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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------- -----
Commission File Number: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 36-3606475
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 North Jefferson Court, Chicago, Illinois 60661
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(Address of principal executive offices) (Zip Code)
312/575-0400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
1
HEARTLAND PARTNERS, L.P.
September 30, 2003
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets...............................3
Consolidated Statements of Operations.....................4
Consolidated Statements of Cash Flows.....................5
Notes to Consolidated Financial Statements................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................19
Item 3 Quantitative and Qualitative Disclosures About Market Risk.....31
Item 4 Controls and Procedures........................................31
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..............................................32
Item 6 Exhibits and Reports on Form 8-K...............................36
Signatures...............................................37
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002...............................37
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(Unaudited)
September 30, December 31,
2003 2002
--------------- ---------------
Assets:
Cash $ 1,297 $ 709
Restricted cash 807 42
Accounts receivable (net of allowance of $316 at September 30, 2003
and December 31, 2002) 525 696
Due from affiliate (net of allowance of $133 at September 30, 2003
and December 31, 2002) 9,601 8,331
Prepaid and other assets 1,136 378
--------------- ---------------
Total 13,366 10,156
--------------- ---------------
Property:
Land 491 1,072
Buildings and improvements 634 634
Less accumulated depreciation 263 213
--------------- ---------------
Net land, buildings and improvements 862 1,493
Land held for sale 631 645
Housing inventories 3,540 7,671
Development land held for sale and development 4,410 4,807
Capitalized predevelopment costs 8,413 14,083
--------------- ---------------
Net properties 17,856 28,699
--------------- ---------------
Total assets $ 31,222 $ 38,855
=============== ===============
Liabilities:
Notes payable $ 5,145 $ 8,282
Accounts payable and accrued
expenses 1,538 3,193
Accrued real estate taxes 363 789
Allowance for claims and liabilities 3,753 4,050
Unearned rents and deferred income 1,353 1,429
Other liabilities 2,874 2,150
--------------- ---------------
Total liabilities 15,026 19,893
--------------- ---------------
Partners' capital:
General Partner 43 70
Class A Limited Partners - 2,142 units
authorized and issued and 2,092 outstanding at
September 30,2003 and December 31, 2002 6,583 9,308
Class B Limited Partner 9,570 9,584
--------------- ---------------
Total partners' capital 16,196 18,962
--------------- ---------------
Total liabilities and partners' capital $ 31,222 $ 38,855
=============== ===============
See accompanying notes to consolidated financial statements.
3
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per unit data)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Income:
Property sales $ 4,657 $ 1,411 $ 17,088 $ 4,943
Less: Cost of property sales 8,172 979 13,035 3,929
--------------- --------------- -------------- ---------------
Gross (loss) profit on property sales (3,515) 432 4,053 1,014
--------------- --------------- --------------- ---------------
Operating Expenses:
Selling expenses 491 278 1,539 915
General and administrative
expenses 855 444 2,422 1,542
Interest expense 95 3 301 30
Bad dept expense -- 316 -- 316
Real estate taxes 74 24 241 131
Environmental expenses and other charges (180) 24 37 51
--------------- --------------- --------------- ---------------
Total operating expenses 1,335 1,089 4,540 2,985
--------------- --------------- --------------- ---------------
Operating loss (4,850) (657) (487) (1,971)
Other Income and (Expenses):
Portfolio income 6 4 21 302
Rental income 45 85 132 279
Other income (loss) 135 (33) 158 57
Depreciation (17) (17) (50) (49)
Management fee (103) (104) (309) (310)
--------------- --------------- --------------- ---------------
Total other income (loss) 66 (65) (48) 279
--------------- --------------- --------------- ---------------
Net loss $ (4,784) $ (722) $ (535) $ (1,692)
=============== =============== =============== ===============
Net loss allocated to
General partner $ (48) $ (7) $ (5) $ (17)
=============== =============== =============== ===============
Net loss allocated to
Class B limited partner $ (24) $ (3) $ (3) $ (8)
=============== =============== =============== ===============
Net loss allocated to
Class A limited partners $ (4,712) $ (712) $ (527) $ (1,667)
=============== =============== =============== ===============
Net loss per Class A
Limited partnership unit $ (2.25) $ (0.34) $ (0.25) $ (0.80)
=============== =============== =============== ===============
Weighted average number of Class A limited
partnership units outstanding 2,092 2,092 2,092 2,093
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements.
4
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2003 2002
--------------- ---------------
Cash Flow from Operating Activities:
Net loss $ (535) $ (1,692)
Adjustments reconciling net loss to net cash provided by (used in)
operating activities:
Land write off to cost of sales 581 --
Allowance for bad debts -- 316
Depreciation 50 49
Net change in allowance for claims and liabilities (297) 19
Net change in assets and liabilities:
Decrease (increase) in accounts receivable 171 (53)
Decrease in housing inventories, net 4,131 2,078
Decrease in land held for sale 14 58
Decrease in development land held for sale and development, net 397 --
Decrease (increase) in capitalized predevelopment costs, net 5,670 (2,946)
(Decrease) increase in accounts payable and accrued liabilities (1,655) 541
Net change in other assets and liabilities (536) (38)
--------------- ---------------
Net cash provided by (used in) operating activities 7,991 (1,668)
--------------- ---------------
Cash Flow from Investing Activities:
Increase in note receivable from affiliate -- (278)
Purchase PG Oldco, Inc. Notes (770) --
--------------- ---------------
Net cash used in investing activities (770) (278)
--------------- ---------------
Cash Flow from Financing Activities:
Advances on notes payable 1,076 6,332
Payoffs on notes payable (4,713) (3,980)
Redemption of Class A Limited Partner units -- (40)
Distribution to partners (2,231) --
Distributions received from joint venture -- 158
(Increase) decrease in restricted cash (765) 1,151
Decrease in cash overdraft -- (278)
--------------- ---------------
Net cash (used in) provided by financing activities (6,633) 3,343
--------------- ---------------
Net increase in cash 588 1,397
Cash at beginning of period 709 103
--------------- ---------------
Cash at end of period $ 1,297 $ 1,500
=============== ===============
Non-cash Activities:
Note payable to PG Oldco, Inc. for purchase of HTI promissory notes $ 500 $ --
=============== ===============
Write off of buildings and improvements and the related
accumulated depreciation $ -- $ 996
=============== ===============
See accompanying notes to consolidated financial statements.
5
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These unaudited Consolidated Financial Statements of Heartland Partners, L.P., a
Delaware Limited Partnership, and its subsidiaries (collectively, "Heartland" or
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the Company's 2002 Annual
Report on Form 10-K (the "2002 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
2002 Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
Certain reclassifications have been made to the prior periods' financial
statements in order to conform with current period presentation.
1. Summary of Significant Accounting Policies
Consolidation
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. At
September 30, 2003, CMC Heartland Partners ("CMC") is an operating general
partnership owned 99.99% by Heartland and .01% by HTI Interests, LLC ("HTII").
