15, 2005. In addition, HTI transferred the Class B Interest to Heartland, and
the General Partner interests to Holdings, an entity controlled by CMC's Board
of Managers.
Heartland had recorded an allowance for doubtful accounts of
approximately $7,334,000 and $7,234,000 on the 2000 Notes and PG Oldco Notes
receivable balance of $9,734,000 at September 30, 2005 and December 31, 2004,
respectively. Heartland began recording an allowance for doubtful accounts
against the 2000 Notes and PG Oldco Notes because HTI indicated to Heartland
that it did not have the means to repay the amounts owed under the 2000 Notes
and PG Oldco Notes. A $5,000,000 allowance for doubtful accounts was recorded in
the fourth quarter of 2003 following the sale of the Company's Fife, Washington
property and the subsequent cash distribution of $2.30 per Unit in December
2003, which reduced the estimated amount of potential future distributions
distributable to the Class B Interest. An additional $2,101,000 was recorded in
the fourth quarter of 2004 based on the Company's continued operating losses,
increased environmental expense and the proposed settlement with HTI. The
remaining $2,500,000 along with the $125,000 DIP Loan was written off in 2005.
2. Summary of Significant Accounting Policies
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 one financial institution.
45
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Accounts Receivable
-------------------
The Company provides an allowance for doubtful accounts against the
portion of accounts receivable that is estimated to be uncollectible. Accounts
receivable in the consolidated balance sheets are shown net of an allowance for
doubtful accounts of $354,000 as of December 31, 2005 and 2004.
Unearned Rents and Deferred Income
----------------------------------
Unearned rents and deferred income are cash received from unrelated
outside parties for the rental of certain parcels of land or land easements
owned by the Company for periods of 20 to 25 years. The amounts received are
recognized as revenue over each agreement's rental period on a straight line
basis.
Fair Value of Financial Instruments
-----------------------------------
The carrying values of cash and cash equivalents, restricted cash,
accounts receivable, accounts payable and accrued expenses are reasonable
estimates of their fair values because of the short maturity of these financial
instruments. The Company's debt was zero at December 31, 2005 and 2004. The
amounts due from affiliate have been written down to reflect their fair value.
Revenue Recognition
-------------------
Land sales are recognized when the following criteria are met:
persuasive evidence of an agreement exists; risks of ownership have passed to
the buyer; the Company's price to the buyer is fixed and determinable; and
collectibility is reasonably assured.
Residential sales were recognized at closing when title to the home
passed to the buyer. The Company's homes were generally offered for sale in
advance of their construction. Most of the Company's homes were sold pursuant to
standard sales contracts entered into prior to commencement of construction. The
Company's standard sales contracts generally required the customer to make an
earnest money deposit. This deposit ranged from 5% to 10% of the purchase price
for a buyer using conventional financing. As of December 31, 2004, the Company
was no longer selling, building or closing homes in any residential communities.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Significant estimates used in the preparation of the
financial statements include the value of the Class B Interest which represented
the collateral of the HTI note receivable formerly owed to the Company and CMC,
the collectibility of the Mr. Jacobson, former President and Chief Executive
Officer of CMC, note and interest receivable, estimated bad debt expense, the
recoverability of the total cost of properties and the estimates used in
determining the Company's environmental and litigation liabilities. Actual
results could differ from those estimates used in the preparation of these
consolidated financial statements.
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
consolidated financial statements.
Heartland's assets are carried at historical cost as adjusted for net
realizable value when appropriate. At December 31, 2005, the book and tax basis
of the properties are the same. At December 31, 2004, the tax basis of the
properties and improvements for Federal income tax purposes was greater than
their carrying value for financial reporting purposes.
46
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Segment Reporting
-----------------
The Company's management views the Company as a single segment.
Property
--------
Properties are carried at their historical cost as adjusted for net
realizable value. Expenditures which significantly improve the values or extend
useful lives of the properties were capitalized. Predevelopment costs including
real estate taxes that were directly identified with a specific development
project were capitalized. Interest and related debt issuance costs were
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 were recognized. Repairs and maintenance were charged to expense as
incurred. Depreciation was provided for financial statement purposes over the
estimated useful life of the respective assets ranging from seven (7) years for
office equipment and fixtures to 40 years for building and improvements using
the straight-line method.
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. An impairment loss on land held for sale of
$57,000 was recognized during the year ended December 31, 2004. In the fourth
quarter of 2003, an impairment loss of $250,000 was recognized as a component of
cost of sales on Kinzie Station Phase II because the fair value of the property
plus costs to sell was lower than the carrying value of the property. No event
occurred during 2005 that resulted in an impairment loss being recognized.
Reclassification
----------------
Certain 2004 and 2003 items have been reclassified to conform to the
2005 presentation.
3. Investment in Joint Venture
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago
based real estate company, and Wooton Construction, formed a joint venture which
developed approximately 265,000 square feet of industrial space in the Goose
Island Industrial Park in Chicago, Illinois. The Company sold its interest in
the joint venture to its partners on October 22, 2002 for a price of $1,250,000
and the assumption by its partners of Heartland's share of the joint venture
liabilities. At the time of closing, Heartland received $750,000 and a note for
$500,000 due October 22, 2003. The $500,000 note was paid in October 2003.
4. Notes Payable
Effective February 11, 2004, CMC executed documents for a line of
credit agreement in the amount of $2,000,000 with LaSalle National Bank ("LNB").
Heartland granted LNB a first lien on certain parcels of land in Chicago,
Illinois which had a carrying value of $5,457,000. The Company was in default
under certain of the loan covenants during 2004 because it did not meet the net
income requirements of the loan covenants and received a waiver of this default
in May 2004. The line of credit matured on December 1, 2004 and was not renewed.
In 2003, the Company had lines of credit from LaSalle National Bank and BankOne
at interest rates from 4% to 5.5% at 12/31/03.
During the years ended December 31, 2004 and 2003, the Company
incurred and paid interest and fees on loans in the amount of $33,000, and
$361,000, respectively, of which $0, and $7,000 was capitalized, respectively.
As of December 31, 2005, Heartland had no outstanding debt.
5. Recognition and Measurement of Environmental Liabilities
The Company evaluates 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 the Company may have for recovery. If the amount of
47
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 a better estimate than any other
amount, 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. By reserving at the low end of possible results, it is likely that the
actual costs of environmental claims will be higher than the recorded reserve,
because it is unlikely that, as a whole, the claims will be less expensive to
resolve than the low end of the range, and more likely that the claims will cost
more than the best case amount. This was not, however, the case for the
remediation of the Lite Yard. See discussion following. Also, the Company does
not reserve any amounts for unknown claims. This means that as new claims arise,
additional reserves will need to be added. 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 of work to be performed at each site, the portion of costs that may be
shared and the timing of the remediation work. In the event the Company believes
a third party was responsible for the contamination, it attempts to have that
third party assume the responsibility for the costs of cleaning up the site.