HTII is the General Partner of Heartland, (in such capacity, the "General
Partner"). HTII is a Delaware limited liability company, owned 99.9% by
Heartland Technology, Inc. ("HTI"), formerly known as Milwaukee Land Company and
..1% by HTI Principals, Inc., a Delaware corporation, owned by four former
directors of HTI's Board of Directors and a current director of HTI.
The following table sets forth various entities formed by the Company since its
inception, date and purpose of formation, development location and Ownership:
6
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
YEAR
COMPANY FORMED BUSINESS PURPOSE
- ----------------------------------------------------- ------ ----------------------------------------------------------------
Heartland Development Corporation ("HDC") 1993 General Partner of CMC Heartland Partners I, Limited Partnership
CMC Heartland Partners I, Limited ("CMCLP") 1993 Owned Bloomfield development
Partnership
CMC Heartland Partners I, LLC ("CMCI") 1998 Owns Kinzie Station Phase II
CMC Heartland Partners II, LLC ("CMCII") 1997 Owned the Goose Island Industrial Park joint venture
CMC Heartland Partners III, LLC ("CMCIII") 1997 Owned Kinzie Station Phase I
CMC Heartland Partners IV, LLC ("CMCIV") 1998 Developing approximately 177 acres in Fife, Washington
CMC Heartland Partners V, LLC ("CMCV") 1996 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 Owns 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 Serves as the general contractor in North Carolina
Lifestyle Communities, Ltd. ("LCL") 1996 Serves as the exclusive sales agent in the
Longleaf development
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 wholly owned by CMC.
7
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Except as otherwise noted herein, references herein to "Heartland" or the
"Company" include CMC, HDC, CMCLP, CMCI, CMCII, CMCIII, CMCIV, CMCV, CMCVI,
CMCVII, CMCVIII, LCC and LCL. The consolidated financial statements include the
accounts of Heartland. All intercompany transactions have been eliminated in
consolidation.
Organization
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner ("Class B
Interest"). In addition, the partnership agreement provides that certain items
of deduction, loss, income and gain may be specially allocated to the
Unitholders, the Class B Interest or the General Partner. Also, the partnership
agreement provides that if an allocation of a net loss to a partner would cause
that partner to have a negative balance in its capital account at a time when
one or more partners would have a positive balance in their capital account such
net loss shall be allocated only among partners having positive balances in
their capital account.
Subject to the limitations described in the preceding paragraph, the General
Partner has the discretion to cause Heartland to make distributions of
Heartland's available cash in an amount equal to 98.5% to the Unitholders, 0.5%
to the Class B Interest and 1% to the General Partner. Liquidating
distributions, upon dissolution of the partnership, are made pro rata to each
partner in accordance with its positive Capital Account balance after certain
adjustments set out in the Partnership agreement. There can be no assurance as
to the amount or timing of Heartland's cash distributions or whether the General
Partner will cause Heartland to make a cash distribution if cash is available.
On December 4, 1997, Heartland's partnership agreement was amended to allow the
General Partner in its discretion to establish a record date for distributions
on the last day of any calendar month. No cash distributions were made during
the year 2002. On August 11, 2003, Heartland declared a cash distribution of
$1.05 per Unit. On September 15, 2003, the Company distributed approximately
$2,231,000, 98.5%, to the Unitholders of record at August 29, 2003, 1% to the
General Partner and 0.5% to the Class B Interest.
As of September 30, 2003 and December 31, 2002, Heartland and CMC had loaned HTI
an aggregate of $8,464,000. The loans are collateralized by a security interest
in the Class B Interest and bear interest at 13%. Effective April 1, 2002, CMC
stopped accruing interest on the outstanding note receivable balance. The
Company has also received as compensation for the loans a Series C Warrant that
entitles Heartland to purchase 320,000 shares of HTI common stock at an exercise
price of $1.05 per share. HTI's stock is now trading in the over-the-counter
market (due to being delisted from the American Stock Exchange) at less than
$.01 per share at September 30, 2003. The initial terms of the loan were based
on the collateral of the Class B Interest and prevailing borrowing rates. When
HTI raised capital through the issuance of subordinated debentures at 13%
interest and the grant of warrants, the loan terms were changed to reflect HTI's
cost of capital.
8
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 25, 2002, the Company and CMC demanded immediate payment in full of
all obligations due under the Line of Credit Promissory Notes from HTI.
Heartland has initiated steps to protect its security interest in the Class B
Interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under notes
aggregating $2,200,000 in principal amount, also had a security interest in the
Collateral and had commenced steps to protect its interest. Under the Lien
Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement") among
Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and prior
security interest in the Collateral and the proceeds thereof up to the Senior
Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG Oldco,
Inc. had a first and prior security interest in the Collateral and the proceeds
thereof for all amounts in excess of the Senior Debt Priority Amount. Because of
the competing interests in the Collateral, Heartland on May 23, 2003 purchased
from PG Oldco, Inc. the notes owed by HTI aggregating $2,200,000 in principal
amount for approximately $1,270,000. The purchase price consisted of $770,000 in
cash paid on May 23, 2003 and a note payable for $500,000 due October 31, 2003
that bears interest at 5% compounded quarterly. The purchase price of $1,270,000
was recorded as an increase in Due from Affiliate. At September 30, 2003, HTI
owed Heartland and CMC approximately $9,734,000. Heartland has recorded an
allowance of approximately $133,000 on the note receivable balance of $9,734,000
based on the September 30, 2003 Class B Interest capital account balance of
$9,570,000.
Accounts Receivable
The Company provides an allowance for doubtful accounts against the portion of
accounts receivable which is estimated to be uncollectible. Accounts receivable
in the consolidated balance sheets are shown net of an allowance for doubtful
accounts of $316,000 as of September 30, 2003 and December 31, 2002.
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 being amortized
over each agreement's rental period.
9
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
Residential sales are recognized at closing when title to the home has passed to
the buyer. The Company's homes are generally offered for sale in advance of
their construction. To date, most of the Company's homes have been sold pursuant
to standard sales contracts entered into prior to commencement of construction.
The Company's standard sales contracts generally require the customer to make an
earnest money deposit. This deposit may range from 5% to 10% of the purchase
price for a buyer using conventional financing.
Land sales are recognized when the Company has received an adequate cash down
payment and all other conditions necessary for profit recognition have been
satisfied.
Investment in Joint Venture
Investment in joint venture represents recording of the Company's interest under
the equity method of accounting. Under the equity method of accounting, the
Company recorded its initial interest at cost and adjusts its investment
accounts for additional capital contributions, distributions and its share of
joint venture income or loss. With respect to the Goose Island joint venture,
Heartland sold its interest to its partners on October 22, 2002.
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 amounts reported in the financial
statements and accompanying notes. Significant estimates used in the preparation
of the financial statements include the value of the Class B Interest which
represents the collateral of the Heartland Technology, Inc. note receivable owed
to the Company and CMC, estimated costs to complete long term development
projects, the collectability of the note and interest receivable from Mr.
Jacobson, former President and Chief Executive Officer of CMC, estimated bad
debt expense, the recoverability of the total cost of properties and the
estimates used in determining the Company's environmental liabilities. Actual
results will differ from those estimates used in preparation of these 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 financial
statements.
10
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Heartland's assets are carried at historical cost. At September 30, 2003 and
December 31, 2002, the tax basis of the properties and improvements for Federal
income tax purposes was greater than their carrying value for financial
reporting purposes.
Property
Properties are carried at their historical cost. Expenditures which
significantly improve the values or extend useful lives of the properties are
capitalized. Predevelopment costs including real estate taxes that are directly
identified with a specific development project are capitalized. Interest and
related debt issuance costs are capitalized to qualifying real estate
inventories as incurred, in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest Costs", and charged to cost of
sales as revenue from residential and land sales are recognized. Repairs and
maintenance are charged to expense as incurred. Depreciation is provided for
financial statement purposes over the estimated useful life of the respective
assets ranging from 7 years for office equipment and fixtures to 40 years for
building and improvements using the straight-line method.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances, such as a
condemnation proceeding being brought by a governmental agency against the
Company or the discovery of an environmental liability related to a particular
site, indicate that the carrying amount of the particular development property
may not be recoverable. If these events or changes in circumstances are present,
the Company estimates the sum of the expected future cash flows (undiscounted)
to result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss, the Company
would measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property. No event occurred
during the nine months ended September 30, 2003 and the year 2002 that resulted
in an impairment loss being recognized.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property. No event occurred during the nine months ended
September 30, 2003 and the year 2002 that resulted in an impairment loss being
recognized.
11
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Housing inventories (including completed model homes) consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost, which is not in excess of fair value. Land, land development
and indirect costs are allocated to cost of sales on the basis of units closed
in relation to the total anticipated units in the related development project;
such allocation approximates the relative sales value method. Direct
construction costs are allocated to the specific units closed for purposes of
determining costs of sales. Selling and marketing costs, not including those
costs incurred related to furnishing and developing the models and sales office,
are expensed in the period incurred. Costs incurred in the construction of the
model units and related furnishings are capitalized at cost. The Company intends
to offer these units for sale at the completion of a project and, accordingly,
no amortization of direct construction costs is provided. Housing inventories
are reviewed for impairment whenever events or circumstances indicate the fair
value less the cost to dispose of the inventories, is less than the capitalized
costs. If these events or changes in circumstances are present, the Company then
writes down the inventory to its fair value. No event occurred during the nine
months ended September 30, 2003 and the year 2002 that resulted in an impairment
loss being recognized.
Housing inventories consisted of the following at September 30, 2003 and
December 31, 2002 (amounts in thousands):
September 30, December 31,
2003 2002
-------------- --------------
Land under development $ 2,135 $ 3,118
Direct construction costs 1,172 1,405
Capitalized project costs 233 3,148
-------------- --------------
Total $ 3,540 $ 7,671
============== ==============
The costs associated with the Kinzie Station Phase II were reclassified from
housing inventories to development land held for sale and development and
capitalized predevelopment costs on March 31, 2003.
2. Contingencies
At September 30, 2003 and December 31, 2002, Heartland's allowance for claims
and liabilities was approximately $3,753,000 and $4,050,000, respectively. At
September 30, 2003, this allowance related entirely to environmental matters.
Significant legal proceedings and contingencies are discussed in the 2002 Form
10-K.
12
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 19, 2002, the Company modified its October 1, 1998 settlement
agreement with the Port of Tacoma (the "Port") in which the Port released all
claims against the Company and the Company agreed either to (a) pay $1,100,000
on or before December 31, 2003, plus interest from January 1, 1999, or (b)
convey real property to be agreed upon at a later date. At September 30, 2003
and December 31, 2002, Heartland's allowance for claims and liabilities for this
site was $1,110,000. At September 30, 2003 and December 31, 2002, interest owed
to the Port had been paid to date.
Pursuant to the terms of a conveyance agreement dated June 27, 1990, the Company
agreed to assume all liability for certain claims in reorganization pending
against the Chicago Milwaukee St. Paul and Pacific Railroad Company, ("Milwaukee
Road"). By order dated June 25, 2003, the US Federal District Court for the
Northern District of Illinois, sitting as the Milwaukee Road Reorganization
Court granted the Company's motion to dismiss those pending claims.
In February 2002, the Company filed suit against the Southeast Wisconsin
Professional Baseball District (the "District") in Milwaukee County Circuit
Court to enforce a provision of a contract between the District and Heartland
providing for the construction of an additional two lane bridge to the Company's
Menomonee Valley project.
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 board members. One of the lawsuits alleges CMC violated the terms of his
employment contract and that the officers and/or board members interfered with
his contract. Mr. Jacobson is seeking compensatory and punitive damages. Mr.
Jacobson also asked the court to reinstate his contract and to enjoin the
Company from selling property or making distributions to Unitholders until it
has appraised its properties and paid him according to the terms of his
employment contract. Mr. Jacobson's second lawsuit was for defamation. He
alleged he was defamed by statements in a Company press release advising
investors of various pending business transactions and describing Heartland's
termination of his contract. He was seeking $1,000,000 in compensatory damages
and $5,000,000 in punitive damages. Edwin Jacobson v. CMC Heartland Partners et
al., Case No. 02 CH 15160, consolidated with Case No. 02 L 010591, Circuit Court
of Cook County, Illinois. On October 24, 2002, the Company filed motions to
dismiss the lawsuits. On January 3, 2003, Mr. Jacobson filed amended complaints
alleging the same and seeking the same relief. 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 board members. At the same time, the court dismissed
with prejudice Mr. Jacobson's motion to enjoin the Company from selling its real
estate. Mr. Jacobson has filed a motion for reconsideration of the dismissals.
CMC is vigorously defending itself against the remaining lawsuit and, in the
opinion of management, has good defenses against the remaining lawsuit arising
out of Mr. Jacobson's employment contract as its actions were consistent with
its duties and in conformance with the law. The Company has not recorded a loss
contingency related to this action because at this time it cannot be determined
if it is probable that a liability has been incurred and the amount of any
possible liability cannot be determined.
13
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 28, 2003, in the Superior Court of the State of Delaware, the
Company filed suit against the former President and Chief Executive Officer of
CMC, Edwin Jacobson, to collect all principal and interest owed the Company,
approximately $332,000, (which includes $16,000 of interest that has not been
recorded on the financial statements), related to money borrowed on October 17,
2000 that has not been paid in accordance with the terms of the note. Of this
amount, $316,000 has been recorded as an allowance for bad debt. In June 2003,
the Company's motion for summary judgement was denied by the Superior Court of
the State of Delaware and the court granted Mr. Jacobson's motion for stay
pending the litigation described in the preceding paragraph. The Company has
appealed this decision.