Sometimes there are funds available from state programs for clean up. These
funds can be available for contamination resulting from railroad operations as
well as those from third parties. The Company seeks these funds when they are
available. Potential recoveries from third parties or government programs are
not considered in the environmental reserve. At December 31, 2005 and 2004,
Heartland's allowance for environmental claims and liabilities was approximately
$2,128,000 and $4,228,000, respectively. Significant matters related to the
Company's reserve for environmental claims are discussed below.
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.
Under environmental laws, liability for hazardous substance
contamination is imposed on the current owners and operators of the contaminated
site, as well as the owner or the operator of the site at the time the hazardous
substance was disposed or otherwise released. In most cases, this liability is
imposed without regard to fault. Currently, the Company has known environmental
liabilities associated with certain of its properties arising out of the
activities of the Chicago, Milwaukee, St. Paul and Pacific Railroad (the
"Milwaukee Road") or certain of the Milwaukee Road'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 the Milwaukee Road's lessees.
From time to time contaminants are discovered on property the Company
now owns. Some of these may have resulted from the historical activities of the
Milwaukee Road. In other cases the property was leased to a tenant who released
contaminants onto the property. The Company's property may also be polluted by a
release or migration of contaminants onto the Company's property by unrelated
third parties.
The Company's practice when it sells land is to sell the property "as
is, where is" without any representation or indemnification for environmental
conditions. The Company has one active site, however, Miles City, Montana, where
the Milwaukee Road and its successor may have issued certain limited indemnities
to the buyer for specified environmental concerns. There are other cases in
which the Company has had a claim arising out of alleged contamination on sold
property. In some, but not all, of these instances, the Company has been
successful in asserting that such liabilities were discharged in the bankruptcy
proceedings of the Milwaukee Road.
The Company may be responsible for certain liabilities that arise
from the historical operations of the Milwaukee Road railroad that have nothing
to do with the ownership of property. The Company has been, for example, named
as a "potentially responsible party" or had claims asserted by private parties
in landfill-clean-up cases in which there is an allegation that the Milwaukee
Road generated or transported materials to the landfill. Additional claims may
arise in the future. In certain of these cases, the Company has asserted that
such liabilities were discharged in the bankruptcy proceedings of the Milwaukee
Road.
48
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 the Milwaukee Road's reorganization
trustee prior to the consummation of its reorganization. The Company has denied
liability at certain of these sites based on the reorganization bar of the
Milwaukee Road bankruptcy proceeding. The Company's potential liability for the
investigation and remediation of these sites was discussed in detail at a
meeting with the DEQ in April 1997. While the DEQ has not formally changed its
position, the DEQ has not elected to file suit.
At two 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.
Summary of certain sites
Lite Yard
---------
CMC owned a 5 acre site in Minneapolis, Minnesota ("Lite Yard") that
was impacted with arsenic and lead. On April 29, 2004, a Response Action Plan
for the site was approved by the Minnesota Department of Agriculture. US Borax
Inc. ("Borax"), which discontinued operations in 1968, is a former operator of a
pesticide/herbicide facility on the property. Under a Confidential Settlement
Agreement and Release dated September 27, 2004, between the Company and Borax,
Borax has agreed to pay a portion of the Company's past and future response
costs at the site. At December 31, 2005 and 2004, the Company's aggregate
allowance for claims and liabilities for this site was $20,000 and $1,588,000,
respectively. The allowance was reduced because remediation of the site has been
substantially completed. At December 31, 2005, the Company has recorded a
$12,000 receivable for the portion of these amounts due from Borax under the
settlement agreement.
The Lite Yard was sold in August 2005. The sale does not affect CMC's
obligations under the Response Action Plan.
On September 3, 2004, the United States Environmental Protection
Agency ("USEPA") issued an order ("Order") requiring the Company and Borax to
remediate arsenic in the soils of a nearby residential neighborhood on an
emergency basis. On January 24, 2005, the USEPA issued a general notice letter
("Letter") to the Company and Borax requesting that the Company and Borax
perform a remedial investigation and feasibility study on the soils of the same
nearby residential neighborhood on a non-emergency basis for matters not covered
by the Order. Neither the Order nor the Letter are covered by the Confidential
Settlement Agreement and Release between the Company and Borax.
The Company offered the USEPA $300,000 to settle the Company's
obligations under the Order and Letter. The USEPA has not yet responded to the
Company's offer. The Company believes, based on USEPA publications and a
newspaper article, that the USEPA has provided $1,500,000 to $2,200,000 for past
and future remediation activities in the residential neighborhood. This amount
does not necessarily represent the entire cost of the cleanup being under taken
by the USEPA. The entire cost could be higher or lower. The USEPA could seek
substantial penalties against the Company in addition to remediation costs. The
Company engaged an environmental engineering consultant to review information
available regarding the possible scope and cost of USEPA activities. The
consultant projected a range of possible costs of $3,083,000 to $3,946,000.
However, this estimate was based on limited data available to the consultant.
The Company has reserved $1,293,000 in connection with the Order and Letter.
This reserve amount takes into consideration the estimated range of possible
costs and the allocation of costs among potentially responsible parties ("PRPs")
for the on-site remediation at the Lite Yard.
Miles City Yard
---------------
By letter dated June 10, 2004, the Montana Department of
Environmental Quality ("DEQ") demanded that the Company or Trinity Railcar
Repair, Inc. ("Trinity") perform a remedial investigation of a railyard in Miles
City, Montana. The yard was previously owned and operated by the Chicago,
Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee Road") and is now owned
by Trinity. The Company has, for many years, been conducting a clean-up of a
substantial diesel fuel release at this site. On September 7, 2004, Trinity
49
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
filed suit against the Company and CMC in Custer County, Montana state court,
for contribution under state environmental law, for indemnification under sale
agreements between the Company's predecessors-in-interest and Trinity's alleged
predecessors and for injunctive relief prohibiting the Company from dissolving
or making any distributions to its Unitholders. The DEQ intervened in the
litigation and filed a complaint asking, among other things, that both Trinity
and CMC be held jointly and severally liable for remediation of the facility.