CMCVII, per the Longleaf lot Purchase and Sale Agreement, dated December 12,
2000, was required on April 1, 2002, November 1, 2002, April 1, 2003 and
November 1, 2003 to pay $135,000, $250,000, $135,000 and $250,000, respectively,
to Maples Properties, Inc. ("Maples"), the owner and operator of the golf course
and club house located at the Longleaf Country Club in Southern Pines, North
Carolina. Since the four payments were not made, this constitutes an event of
default under the agreement. The Company believes Maples is in default of its
obligations. In addition, Longleaf Associates Limited Partnership ("LALP"), the
seller of the Longleaf lots, has not notified CMCVII that it is in default. LALP
would be entitled to seek specific performance and/or other remedies as provided
for in the contract. However, due to its belief that Maples has breached the
contract, CMCVII does not intend to make these payments at this time. On June
19, 2003, Maples included CMCVII 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. Maples is seeking $3,515,000 in
compensatory damages from the defendants. CMCVII is vigorously defending itself
against this action and at this time the Company has not recorded a loss
contingency because it cannot be determined if it is a probable that a liability
has been incurred and the amount of any possible liability cannot be determined.
Also, management is not able to express an opinion on whether this action will
or will not adversely affect the Company's future financial condition or results
of operations.
14
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company owned approximately 142 acres of property in the Menomonee River
Valley in Milwaukee, Wisconsin. The property is located next to Miller Park, the
home stadium of the Milwaukee Brewers baseball team. The Company had proposed a
mixed use development to include retail and entertainment uses complementary to
the baseball park as a recreational destination. The City of Milwaukee had
stated that it believed industrial development would be more appropriate for the
site and the Redevelopment Authority of the City of Milwaukee ("RACM") had
announced it would seek to acquire the property through eminent domain if
necessary. On June 10, 2003, RACM delivered to the Company an appraisal of the
Company's property in the Menomonee Valley in Milwaukee as an initial step in
RACM's condemnation of the property. The RACM appraisal valued the property at
$3,550,000. On July 30, 2003, the Company received $3,550,000 and a release for
all environmental matters related to the property from RACM and conveyed title
to the property to RACM. The Company and RACM have agreed to negotiate the
amount of additional compensation due from RACM to the Company. The Company has
reserved the right to bring suit for additional consideration. Any additional
amount to be received by the Company is uncertain at this time, however
management believes that additional consideration will be received either
through negotiation with RACM or the filing of a lawsuit. The carrying amount of
the Menomonee property was approximately $7,656,000. This amount compared to the
$3,550,000 received from RACM resulted in a loss of approximately $4,106,000
that has been recognized as part of the gross profit on property sales in the
consolidated financial statements at September 30, 2003. Any additional
compensation received will be recognized as income in the period received.
3. Notes Payable
Heartland had a line of credit agreement in the amount of $3,850,000 with
LaSalle National Bank ("LNB"). On February 11, 2003, the Company closed on the
sale of approximately 3.4 acres of land in Chicago, Illinois at a price of
$9,850,000. At that time the outstanding LNB line of credit balance of
$3,850,000 was paid in full. The LNB line of credit matured March 31, 2003.
As of December 8, 2000, Heartland had an agreement for a $3,000,000 revolving
line of credit for the construction of homes in its Longleaf community located
in Southern Pines, North Carolina with Bank One of Illinois ("Bank One").
Effective April 23, 2003, the revolving line of credit was reduced to
$2,250,000. The carrying value of the land and housing inventories for this loan
at September 30, 2003 and December 31, 2002, is $2,243,000 and $2,290,000,
respectively. The line of credit matures on December 31, 2003 and bears interest
at the prime rate (4.0% at September 30, 2003). At September 30, 2003 and
December 31, 2002, $1,145,000 and $932,000, respectively, had been advanced by
Bank One to Heartland on the line of credit.
On August 22, 2002, Heartland executed documents for a loan of $4,000,000 from
Bank One. At that time $500,000 was held in reserve by Bank One to pay future
environmental costs if needed. As collateral for this loan, the Company pledged
the Fife, Washington property. Effective August 31, 2003, Heartland executed
documents that extended the maturity date of the loan to December 31, 2003 and
required Heartland to deposit the earnest money received from the purchaser of
the Fife property (a total of $1,500,000 by October 15, 2003) as collateral for
the loan in a money market account with Bank One, of which $750,000 has been
deposited as of September 30, 2003 and is included as a component of restricted
cash. An additional $750,000 was deposited in the money market account by
October 15, 2003. The loan bears interest at the prime rate plus 1% (5.0% at
September 30, 2003), and matures December 31, 2003. The carrying value of the
land and development costs collateralizing the loan is $6,190,000 and $6,116,000
at September 30, 2003 and December 31, 2002, respectively. The outstanding loan
balance is $3,500,000 at September 30, 2003 and December 31, 2002.
15
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 23, 2003, the Company purchased notes (see Note 1 to the Consolidated
Financial Statements) issued by HTI to PG Oldco, Inc. for $770,000 in cash and a
note payable for $500,000, which bears interest at 5% and is due October 31,
2003. The $500,000 promissory note dated October 22, 2002 granted to CMCII by
Goose, LLC related to the sale of the Company's interest in the Goose Island
joint venture to its partners on October 22, 2002 has been pledged as collateral
for the $500,000 PG Oldco, Inc. note payable. The outstanding note payable
balance is $500,000 at September 30, 2003.
As of September 30, 2003, Heartland's total consolidated indebtedness was
$5,145,000, which is due within one year. There can be no assurance that the
amounts available from internally generated funds, cash on hand, Heartland's
existing credit facilities and sale of non-strategic assets will be sufficient
to fund Heartland's anticipated operations. Heartland may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financing and sales of debt or
equity securities. No assurance can be given that such financing will be
available or, if available, will be on terms favorable to Heartland. If
Heartland is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures, development
projects may be delayed or abandoned. Any such delay or abandonment could result
in a reduction in sales and would adversely affect Heartland's future financial
condition and results of operations. Management does not intend to abandon any
projects.
4. Related Party Transactions
Heartland has a management agreement with HTII pursuant to which Heartland is
required to pay HTII an annual management fee in the amount of $413,000 for the
years 2003 and 2002. As of September 30, 2003, the Company has prepaid
approximately $93,000 of the fourth quarter management fee. The management
agreement terminates on June 27, 2005.
Under a management services agreement, HTI was reimbursing CMC for reasonable
and necessary costs and expenses for services. These totaled approximately
$165,000 for the three months ended March 31, 2002. Effective April 1, 2002, CMC
stopped accruing the reimbursement of management services, as well as the
accrual of interest on the outstanding note receivable balance. CMC stopped
these accruals because of the uncertainty related to the competing interests in
the Collateral (see Note 1 to the Consolidated Financial Statements and the next
paragraph) and the uncertainty concerning the continued existence of HTI as a
going concern. HTI's stock is now trading in the over-the-counter market (due to
being delisted from the American Stock Exchange) at less than $.01 per share as
of September 30, 2003.
16
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 25, 2002, the Company and CMC demanded immediate payment in full of
all obligations due under the Line of Credit Promissory Notes from HTI.