On September 14, 2004, Trinity filed a motion for a preliminary
injunction to prohibit the Company from liquidating or making distributions to
its Unitholders. On January 10, 2005, the court held a hearing at which the
Company's engineering witness testified that the maximum cost of investigation
and remediation could be as much as $1,250,000. However, this estimate was not
based on any direct investigation of conditions at the site. On March 24, 2005,
the court ordered the Company to escrow cash, post a bond, or provide another
guarantee, of $2,500,000 to cover possible remediation and clean-up costs for
the site. The court did not make a determination as to the requirement for any
remediation, the costs of remediation or liability for any costs. The Company is
considering an appeal of this order and has posted a letter of credit to comply
with the terms of such order. At December 31, 2005, a letter of credit was
secured with $1.1 million of the Company's restricted cash and a mortgage lien
of $1.4 million on the Company's Kinzie Station Parcel B property. The Company,
based on current review of the site, believes that the range of costs of
investigation and remediation under the June 10, 2004 DEQ letter and completion
of the ongoing diesel fuel remediation could be between $174,000 and $1,740,000.
At December 31, 2005, the Company's aggregate allowance for claims and
liabilities for this site (including costs of investigation, remediation and
legal fees relating to the litigation) is $309,000.
Bozeman
-------
In 2001, the Company sold a 14 acre property to the City of Bozeman,
Montana that was known to be contaminated with asbestos ore. As part of the
sale, the City of Bozeman released the Company from all environmental liability.
The City of Bozeman performed a clean-up of the north half of the property. The
Company understands that the clean up cost of the north half of the site cost
between $912,000 and $920,000. In September 2003, the Company received a letter
from the DEQ requesting an investigation of possible asbestos ore on the south
half of the property sold to the City of Bozeman and a neighboring property. The
City of Bozeman conducted studies indicating that no remediation is required for
the south half of the site. By letter dated November 3, 2004, the Company was
notified by the DEQ that the City of Bozeman, Montana had initiated a proceeding
under the Montana Controlled Allocation of Liability Act ("CALA") with regard to
the sold property. In the administrative proceeding, the DEQ will allocate
environmental liability among potentially liable parties. The estimated range of
costs for the neighboring property is $111,000 to $176,000. The Company believes
it has valid defenses to any CALA allocated liability for the clean-up of the
north half of the property and could assert a claim against the City of Bozeman
for liabilities for any clean-up of the south half of the property. The Company
has reserved an aggregate of $126,000 for all claims and liabilities associated
with this property and the neighboring property. This reserve amount reflects
the ranges of costs for both on-site and off-site remediation and the Company's
limited liability to the City of Bozeman under the terms of the sale of the
property to the City of Bozeman.
Other
-----
Under environmental laws, liability for hazardous substance
contamination is imposed on the current owners and operators of the contaminated
site, as well as the owner or the operator of the site at the time the hazardous
substance was disposed or otherwise released. In most cases, this liability is
imposed without regard to fault. Currently, the Company has known environmental
liabilities associated with certain of its properties arising out of the
activities of the Milwaukee Road or certain of the Milwaukee Road'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 the Milwaukee Road's lessees.
The DEQ has asserted that the Company is liable for some or all of
the investigation and remediation of certain properties in Montana sold by the
Milwaukee Road's reorganization trustee prior to the consummation of its
reorganization. The Company has denied liability at certain of these sites based
on the reorganization bar of the Milwaukee Road bankruptcy proceeding. The
Company's potential liability for the investigation and remediation of these
sites was discussed in detail at a meeting with the DEQ in April 1997. While the
DEQ has not formally changed its position, the DEQ has not elected to file suit.
50
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
At two 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 Canadian Pacific Railroad, formerly known as the Soo Line
Railroad Company, has asserted that the Company is liable for, among other
things, the remediation of releases of petroleum or other regulated materials at
six different sites located in Iowa, Minnesota and Wisconsin that Canadian
Pacific acquired from the Company. The Company has denied liability based on the
underlying sale agreement. The environmental claims are all currently being
handled by Canadian Pacific, and the Company understands that Canadian Pacific
has paid settlements on certain of these claims. Because Canadian Pacific has
been handling these matters exclusively, the Company has made no determination
as to the merits of the claims and is unable to determine their materiality.
Therefore, there is no accrual recorded in the financial statements for these
sites.
In November 1995, the Company settled a claim with respect to the
so-called "Wheeler Pit" site near Janesville, Wisconsin. The Company's only
outstanding obligation under the settlement is to pay 32% of the monitoring
costs for twenty-five years beginning in 1997. At December 31, 2005, Heartland's
allowance for claims and liabilities for this site is $191,000. By letter dated
April 6, 2005, the lead PRP at this site offered to settle the Company's future
obligations for approximately $266,000. Additionally, the lead PRP at this site
previously made a demand for monitoring costs of $53,000 incurred through March
of 2004. The Company has not paid any amounts to the PRP in respect of
monitoring costs for this site to date.
In addition to the environmental matters set forth above, there may
be other properties with environmental liabilities not yet known to the Company,
with potential environmental liabilities for which the Company has no reasonable
basis to estimate, or for which the Company believes it is not reasonably likely
to ultimately bear responsibility for 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 insurers, which issued policies to the Milwaukee
Road 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.
6. Real Estate Sale Activities
Property sales were $5,513,000 for year ended December 31, 2005. Sales for 2005
included Kinzie Station Phase II for $4,200,000; Lite Yard, Minneapolis, MN for
$490,000; and the $650,000 sale of land in Glendale, WI. The Company also closed
the sale of its 4,000 square foot office property in Chicago, IL, but this is
treated under sale of assets rather property sales.
Property sales during 2004 totaled $4,035,000. Significant sales included
approximately 2 acres of land in the Kinzie Station development in Chicago,
Illinois for $1,597,000, 6 acres of land at Petit Point located near Milwaukee,
Wisconsin for $1,155,000, approximately 21 acres of land in Rockford, Illinois
for $180,000, 7 acres of land in Fife, Washington for $200,000, approximately
11,777 acres of land scattered over 12 states for approximately $250,000 and
other land parcels for approximately $610,000.
Property sales in 2003 totaled $32,680,000, including 170 acres in Fife
Washington for $13,250,000, 3 acres of land in Kinzie Station North for
$9,850,000, 142 acres in the Menomonee Valley in Milwaukee, Wisconsin for
$3,550,000, 11 acres of land at Plankinton Yard, located near Milwaukee,
Wisconsin for $819,000, and 7 units in Longleaf for $1,811,000.
51
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
At December 31, 2005, the Company had approximately 3 acres of remaining
property at Kinzie Station in Chicago, Illinois, along with associated air
rights, and approximately 131 acres of land and easements scattered over 9
states. On July 30, 2003, the Company conveyed 142 acres of property in
Milwaukee, Wisconsin to the Redevelopment Authority of the City of Milwaukee
("RACM") in consideration of $3.55 million in lieu of condemnation. The Company
reserved the right to appeal the fair market value of the property and filed
that appeal on April 6, 2004, in Milwaukee County, Wisconsin Circuit court. In
January of 2006, the appeal was settled with RACM agreeing to make an additional
payment of $3.25 million. This amount is not included in property sales or
accounts receivable for 2005.
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 receives two thirds of the
proceeds of any sale. The owner of the right of way receives the other third.
7. Related Party Transactions
Consulting Arrangement
----------------------
In 2005, the Company entered into a separation and consulting agreement with Mr.
Brandstatter. Under the agreement, Mr. Brandstatter will receive an annual
consulting fee of $100,000 for ongoing consulting services during 2005 and can
receive $15,000 for assistance with any transition to a trustee for dissolution
or liquidation. Additionally, Mr. Brandstatter was paid a $45,000 bonus during
the first quarter of 2005, which was accrued at December 31, 2004, based upon
the achievement of certain criteria established by the General Partner. Mr.
Brandstatter is a director of the General Partner.
Management Agreement
--------------------
Heartland had a management agreement with HTI. Heartland was required to pay HTI
an annual management fee in the amount of $413,000 for the years ended December
31, 2004 and, 2003. The management agreement terminated on June 27, 2005.
Management fee expense for 2005 was $197,000.
HTI Settlement and Notes Receivable From HTI
--------------------------------------------
See "Note 1 - Treatment of Certain Loans from HTI to Heartland."
HTI Warrant
-----------
On December 29, 2000, HTI granted the Company a Series C Warrant that entitled
Heartland to purchase 320,000 shares of HTI common stock at an exercise price of
$1.05. The warrant was exercisable on or before February 16, 2006. HTI is
currently in the process of being liquidated and the warrant is deemed to have
no value.
Lease of Kinzie Station Homes from Officers
-------------------------------------------
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 Richard
Brandstatter and Susan Tjarksen Roussos, who at the time were officers of the
Company, at fair market value. Heartland 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 was $2,350 and on the two bedroom model was $4,200. The
leases contained standard insurance and maintenance clauses as customary in
these types of leases. These leases expired on April 1, 2004.
Other
-----
A senior partner of a law firm who provides services to the Company owns
approximately 7.5% of the stock of HTI. Lawrence S. Adelson, C.E.O. of the
Company, also owned 119,500 shares of HTI. Furthermore, Lawrence S. Adelson,
C.E.O. of the Company, and Richard P. Brandstatter, former President of the
Company, were employees and directors of HTI.
52
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. Legal Proceedings and Contingencies
All operating leases expired during the year ended December 31, 2004. Heartland
leases about 500 square feet of office space under a month-to-month lease. Rent
is $2,200 per month.
Rent expense for the years ended December 31, 2005, 2004 and 2003 was $25,000,
$12,000 and $113,000 respectively.
At December 31, 2005 and 2004, Heartland's allowance for claims and liabilities
was approximately $2,128,000 and $4,228,000, respectively. During the years
ended December 31, 2005, 2004 and 2003, ($311,000), $863,000 and $1,649,000,
respectively, were recorded as environmental recoveries or expenses and other
charges in respect to environmental matters. The environmental recoveries and
expenses reflect adjustments to reserves and recoveries as described in more
detail below. Significant legal matters are described below.
Krachtt Litigation
------------------
The surviving spouse of an employee of a contractor demolishing buildings on
what was then Company owned property filed suit against the Company, the
contractor and the contractor's insurer in Milwaukee County, Wisconsin Circuit
Court alleging wrongful death of the employee and other damages. The Company was
dismissed from the litigation on August 8, 2005.
Maples
------
Under the terms of a lot agreement with the Longleaf Associates
Limited Partnership ("LALP"), a Company subsidiary was required to make certain
payments to Maples, the owner and operator of the golf course and club house
located at the Longleaf Country Club in Southern Pines, North Carolina. Maples
joined a Company subsidiary as a defendant in a lawsuit Maples filed against
LALP in the North Carolina General Court of Justice Superior Court Division of
Moore County for breach of contract. The suit against the Company subsidiary was
dismissed on February 15, 2005.
Edwin Jacobson Lawsuit
----------------------
On August 19, 2002, the former President and Chief Executive Officer
of CMC, Edwin Jacobson, filed two lawsuits against the Company, CMC and certain
officers and/or managers of the General Partner in Circuit Court, Cook County,
Illinois. One of the lawsuits alleges CMC breached the terms of his employment
contract and that the officers and/or board members wrongfully interfered with
his contract. Jacobson is seeking compensatory and punitive damages ($1,000,000
in salary and $11,000,000 in incentive compensation). Jacobson asked the court
to enforce his contract and enjoin the Company from selling property or making
distributions to the Unitholders until the Company has appraised its properties
and paid him according to the terms of his employment contract. Jacobson's
second lawsuit was for defamation. On January 31, 2003, the Company filed
motions to dismiss the amended lawsuits. On May 29, 2003, the court dismissed,
with prejudice, the defamation lawsuit against the Company, CMC and certain
officers and/or managers of the General Partner. At the same time, the court
dismissed, with prejudice, Jacobson's motion to enjoin the Company from selling
its real estate properties. Jacobson also filed a motion for summary judgment on
his contract claims which the court denied. Jacobson filed a motion for
reconsideration, which was denied on April 8, 2005. CMC has filed a counterclaim
alleging breach of fiduciary duty and a motion to dismiss the claim for tortious
interference with a contract. Jacobson filed a motion for summary judgment on
CMC's counterclaim alleging breach of fiduciary duty, which was denied on April
8, 2005.
On February 28, 2003, the Company filed suit against Jacobson in
Delaware state court to collect a note from Jacobson to the Company in the
amount of $332,000, which includes $16,000 of interest that has not been
recorded in the Company's consolidated financial statements. On July 8, 2003,
the Delaware Court stayed that action pending resolution of Jacobson's action
against the Company.
53
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
CMC is vigorously defending itself against Jacobson's lawsuit and, in
the opinion of management, has valid defenses against the remaining lawsuit
relating to the Company's alleged breach of Jacobson's employment contract. At
this time, the probability that a liability will be incurred and the amount of
any potential liability cannot be determined. However, this litigation may not
be resolved in the Company's favor, and the Company may incur significant costs
associated therewith. If the Company is required to pay substantial amounts with
respect to the Jacobson litigation, the Company may not be left with any cash or
other property to distribute to the Unitholders. The parties have agreed to
voluntary, non-binding mediation. If mediation is unsuccessful, this matter is
expected to go to trial in the second half of 2006.
RACM
----
On July 30, 2003, the Company conveyed 142 acres of property in
Milwaukee, Wisconsin to the Redevelopment Authority of the City of Milwaukee
("RACM") in consideration of $3.55 million in lieu of condemnation. The Company
reserved the right to appeal the fair market value of the property and filed
that appeal on April 6, 2004, in Milwaukee County, Wisconsin Circuit court. In
January 2006, the appeal was settled with RACM making an additional payment of
$3.25 million on March 2, 2006. The RACM settlement will be reflected in the
Company's first quarter 2006 financial statements.