Heartland has initiated steps to protect its security interest in the
Collateral. PG Oldco, Inc., a creditor of HTI under notes aggregating $2,200,000
in principal amount, also had a security interest in the Collateral and had
commenced steps to protect its interest. Because of the competing interests in
the Collateral, Heartland on May 23, 2003 purchased from PG Oldco, Inc. the
notes owed by HTI aggregating $2,200,000 in principal amount for approximately
$1,270,000. The purchase price consisted of $770,000 in cash paid on May 23,
2003 and a note payable for $500,000 due October 31, 2003 that bears interest at
5% compounded quarterly. The purchase price of $1,270,000 was recorded as an
increase in Due from Affiliate. At September 30, 2003, HTI owed Heartland and
CMC approximately $9,734,000. Heartland has recorded an allowance of
approximately $133,000 on the note receivable balance of $9,734,000 based on the
September 30, 2003 Class B Interest capital account balance of $9,570,000.
On September 15, 2003, Heartland distributed $22,000 to the General Partner and
$11,000 to the Class B Interest as part of the approximately $2,231,000
distributed to all partners.
On March 31, 2001, the two Kinzie Station Phase I model homes (a one bedroom
unit and a two bedroom unit) and furniture were purchased by two officers of the
Company at fair market value. Heartland has leased these model homes back from
the officers starting April 1, 2001 and ending April 1, 2004. The monthly rent
on the one bedroom model is $2,350 and on the two bedroom model is $4,200. The
leases contain standard insurance and maintenance clauses as customary in these
types of leases.
5. Employee Compensation Arrangements
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 is from March 1, 2002 to June 27, 2005 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 is
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 of $105,000 has
been recognized in the consolidated statements of operations, of which $59,000
has been paid, for the nine months ended September 30, 2003.
17
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effective January 1, 2000, the Company approved the CMC Heartland Partners
Incentive Plan ("CMC 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 the following percentages (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. As of September 30, 2003, $973,000 had been accrued
as compensation expense under the plans of which $481,000 has been paid to the
officers by the Company.
Effective January 1, 2002, the CMC Heartland Partners 2002 Incentive Plan ("2002
CMC Plan") was approved by the Company. 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,
2004. Three officers of the Company are eligible for benefits under the 2002 CMC
Plan. As of September 30, 2003, $321,000 has been accrued as compensation
expense under the 2002 CMC Plan of which $206,000 has been paid to the three
officers. 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 each payable at the time of any distributions to the
Unitholders. The phantom Units awarded under the CMC Plan is 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 $31,500 has
been recognized in the consolidated statements of operations, of which $19,500
has been paid, for the nine months ended September 30, 2003.
6. Subsequent Events
During October 2003, an additional $750,000 was deposited into the money market
account with Bank One. A total amount of $1,500,000 has been deposited as
collateral for the $3,500,000 outstanding Bank One loan.
During October 2003, payment on the $500,000 note receivable from Goose, LLC
related to the sale of the Company's interest in the Goose Island joint venture
was received. The $500,000 PG Oldco, Inc. note payable that was due on October
31, 2003 related to the Company's purchase of notes issued by HTI to PG Oldco,
Inc. along with accrued interest was paid.
18
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Forward-Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section, and elsewhere
in this Form 10-Q are "forward-looking statements". 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, performance
or achievement of results and the value of the partnership Units may differ
materially from what is forecast in 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.
Summary of Critical Accounting Policies
Accounts Receivable
The Company provides an allowance for doubtful accounts against the portion of
accounts receivable which is estimated to be uncollectible. Accounts receivable
in the consolidated balance sheets are shown net of an allowance for doubtful
accounts of $316,000 as of September 30, 2003 and December 31, 2002.
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 being amortized
over each agreement's rental period.
Revenue Recognition
Residential sales are recognized at closing when title to the home has passed to
the buyer. The Company's homes are generally offered for sale in advance of
their construction. To date, most of the Company's homes have been sold pursuant
to standard sales contracts entered into prior to commencement of construction.
The Company's standard sales contracts generally require the customer to make an
earnest money deposit. This deposit may range from 5% to 10% of the purchase
price for a buyer using conventional financing.
Land sales are recognized when the Company has received an adequate cash down
payment and all other conditions necessary for profit recognition have been
satisfied.
19
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Investment in Joint Venture
Investment in joint venture represents recording of the Company's interest under
the equity method of accounting. Under the equity method of accounting, the
Company recorded its initial interest at cost and adjusts its investment
accounts for additional capital contributions, distributions and its share of
joint venture income or loss. With respect to the Goose Island joint venture,
Heartland sold its interest to its partners on October 22, 2002.
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 amounts reported in the financial
statements and accompanying notes. Significant estimates used in the preparation
of the financial statements include the value of the Class B Interest which
represents the collateral of the Heartland Technology, Inc. note receivable owed
to the Company and CMC, estimated costs to complete long term development
projects, the collectability of the note and interest receivable from Mr.
Jacobson, former President and Chief Executive Officer of CMC, estimated bad
debt expense, the recoverability of the total cost of properties and the
estimates used in determining the Company's environmental liabilities. Actual
results will differ from those estimates used in preparation of these 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 financial
statements.
Heartland's assets are carried at historical cost. At September 30, 2003 and
December 31, 2002, the tax basis of the properties and improvements for Federal
income tax purposes was greater than their carrying value for financial
reporting purposes.
Property
Properties are carried at their historical cost. Expenditures which
significantly improve the values or extend useful lives of the properties are
capitalized. Predevelopment costs including real estate taxes that are directly
identified with a specific development project are capitalized. Interest and
related debt issuance costs are capitalized to qualifying real estate
inventories as incurred, in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest Costs", and charged to cost of
sales as revenue from residential and land sales are recognized. Repairs and
maintenance are charged to expense as incurred. Depreciation is provided for
financial statement purposes over the estimated useful life of the respective
assets ranging from 7 years for office equipment and fixtures to 40 years for
building and improvements using the straight-line method.
20
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances, such as a
condemnation proceeding being brought by a governmental agency against the
Company or the discovery of an environmental liability related to a particular
site, indicate that the carrying amount of the particular development property
may not be recoverable. If these events or changes in circumstances are present,
the Company estimates the sum of the expected future cash flows (undiscounted)
to result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss, the Company
would measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property. No event occurred
during the nine months ended September 30, 2003 and the year 2002 that resulted
in an impairment loss being recognized.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property. No event occurred during the nine months ended
September 30, 2003 and the year 2002 that resulted in an impairment loss being
recognized.
Housing inventories (including completed model homes) consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost, which is not in excess of fair value. Land, land development
and indirect costs are allocated to cost of sales on the basis of units closed
in relation to the total anticipated units in the related development project;
such allocation approximates the relative sales value method. Direct
construction costs are allocated to the specific units closed for purposes of
determining costs of sales. Selling and marketing costs, not including those
costs incurred related to furnishing and developing the models and sales office,
are expensed in the period incurred. Costs incurred in the construction of the
model units and related furnishings are capitalized at cost. The Company intends
to offer these units for sale at the completion of a project and, accordingly,
no amortization of direct construction costs is provided. Housing inventories
are reviewed for impairment whenever events or circumstances indicate the fair
value less the cost to dispose of the inventories, is less than the capitalized
costs. If these events or changes in circumstances are present, the Company then
writes down the inventory to its fair value. No event occurred during the nine
months ended September 30, 2003 and the year 2002 that resulted in an impairment
loss being recognized.
21
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Housing inventories consisted of the following at September 30, 2003 and
December 31, 2002 (amounts in thousands):
September 30, December 31,
2003 2002
--------------- ---------------
Land under development $ 2,135 $ 3,118
Direct construction costs 1,172 1,405
Capitalized project costs 233 3,148
--------------- ---------------
Total $ 3,540 $ 7,671
=============== ===============
The costs associated with the Kinzie Station Phase II were reclassified from
housing inventories to development land held for sale and development and
capitalized predevelopment costs on March 31, 2003.
Liquidity and Capital Resources
Cash flow from operating activities has been derived primarily from proceeds of
property sales. Cash was $2,104,000 (including $807,000 of restricted cash) at
September 30, 2003 and $751,000 (including $42,000 of restricted cash) at
December 31, 2002.
Net cash provided by operating activities was $7,991,000 in the first nine
months of 2003, compared to ($1,668,000) used in operating activities in the
first nine months of 2002 or an increase in net cash provided by operating
activities of $9,659,000 between the two nine month periods. This is primarily
attributable to an increase from 2002 to 2003 in revenues from the closing of
property sales of $12,145,000.
Heartland's management believes it will have sufficient funds available for
operating expenses, but anticipates the necessity of utilizing outside financing
to fund development projects. As of December 31, 2002, the Company had a line of
credit with LaSalle National Bank ("LNB") in the amount of $3,850,000. On
February 11, 2003, the Company closed on the sale of approximately 3.4 acres of
land in Chicago, Illinois at a price of $9,850,000. At that time the outstanding
LNB line of credit balance of $3,850,000 was paid in full. The line of credit
matured March 31, 2003.
If Heartland is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures, development
projects may be delayed or abandoned. No assurance can be given that such
financing will be available or, if available, will be on terms favorable to
Heartland. The consolidated financial statements do not contain any adjustments
to reflect the ultimate outcome of this uncertainty. Management does not intend
to abandon any projects.
22
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
On February 25, 2002, the Company and CMC demanded immediate payment in full of
all obligations due under the Line of Credit Promissory Notes from HTI.
Heartland has initiated steps to protect its security interest in the Class B
Interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under notes
aggregating $2,200,000 in principal amount, also had a security interest in the
Collateral and had commenced steps to protect its interest. Under the Lien
Subordination and Inter-Creditor Agreement (the "Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. had a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland on May 23, 2003
purchased from PG Oldco, Inc. the notes owed by HTI aggregating $2,200,000 in
principal amount for approximately $1,270,000. The purchase price consisted of
$770,000 in cash paid on May 23, 2003 and a note payable for $500,000 due
October 31, 2003 that bears interest at 5% compounded quarterly. The purchase
price of $1,270,000 was recorded as an increase in Due from Affiliate. At
September 30, 2003, HTI owed Heartland and CMC approximately $9,734,000.
Heartland has recorded an allowance of approximately $133,000 on the note
receivable balance of $9,734,000 based on the September 30, 2003 Class B
Interest capital account balance of $9,570,000.
On May 23, 2003, the Company purchased notes (see paragraph above) issued by HTI
to PG Oldco, Inc. for $770,000 in cash and a note payable for $500,000, which
bears interest at 5% and is due October 31, 2003. The $500,000 promissory note
dated October 22, 2002 granted to CMCII by Goose, LLC related to the sale of the
Company's interest in the Goose Island joint venture to its partners on October
22, 2002 has been pledged as collateral for the $500,000 PG Oldco, Inc. note
payable. The outstanding note payable balance is $500,000 at September 30, 2003.
During October 2003, payment on the $500,000 note receivable from Goose, LLC
related to the sale of the Company's interest in the Goose Island joint venture
was received. The $500,000 PG Oldco, Inc. note payable that was due on October
31, 2003 related to the Company's purchase of notes issued by HTI to PG Oldco,
Inc. along with accrued interest was paid.
On August 11, 2003, Heartland declared a cash distribution of $1.05 per Unit. On
September 15, 2003, the Company distributed approximately $2,231,000, 98.5%, to
the Unitholders of record at August 29, 2003, 1% to the General Partner and 0.5%
to the Class B Interest.
23
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Development Property
At September 30, 2003, property designated for sale and development consisted of
8 sites comprising approximately 345 acres. The book value of this land is
$6,545,000 or an average of $19,000 per acre. Heartland reviews these properties
to determine whether to hold, develop, joint venture or sell. Heartland's
objective for these properties is to maximize Unitholder value. At this time,
Heartland is focusing on raising cash by selling properties.
The real estate development business is highly competitive. Heartland is subject
to competition from a great number of real estate developers, including
developers with national operations, many of which have greater sales and
financial resources than Heartland.
Kinzie Station
Heartland has a 2.68 acre site in the City of Chicago known as Kinzie Station
Phase I and Phase II. Zoning approval for the construction of 381 residential
units on this 2.68 acre site was received in 1997. On March 28, 2001, zoning
approval to increase the total number of residential units from 381 to 442 units
was received from the City of Chicago. In addition to the 2.68 acre site, the
Company owns approximately 5 acres of land and 4 acres of air rights adjacent to
Kinzie Station Phase I and II ("Kinzie Station North"). Of the 5 acres,
approximately 3 acres are currently zoned for residential units, a food store
and a public park. A consortium of residential developers has the Kinzie Station
North residential acreage under contract. On February 11, 2003, the sale of two
parcels was closed for $9,850,000. The closing of the third parcel is contingent
on the vacation of a city street by the City of Chicago. Management believes
that this vacation could take place during the year 2004. The Company has an
agreement to sell the food store site to a retail developer. The closing of this
sale is contingent on certain governmental approvals, which could take place in
2004.
The remaining approximately 2 acres the Company owns in Chicago is zoned for
commercial use. The Company has an agreement to sell these 2 acres to a
commercial user, subject to various contingencies.
Kinzie Station Phase I
Kinzie Station Phase I was situated on 1.23 acres. The construction of Kinzie
Station Phase I, which is complete, started on October 1, 1998. The Company has
closed all 187 units (163 Tower units and 24 Plaza units), during the period May
1, 2000 to September 30, 2003; 1 in 2003, 8 in 2002, 38 in 2001 and 140 in 2000.
The Company's remaining ownership in Kinzie Station Phase I is approximately
5,200 square feet of commercial space, including the Company's offices, and 22
parking spaces.
24
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Kinzie Station Phase II
Heartland has a 1.45 acre site in the City of Chicago known as Kinzie Station
Phase II. The Company has zoning to construct a 267 unit residential tower
building. On April 23, 2003, the Company signed a contract to sell the property,
subject to various contingencies.