Lite Yard
---------
CMC owned a 5 acre site in Minneapolis, Minnesota ("Lite Yard") that
was impacted with arsenic and lead. On April 29, 2004, a Response Action Plan
for the site was approved by the Minnesota Department of Agriculture. US Borax
Inc. ("Borax"), which discontinued operations in 1968, is a former operator of a
pesticide/herbicide facility on the property. Under a Confidential Settlement
Agreement and Release dated September 27, 2004, between the Company and Borax,
Borax has agreed to pay a portion of the Company's past and future response
costs at the site. At December 31, 2005 and 2004, the Company's aggregate
allowance for claims and liabilities for this site was $20,000 and $1,588,000,
respectively. The allowance was reduced because remediation of the site has been
substantially completed. At December 31, 2005, the Company has recorded a
$12,000 receivable for the portion of these amounts due from Borax under the
settlement agreement.
The Lite Yard was sold in August 2005. The sale does not affect CMC's
obligations under the Response Action Plan.
On September 3, 2004, the United States Environmental Protection
Agency ("USEPA") issued an order ("Order") requiring the Company and Borax to
remediate arsenic in the soils of a nearby residential neighborhood on an
emergency basis. On January 24, 2005, the USEPA issued a general notice letter
("Letter") to the Company and Borax requesting that the Company and Borax
perform a remedial investigation and feasibility study on the soils of the same
nearby residential neighborhood on a non-emergency basis for matters not covered
by the Order. Neither the Order nor the Letter are covered by the Confidential
Settlement Agreement and Release between the Company and Borax.
The Company offered the USEPA $300,000 to settle the Company's
obligations under the Order and Letter. The USEPA has not yet responded to the
Company's offer. The Company believes, based on USEPA publications and a
newspaper article, that the USEPA has provided $1,500,000 to $2,200,000 for past
and future remediation activities in the residential neighborhood. This amount
does not necessarily represent the entire cost of the cleanup being under taken
by the USEPA. The entire cost could be higher or lower. The USEPA could seek
substantial penalties against the Company in addition to remediation costs. The
Company engaged an environmental engineering consultant to review information
available regarding the possible scope and cost of USEPA activities. The
consultant projected a range of possible costs of $3,083,000 to $3,946,000.
However, this estimate was based on limited data available to the consultant.
The Company has reserved $1,293,000 in connection with the Order and Letter.
This reserve amount takes into consideration the estimated range of possible
costs and the allocation of costs among potentially responsible parties ("PRPs")
for the on-site remediation at the Lite Yard.
Exponent
--------
A former consultant for the Company at the Lite Yard, Exponent, Inc.,
filed suit against the Company in Minnesota state court on January 27, 2005. The
complaint alleged that the Company owes Exponent $361,000 in unpaid consultant
fees. The suit was settled on August 3, 2005. CMC paid $140,000 in connection
with the settlement.
54
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Miles City Yard
---------------
By letter dated June 10, 2004, the Montana Department of
Environmental Quality ("DEQ") demanded that the Company or Trinity Railcar
Repair, Inc. ("Trinity") perform a remedial investigation of a railyard in Miles
City, Montana. The yard was previously owned and operated by the Chicago,
Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee Road") and is now owned
by Trinity. The Company has, for many years, been conducting a clean-up of a
substantial diesel fuel release at this site. On September 7, 2004, Trinity
filed suit against the Company and CMC in Custer County, Montana state court,
for contribution under state environmental law, for indemnification under sale
agreements between the Company's predecessors-in-interest and Trinity's alleged
predecessors and for injunctive relief prohibiting the Company from dissolving
or making any distributions to its Unitholders. The DEQ intervened in the
litigation and filed a complaint asking, among other things, that both Trinity
and CMC be held jointly and severally liable for remediation of the facility.
On September 14, 2004, Trinity filed a motion for a preliminary
injunction to prohibit the Company from liquidating or making distributions to
its Unitholders. On January 10, 2005, the court held a hearing at which the
Company's engineering witness testified that the maximum cost of investigation
and remediation could be as much as $1,250,000. However, this estimate was not
based on any direct investigation of conditions at the site. On March 24, 2005,
the court ordered the Company to escrow cash, post a bond, or provide another
guarantee, of $2,500,000 to cover possible remediation and clean-up costs for
the site. The court did not make a determination as to the requirement for any
remediation, the costs of remediation or liability for any costs. The Company is
considering an appeal of this order and has posted a letter of credit to comply
with the terms of such order. At December 31, 2005, a letter of credit was
secured with $1.1 million of the Company's restricted cash and a mortgage lien
of $1.4 million on the Company's Kinzie Station Parcel B property. The Company,
based on current review of the site, believes that the range of costs of
investigation and remediation under the June 10, 2004 DEQ letter and completion
of the ongoing diesel fuel remediation could be between $174,000 and $1,740,000.
At December 31, 2005, the Company's aggregate allowance for claims and
liabilities for this site (including costs of investigation, remediation and
legal fees relating to the litigation) is $309,000.
Bozeman
-------
In 2001, the Company sold a 14 acre property to the City of Bozeman,
Montana that was known to be contaminated with asbestos ore. As part of the
sale, the City of Bozeman released the Company from all environmental liability.
The City of Bozeman performed a clean-up of the north half of the property. The
Company understands that the clean up cost of the north half of the site cost
between $912,000 and $920,000. In September 2003, the Company received a letter
from the DEQ requesting an investigation of possible asbestos ore on the south
half of the property sold to the City of Bozeman and a neighboring property. The
City of Bozeman conducted studies indicating that no remediation is required for
the south half of the site. By letter dated November 3, 2004, the Company was
notified by the DEQ that the City of Bozeman, Montana had initiated a proceeding
under the Montana Controlled Allocation of Liability Act ("CALA") with regard to
the sold property. In the administrative proceeding, the DEQ will allocate
environmental liability among potentially liable parties. The estimated range of
costs for the neighboring property is $111,000 to $176,000. The Company believes
it has valid defenses to any CALA allocated liability for the clean-up of the
north half of the property and could assert a claim against the City of Bozeman
for liabilities for any clean-up of the south half of the property. The Company
has reserved an aggregate of $126,000 for all claims and liabilities associated
with this property and the neighboring property. This reserve amount reflects
the ranges of costs for both on-site and off-site remediation and the Company's
limited liability to the City of Bozeman under the terms of the sale of the
property to the City of Bozeman.
Other
-----
Under environmental laws, liability for hazardous substance
contamination is imposed on the current owners and operators of the contaminated
site, as well as the owner or the operator of the site at the time the hazardous
substance was disposed or otherwise released. In most cases, this liability is
55
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
imposed without regard to fault. Currently, the Company has known environmental
liabilities associated with certain of its properties arising out of the
activities of the Milwaukee Road or certain of the Milwaukee Road'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 the Milwaukee Road's lessees.
The DEQ has asserted that the Company is liable for some or all of
the investigation and remediation of certain properties in Montana sold by the
Milwaukee Road's reorganization trustee prior to the consummation of its
reorganization. The Company has denied liability at certain of these sites based
on the reorganization bar of the Milwaukee Road bankruptcy proceeding. The
Company's potential liability for the investigation and remediation of these
sites was discussed in detail at a meeting with the DEQ in April 1997. While the
DEQ has not formally changed its position, the DEQ has not elected to file suit.
At two 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 Canadian Pacific Railroad, formerly known as the Soo Line
Railroad Company, has asserted that the Company is liable for, among other
things, the remediation of releases of petroleum or other regulated materials at
six different sites located in Iowa, Minnesota and Wisconsin that Canadian
Pacific acquired from the Company. The Company has denied liability based on the
underlying sale agreement. The environmental claims are all currently being
handled by Canadian Pacific, and the Company understands that Canadian Pacific
has paid settlements on certain of these claims. Because Canadian Pacific has
been handling these matters exclusively, the Company has made no determination
as to the merits of the claims and is unable to determine their materiality.
Therefore, there is no accrual recorded in the financial statements for these
sites.
In November 1995, the Company settled a claim with respect to the
so-called "Wheeler Pit" site near Janesville, Wisconsin. The Company's only
outstanding obligation under the settlement is to pay 32% of the monitoring
costs for twenty-five years beginning in 1997. At December 31, 2005, Heartland's
allowance for claims and liabilities for this site is $191,000. By letter dated
April 6, 2005, the lead PRP at this site offered to settle the Company's future
obligations for approximately $266,000. Additionally, the lead PRP at this site
previously made a demand for monitoring costs of $53,000 incurred through March
of 2004. The Company has not paid any amounts to the PRP in respect of
monitoring costs for this site to date.
In addition to the environmental matters set forth above, there may
be other properties with environmental liabilities not yet known to the Company,
with potential environmental liabilities for which the Company has no reasonable
basis to estimate, or for which the Company believes it is not reasonably likely
to ultimately bear responsibility for 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 insurers, which issued policies to
the Milwaukee Road 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.
9. Compensation and Benefits
Effective March 1, 2002, an employment agreement with Lawrence S. Adelson, Chief
Executive Officer of CMC, was approved by the HTII Board of Managers. The term
of the employment agreement (as amended) is from March 1, 2002 to October 31,
2006 and his salary is $200,000 per year. His incentive compensation is the
economic (but not tax) equivalent of ownership of 100,000 (non-voting) Heartland
Class A Partnership Units and is payable at the time of any distributions to the
Unitholders. The Phantom Units awarded under the incentive compensation plan are
accounted for in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations. No
compensation expense has been recognized in the consolidated statements of
operations for the years ended December 31, 2005 and 2004. Compensation expense
of $335,000 was recognized in the consolidated statements of operations, of
which $59,000 had been paid by year end, for the year ending December 31, 2003.
The outstanding balance owed of $276,000 was paid on January 5, 2004.
56
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 were computed
by multiplying 3% for the year 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. Effective December 31, 2001, the CMC Plan was amended to vest benefits
earned under the CMC Plan as of December 31, 2001 and provides that earned
benefits shall be paid at the time of a cash distribution to the Unitholders.
The CMC Plan was then terminated effective December 31, 2001. The aggregate
benefits payable under the Sales Plan were computed by multiplying 3% for the
year 2001 by the net proceeds from the sale of certain real estate during that
year. During the year ended December 31, 2003, $973,000 had been recorded as
compensation expense under the plans of which $481,000 had been paid to the
officers by the Company in 2003. The outstanding balance owed of $492,000 was
paid on January 5, 2004.
Effective January 1, 2002, the CMC Heartland Partners 2002 Incentive Plan ("2002
CMC Plan") was approved by the Company. Effective December 22, 2004, the 2002
CMC Plan was amended to extend to the later of December 31, 2006, or the
conclusion of litigation brought by the Company against the Redevelopment
Authority of the City of Milwaukee ("RACM") for recovery of the fair value of
142 acres of property previously conveyed to RACM. The aggregate benefits
payable under the 2002 CMC Plan shall be computed by multiplying 2% by the net
proceeds from the sale of certain land parcels for the period January 1, 2002 to
December 31, 2006. One current and two former officers of the Company are
eligible for benefits under the 2002 CMC Plan. During the years ended December
31, 2005, 2004, and 2003, compensation expense under the 2002 CMC Plan was
$109,000, $77,000 and $542,000, respectively. Also, the 2002 CMC Plan granted
three officers the economic (but not tax) equivalent of ownership of 10,000
(non-voting) Heartland Class A Partnership Units payable at the time of any
distributions to the Unitholders. These "phantom" Units are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. Compensation expense is
recognized when the amount of the underlying distribution is probable and
estimable. Compensation expense related to these "phantom" Units of $100,500 was
recognized in the consolidated statement of operations, of which $19,500 had
been paid, for the year ending December 31, 2003. The outstanding balance owed
of $81,000 was paid on January 5, 2004. No expense related to the phantom Units
was recognized in 2005.
In 2005, the Company entered into a separation and consulting agreement with Mr.
Brandstatter. Under the agreement, Mr. Brandstatter will receive an annual
consulting fee of $100,000 for ongoing consulting services during 2005 and can
receive $15,000 for assistance with the Company's Form 10K and Annual Report and
$15,000 for assistance with transition to a trustee for dissolution or
liquidation. Additionally, Mr. Brandstatter was paid a $45,000 bonus in December
2004 related to the achievement of certain criteria established by the General
Partner.
10. Liquidation of Heartland Partners, L.P.
The Company's management expects to sell to unrelated third parties
the remainder of its saleable properties with a view towards dissolving the
partnership. The Company has engaged a consultant and a law firm to advise it on
procedures for dissolution and expects to begin the process in the second
quarter of 2006. The Company may soon be required to use a liquidation basis of
accounting in light of the foregoing. As part of any dissolution and
liquidation, the Company will need to make reasonable provisions to pay all
claims and obligations, which include contingent and conditional claims as well
as unknown claims that may arise after dissolution. The consequence is that
Unitholders may not receive any distributions, or if they do, the distributions
may be lower than the true value of the Units. Because the amount of reserve
required is uncertain, the Company may reserve a higher amount than necessary.