Longleaf
At September 30, 2003, the Company owns 194 lots in its Longleaf community
located in Southern Pines, North Carolina. At September 30, 2003, the book value
of the lots is $2,135,000, an average of $11,000 per lot.
In Longleaf, the Company has closed as of September 30, 2003, a total of 53
contracts; 7 in 2003, 9 in 2002, 9 in 2001, 15 in 2000 and 13 in 1999. When the
Company assumed day-to-day operations of Longleaf in April, 1998, there were a
number of homes under construction which were owned by the developer, as well as
resale homes, on the market. As of September 30, 2003, the Company has sold 59
homes and 5 lots for these owners since April 1, 1998.
Longleaf
Unit Inventory Detail
As of September 30, 2003
Model homes 1
Sold homes under construction 3
Inventory homes under construction 3
Lots owned 187
------
Total unit inventory 194
======
As of September 30, 2003, Heartland has an agreement for a $2,250,000 revolving
line of credit for the construction of homes in Longleaf with Bank One of
Illinois ("Bank One"). The revolving line of credit matures December 31, 2003
and bears interest at the prime rate (4.0% at September 30, 2003). At September
30, 2003, $1,145,000 had been advanced by Bank One to Heartland on the line of
credit.
CMCVII, per the Longleaf lot Purchase and Sale Agreement, dated December 12,
2000, was required on April 1, 2002, November 1, 2002, April 1, 2003 and
November 1, 2003 to pay $135,000, $250,000, $135,000 and $250,000, respectively,
to Maples Properties, Inc. ("Maples"), the owner and operator of the golf course
and club house located at the Longleaf Country Club in Southern Pines, North
Carolina. Since the four payments were not made, this constitutes an event of
default under the agreement. The Company believes Maples is in default of its
obligations. In addition, Longleaf Associates Limited Partnership ("LALP"), the
seller of the Longleaf lots, has not notified CMCVII that it is in default.
25
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
LALP would be entitled to seek specific performance and/or other remedies as
provided for in the contract. However, due to its belief that Maples has
breached the contract, CMCVII does not intend to make these payments at this
time. On June 19, 2003, Maples included CMCVII 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. Maples is
seeking $3,515,000 in compensatory damages from the defendants. CMCVII is
vigorously defending itself against this action and at this time the Company
has not recorded a loss contingency because it cannot be determined if it is a
probable that a liability has been incurred and the amount of any possible
liability cannot be determined. Also, management is not able to express an
opinion on whether this action will or will not adversely affect the Company's
future financial condition or results of operations.
Fife, Washington
On December 1, 1998, the Company's 177 acre Fife property was annexed to the
City of Fife, Washington. A Local Improvement District (LID) has been approved
in order to support the improvement and extension of sewers and sewer capacity
for the site. The City of Fife has zoned the property for residential usage. The
Fife City Council approved the preliminary plat for the project on September 25,
2001. Development of the property was started during the first quarter of the
year 2002. The Company has an agreement to sell the Fife property to a national
homebuilder.
On August 22, 2002, Heartland executed documents for a loan of $4,000,000 from
Bank One. At that time Bank One reserved $500,000 to pay future environmental
costs if needed. As collateral for this loan, the Company pledged the Fife,
Washington property. Effective August 31, 2003, Heartland executed documents
that extended the maturity date of the loan to December 31, 2003 and required
Heartland to deposit the earnest money received from the purchase of the Fife
property (a total of $1,500,000 by October 15, 2003) as collateral for the loan
in a money market account with Bank One, of which $750,000 has been deposited at
September 30, 2003 and is included as a component of restricted cash. The
additional $750,000 was deposited by the Company by October 15, 2003. The loan
bears interest at the prime rate plus 1% (5.0% at September 30, 2003), and
matures December 31, 2003. The outstanding loan balance is $3,500,000 at
September 30, 2003.
On December 19, 2002, the Company modified its October 1, 1998 settlement
agreement with the Port of Tacoma (the "Port") in which the Port released all
claims against the Company and the Company agreed either to (a) pay $1,100,000
on or before December 31, 2003, plus interest from January 1, 1999, or (b)
convey real property to be agreed upon at a later date. At September 30, 2003,
Heartland's allowance for claims and liabilities for this site was $1,110,000.
At September 30, 2003, interest owed to the Port had been paid to date.
26
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Menomonee Valley
The Company owned approximately 142 acres of property in the Menomonee River
Valley in Milwaukee, Wisconsin. The property is located next to Miller Park, the
home stadium of the Milwaukee Brewers baseball team. The Company had proposed a
mixed use development to include retail and entertainment uses complementary to
the baseball park as a recreational destination. The City of Milwaukee had
stated that it believed industrial development would be more appropriate for the
site and the Redevelopment Authority of the City of Milwaukee ("RACM") had
announced it would seek to acquire the property through eminent domain if
necessary.
On June 10, 2003, RACM delivered to the Company an appraisal of the Company's
property in the Menomonee Valley in Milwaukee as an initial step in RACM's
condemnation of the property. The RACM appraisal valued the property at
$3,550,000. On July 30, 2003, the Company received $3,550,000 and a release for
all environmental matters related to the property from RACM and conveyed title
to the property to RACM. The Company and RACM have agreed to negotiate the
amount of additional compensation due from RACM to the Company. The Company has
reserved the right to bring suit for additional consideration. Any additional
amount to be received by the Company is uncertain at this time, however
management believes that additional consideration will be received either
through negotiation with RACM or the filing of a lawsuit. The carrying amount of
the Menomonee property was approximately $7,656,000. This amount compared to the
$3,550,000 received from RACM resulted in a loss of approximately $4,106,000
that has been recognized as part of the gross profit on property sales in the
consolidated financial statements at September 30, 2003. Any additional
compensation received will be recognized as income in the period received.
Property Sales and Leasing Activities
The Company has the right to sell easements for fiber optic lines along or
across approximately 83 miles of rail right of way running from downtown Chicago
west to Elgin and Northwest to Fox Lake, Illinois. The Company receives 2/3 of
the proceeds of any sale.
Heartland's current inventory of land held for sale consists of approximately
13,694 acres located throughout 12 states. The book value of this inventory is
approximately $631,000 at September 30, 2003. The majority of the land is former
railroad rights-of-way, long, narrow strips of land approximately 100 feet in
width. Some of Heartland's sites located in small rural communities or outlying
mid-cities, are leased to third parties for agricultural use and these
properties may be improved with the lessee's structures.
The sale, management and leasing of the Company's non-development real estate
inventory is conducted by Heartland's sales and property management department.
The volume of the Company's sales has slowed over the last seven years due to
the less desirable characteristics of the remaining properties. The individual
parcels are held at a low book value and the Company anticipates that the sale
of its remaining parcels may extend beyond the year 2004. The Company is also
exploring the sale of these properties as a whole to a third party.
27
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
The Company leases less than 1% of its total acreage under operating leases. The
number of leases declines each year as sales of properties are made to existing
lessees. The majority of the leases provide nominal rental income to Heartland.