The Company does not plan to distribute cash to Unitholders before entering
dissolution. Its ability to make cash distributions during dissolution will
depend on resolution of claims and liabilities. Alternatively, the Company may
determine to dissolve and liquidate in the context of a bankruptcy proceeding if
the Company believes that such a proceeding would likely serve to maximize value
for the Company's Unitholders by providing greater certainty with respect to the
satisfaction of, or provision for, the Company's known and contingent
liabilities. However, even in the context of a bankruptcy proceeding, the
57
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Company will still face uncertainty, especially with respect to the
environmental claims. Additionally, under any liquidation scenario, the
Unitholders will not have control over the divestiture of the Company's
remaining assets or the liquidation process. The Company cannot make any
assurance that changes in its policies will serve fully the interests of all
Unitholders or that under any liquidation scenario the Unitholders will receive
any liquidating distributions of cash or other property, or if they do, that the
distributions will reflect the true value of the Units.
The Company is working to resolve its remaining liabilities which
primarily consist of environmental matters and Edwin Jacobson's claim against
the Company. Significant estimates are used in the preparation of financial
statements to value the Company's environmental liabilities. The amount and
timing of future cash distributions, if any, to the Company's Unitholders will
depend on generation of cash from sales of real estate holdings and the
resolution of liabilities and associated costs. The Company has experienced
recurring operating losses for the years ended December 31, 2005, 2004, 2003 and
2002 and there can be no assurance that the amounts available from internally
generated funds, cash on hand, and sale of the remaining assets of the Company
will be sufficient to fund Heartland's anticipated operations and meet existing
and future liabilities. These losses, and the uncertainty surrounding such
environmental liabilities and other claims, particularly the Edwin Jacobson
lawsuit, create uncertainties about the Company's ability to meet existing and
future liabilities as they become due. The Company has taken certain steps,
including the reduction of fixed overhead and conservation of cash, in light of
these uncertainties. The Company may be required to seek additional capital in
the form of bank financing, however, there is no assurance that such bank
financing will be available or, if available, will be on terms favorable to the
Company.
There can be no assurance that the amounts available from internally
generated funds, cash on hand and sale of the remaining assets of the Company
will be sufficient to fund Heartland's anticipated operations. Heartland may be
required to seek additional capital in the form of bank financing. No assurance
can be given that such bank 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 liquidation strategy and
for other expenditures, properties might be sold for far less than their value.
Any such discounted sale could adversely affect Heartland's future financial
condition and results of operations. However, management does not intend to
discount the sale of properties for far less than their value.
11. Recently Issued Accounting Standards Not Yet Adopted
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, "Accounting Changes and Error Corrections - A Replacement of
APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 primarily
requires retrospective application to prior periods' financial statements for
the direct effects of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005,
and early adoption is permitted. The Company is required to adopt the provision
of SFAS 154, as applicable, beginning in fiscal 2006.
12. Subsequent Events
In January 2006, the Company and RACM agreed to settle the Company's
appeal in the RACM litigation for an additional payment to the Company of $3.25
million. The amount will be recorded as revenue for the first quarter of 2006.
Payment was received on March 2, 2006.
58
Heartland Partners, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Quarterly Financial Data (Unaudited)
(dollars in thousands)
FOR THE THREE MONTHS ENDED March 31, June 30, September 30, December 31,
2005 2005 2005 2005
------------- ------------ -------------- ----------------
Property sales $ 4,203 $ 170 $ 490 $ 650
Gross profit on property sales 337 164 4 329
Operating income (loss) (1,090) 222 (683) (3,680)
Other income net 3 392 46 78
Net income (loss) $ (1,087) $ 614 $ (637) $ (3,602)
------------- ------------ -------------- ----------------
Net loss allocated to Class A Units $ -- $ -- $ -- $ (141)
------------- ------------ -------------- ----------------
Net loss per Class A Unit $ -- $ -- $ -- $ (0.07)
------------- ------------ -------------- ----------------
(dollars in thousands)
FOR THE THREE MONTHS ENDED March 31, June 30, September 30, December 31,
2004 2004 2004 2004
------------- ------------ -------------- ---------------
Property sales $ 3,115 $ 749 $ 128 $ 43
Gross profit (loss) on property sales 2,371 336 (35) 42
Operating income (loss) 630 (1,296) 1,096 (4,954)
Other income (loss), net 307 (61) (125) 48
Net income (loss) $ 937 $ (1,357) $ 971 $ (4,906)
------------- ------------ -------------- ---------------
Net income (loss) allocated to Class A $ 880 $ (880) $ 520 $ (520)
Units
------------- ------------ -------------- ---------------
Net income (loss) per Class A Unit $ 0.42 $ (0.42) $ 0.25 $ (0.25)
------------- ------------ -------------- ---------------
59
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 2005, 2004 and 2003
(dollars in thousands)
Description Additions
----------- Balance at charged to Balance
beginning costs and at end
Allowance for Claims and Liabilities of year expenses Deductions of year
------- -------- ---------- -------
Year ended December 31, 2005: $ 4,228 $ (311) $ (1,789) $ 2,128
========= ========== ========== ==========
Year ended December 31, 2004: $ 3,970 $ 863 $ (605) $ 4,228
========= ========== ========== ==========
Year ended December 31, 2003: $ 4,050 $ 1,649 $ (1,729) $ 3,970
========= ========== ========== ==========
Description
----------- Additions
Balance at charged to Balance
Allowance for Doubtful Accounts beginning costs and at end
Accounts Receivable of year expenses Deductions of year
------- -------- ---------- -------
Year ended December 31, 2005: $ 354 $ -- $ -- $ 354
========= ========== ========== ==========
Year ended December 31, 2004: $ 316 $ 38 $ -- $ 354
========= ========== ========== ==========
Year ended December 31, 2003: $ 316 $ -- $ -- $ 316
========= ========== ========== ==========
Description
------------ Additions
Balance at charged to Balance
Allowance for Doubtful Accounts beginning costs and at end
Due from Affiliate of year expenses Deductions of year
Year ended December 31, 2005: $ 7,234 $ 2,625 $ (9,859) $ --
========= ========== ========== ==========
Year ended December 31, 2004: $ 5,133 $ 2,101 $ -- $ 7,234
========= ========== ========== ==========
Year ended December 31, 2003: $ 133 $ 5,000 $ -- $ 5,133
========= ========== ========== ==========
60
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005
(dollars in thousands)
Description
Land, Cost Capitalized Gross Amount at
Buildings and Subsequent to Which Carried at
Improvements Initial Cost to Heartland Acquisition Close of Period (1)
------------ ------------------------- ---------------------------- ------------------------------------------
Buildings Building,
and Improvement
Improve- Improve- Carrying and Carrying
Land ments ments(2) Costs (3) Land Costs Total
---- ----- -------- --------- ---- ----- -----
Chicago, IL $ 237 $ -- $ 50 $ 96 $ 237 $ 146 $ 383
----------- --------- ---------- ---------- --------- ---------- --------
TOTAL $ 237 $ -- $ 50 $ 96 $ 237 $ 146 $ 383
=========== ========= ========== ========== ========= ========== ========
(1) See Attachment A to Schedule III for reconciliation of beginning of period
total to total at end of period.
(2) Improvements include all costs which increase the net realizable value of
the property except carrying costs.
(3) Carrying costs consists primarily of legal fees, real estate taxes and
interest.
61
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, 2005
(dollars in thousands)
2005
-------------
Balance at January 1 $ 524
-------------
Additions during year: Other acquisitions --
-------------
Total additions --
-------------
Deductions during year:
Sale of asset (141)
-------------
Total deductions (141)
-------------
Balance at December 31 $ 383
=============
RECONCILIATION OF REAL ESTATE ACCUMULATED DEPRECIATION
AT BEGINNING OF YEAR WITH TOTAL AT END OF YEAR
December 2005
(dollars in thousands)
2005
-------------
Balance at January 1 $ 20
-------------
Additions during year: Charged to expense 2
-------------
Total additions 2
-------------
Deductions during year:
Write off of accumulated depreciation
in connection with sale of asset (22)
Total deductions (22)
-------------
Balance at December 31 $ 0
=============
62
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 to the Amended and Restated Agreement of Limited Partnership
of Heartland Partners, L.P., dated as of December 4, 1997,
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.
10.3 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.
10.11 Amended and Restated Loan and 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.
10.13 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.
10.18 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.
10.21 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.
63
Exhibit
Number Description
------ -----------
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.
10.25 First Amendment to Edwin Jacobson December 20, 1999 Employment
Agreement dated April 11, 2000, 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.
10.30 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 Management Agreement, dated as of June 27, 1990, by and among
Heartland Technology, Inc. (f/k/a Chicago Milwaukee Corporation), the
Company and CMC, incorporated by reference to Exhibit 10.2 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
1990; and 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.
10.35 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 from CMC Heartland Partners
VII, LLC to 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 from Heartland
Technology, Inc. (Borrower) to Heartland Partners, L.P. 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.
64
Exhibit
Number Description
------ -----------
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, Illinois, N.A., incorporated by reference to
Exhibit 10.40 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.
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.
65
Exhibit
Number Description
------ -----------
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, incorporated by reference to Exhibit 10.55 to
Heartland's Annual Report on Form 10-K for the year ended December 31,
2001.
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, incorporated by
reference to Exhibit 10.56 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2001.
10.58 Third Amendment of Construction Loan Agreement, Note, Deed of Trust
and Other Loan Agreements dated April 12, 2002 between CMC Heartland
Partners VII, LLC and Bank One, Illinois, N.A., incorporated by
reference to Exhibit 10.58 to Heartland's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
10.59 Eighth Amendment to Amended and Restated Loan and Security Agreement
dated February 28, 2002 between CMC Heartland Partners and Heartland
Partners, L.P. and LaSalle Bank National Association, incorporated by
reference to Exhibit 10.59 to Heartland's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
10.60 Employment Agreement effective March 1, 2002 for Lawrence S. Adelson,
Chief Executive Officer of CMC Heartland Partners, incorporated by
reference to Exhibit 10.60 to Heartland's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
10.63 Memorandum of Amendment and Termination for the CMC Heartland Partners
Incentive Plan, effective December 31, 2001, incorporated by reference
to Exhibit 10.63 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
10.64 The CMC Heartland Partners 2002 Incentive Plan effective January 1,
2002, incorporated by reference to Exhibit 10.64 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.
10.65 Fourth Agreement dated December 19, 2002 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 10.65 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 2002.
10.66 First Amendment of Loan Agreement, Note, Deed of Trust, Security
Agreement and Fixture Filing and Other Loan documents between CMC
Heartland Partners IV, LLC and Bank One, NA dated April 30, 2003,
incorporated by reference to Exhibit 10.66 to Heartland's Quarterly
Report on Form 10-Q for the quarter ending June 30, 2003.
66
Exhibit
Number Description
------ -----------
10.67 Fourth Amendment of Construction Loan Agreement, Notes, Deed of Trust
and Other Loan Documents dated April 12, 2003 between CMC Heartland
Partners VII, LLC and Bank One, NA, incorporated by reference to
Exhibit 10.67 to Heartland's Quarterly Report on Form 10-Q for the
quarter ending June 30, 2003.
10.68 Fifth Amendment of Construction Loan Agreement, Notes, Deed of Trust
and Other Loan Documents dated June 18, 2003 between CMC Heartland
Partners VII, LLC and Bank One, NA, incorporated by reference to
Exhibit 10.68 to Heartland's Quarterly Report on Form 10-Q for the
quarter ending June 30, 2003.
10.69 Second Amendment of Loan Agreement, Note, Deed of Trust, Security
Agreement and Fixture Filing and Other Loan documents between CMC
Heartland Partners IV, LLC and Bank One, NA dated August 31, 2003,
incorporated by reference to Exhibit 10.69 to Heartland's Quarterly
Report on Form 10-Q for the quarter ending September 30, 2003.
10.70 2004 Amendment to the CMC Heartland Partner 2002 Incentive Plan,
incorporated by reference to Exhibit 10.70 to Heartland's Annual
Report on Form 10-K for the Year Ending December 31, 2004.
10.71 Separation, Release and Consulting Agreement between CMC Heartland
Partners and Richard P. Brandstatter, incorporated by reference to
Exhibit 10.71 to Heartland's Annual Report on Form 10-K for the Year
Ending December 31, 2004.
10.72 Amendment No. 1 to Employment Agreement, dated January 26, 2006,
between CMC Heartland Partners and Lawrence S. Adelson, incorporated
by reference to Exhibit 10.1 to Heartland's Current Report on Form 8-K
dated January 26, 2006.
10.73 Amendment Number 2 to the Amended and Restated Agreement of Limited
Partnership of Heartland Partners, L.P., dated March 7, 2006, by
CMC/Heartland Partners Holdings, Inc., the General Partner,
incorporated by reference to Exhibit 10.1 to Heartland's Current
Report on Form 8-K dated March 13, 2006.
10.74 Severance Agreement, dated March 31, 2006, between CMC Heartland
Partners and Charles Harrison.
14 Heartland Partners, L.P. Code of Ethics adopted March 29, 2004,
incorporated by reference to Exhibit 14 to Heartland's Annual Report
on Form 10-K for the year ending December 31, 2003.
16.1 Letter from PricewaterhouseCoopers LLP, dated September 12, 2005,
incorporated by reference to Exhibit 16.1 to Heartland's Current
Report on Form 8-K dated September 6, 2005.
21 Subsidiaries of Heartland Partners, L.P., incorporated by reference to
Exhibit 14 to Heartland's Annual Report on Form 10-K for the year
ending December 31, 2003.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
67