The leases generally require the lessee to construct, maintain and remove any
improvements, pay property taxes, maintain insurance and maintain the condition
of the property. The majority of the leases are cancellable by either party upon
thirty to sixty days notice. Heartland's ability to terminate or modify certain
of its leases is restricted by applicable law and regulations.
Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. If the Company were to use a
different approach, the reserve could be materially higher. 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 of work to be performed at each site, the portion of
costs that may be shared and the timing of the remediation work. Environmental
costs which are incurred in connection with Heartland's development activities
are expensed or capitalized as appropriate.
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives. As additional information becomes
available, the Company will reassess its reserves which may then be modified and
related charges/credits against earnings may then be made.
At September 30, 2003, the Company has recorded a liability of approximately
$3,753,000 for possible environmental liabilities, including legal, remediation
and consulting fees.
At September 30, 2003, there is not sufficient information to reasonably
estimate all the environmental liabilities of which management is aware.
Accordingly, management is unable to determine whether environmental liabilities
which management is unable to reasonably estimate may or may not have a
significant adverse effect on Heartland's financial condition or results of
operations.
28
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Heartland does not at this time anticipate that these claims or assessments will
have a material effect on the Company's liquidity, financial position and
results of operations beyond the reserve which the Company has established for
such claims and assessments. In making this evaluation, the Company has assumed
it will continue to be able to assert the bankruptcy bar arising from the
reorganization of its predecessor and that resolution of current pending and
threatened claims and assessments will be consistent with the Company's
experience with similar previously asserted claims and assessments. While the
timing of the payment in respect of environmental claims has not significantly
adversely affected the Company's cash flow or liquidity in the past, management
is not able to reasonably anticipate whether future payments may or may not have
a significant adverse effect in the future.
Results of Operations
Operations for the three months ended September 30, 2003 and 2002 resulted in a
net loss of ($4,784,000) and ($722,000), respectively. Operations for the nine
months ended September 30, 2003 and 2002, resulted in a net loss of ($535,000)
and ($1,692,000), respectively. For the three months ended September 30, 2003
and 2002, the net loss allocated to the Class A Limited Partners is ($4,712,000)
and ($712,000), respectively or ($2.25) and ($0.34), respectively per Class A
Unit. For the nine months ended September 30, 2003 and 2002, the net loss
allocated to the Class A Limited Partners is ($527,000) and ($1,667,000),
respectively or ($0.25) and ($0.80), respectively per Class A Unit.
The decrease in net loss for the first nine months of 2003 compared to the first
nine months of 2002 of $1,157,000 is primarily attributable to an increase in
the gross profit on property sales from 2002 to 2003 of $3,039,000. In
particular, on February 11, 2003, the Company closed on the sale of
approximately 3.4 acres of land in Chicago, Illinois at a price of $9,850,000.
Income was reduced by a book loss on the Menomonee Valley property of
approximately $4,106,000, which is the proceeds received of $3,550,000 less the
carrying value of the property of approximately $7,656,000.
Total operating expenses were $4,540,000 and $2,985,000 for the nine months
ending September 30, 2003 and 2002, respectively. The increase of $1,555,000 is
primarily due to increased sales and marketing expenses of $624,000, increased
general and administrative expenses of $880,000 and an increase in interest
expense of $271,000. The increase in sales and marketing expenses is primarily
attributable to the payment of a commission to an outside broker on the Kinzie
North 3.4 acres closing and consulting and legal expenses related to completing
the sale of the Kinzie Station and Menomonee Valley properties. At this time,
Heartland is focusing on raising cash by selling properties. The increase in
general and administrative expenses is primarily attributable to an increase in
legal expenses related to corporate and tax restructuring matters and the
various lawsuits the Company is litigating. Costs, such as interest expense,
that would have been capitalized in prior periods are now being expensed since
the properties are now under contract or for sale.
29
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Economic and Other Conditions Generally
The real estate industry is highly cyclical and is affected by changes in local,
national, and global economic conditions and events, such as employment levels,
availability of financing, interest rates, consumer confidence and the demand
for housing and other types of construction. Real estate developers are subject
to various risks, many of which are outside the control of the developer,
including real estate market conditions, changing demographic conditions,
adverse weather conditions and natural disasters, such as hurricanes and
tornadoes, delays in construction schedules, cost overruns, changes in
government regulations or requirements, increases in real estate taxes and other
local government fees and availability and cost of land, materials and labor.
The occurrence of any of the foregoing could have a material adverse effect on
the financial condition and results of operations of Heartland.
Access to Financing
The real estate business is capital intensive and requires expenditures for land
and infrastructure development, housing construction and working capital.
Accordingly, Heartland anticipates incurring additional indebtedness to fund
their real estate development activities. As of September 30, 2003, Heartland's
total consolidated indebtedness was $5,145,000, which is due within one year.
There can be no assurance that the amounts available from internally generated
funds, cash on hand, Heartland's existing credit facilities and sale of
non-strategic assets will be sufficient to fund Heartland's anticipated
operations. Heartland may be required to seek additional capital in the form of
equity or debt financing from a variety of potential sources, including
additional bank financing and sales of debt or equity securities. No assurance
can be given that such financing will be available or, if available, will be on
terms favorable to Heartland. If Heartland is not successful in obtaining
sufficient capital to fund the implementation of its business strategy and other
expenditures, development projects may be delayed or abandoned. Any such delay
or abandonment could result in a reduction in sales and would adversely affect
Heartland's future financial condition and results of operations. Management
does not intend to abandon any projects.
Period-to-Period Fluctuations
Heartland's real estate projects are long-term in nature. Sales activity varies
from period to period, and the ultimate success of any development cannot always
be determined from results in any particular period or periods. Thus, the timing
and amount of revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage effectively their
cash flows from operations would have an adverse effect on their ability to
service debt, and to meet working capital requirements.
30
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Interest Rate Sensitivity
The Company's total consolidated indebtedness at September 30, 2003 is
$5,145,000. The Company pays interest on its outstanding borrowings under
revolving credit facilities and fixed loan amounts at the prime rate, the prime
rate plus 1%, and at fixed rates of 5% and 7.5%. An adverse change of 1.00% in
the prime rate would increase the quarterly interest incurred by approximately
$13,000. The Company does not have any other financial instruments for which
there is a significant exposure to interest rate changes.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Economic and Other Conditions Generally", "Access to Financing"
and "Interest Rate Sensitivity". The Company is not subject to significant
foreign currency exchange rate risk, commodity price risk or other relevant
market price risks.
Item 4. Controls and Procedures
CEO and CFO Certifications
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of this period, the
Company's Chief Executive Officer and Chief Financial Officer evaluated, with
the participation of the Company's management, the effectiveness of the
Company's disclosure controls and procedures. Based on the evaluation, which
disclosed no significant deficiencies or material weaknesses, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the evaluation.
31
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At September 30, 2003, Heartland's allowance for claims and liabilities was
approximately $3,753,000. During the nine months ended September 30, 2003, the
Company incurred approximately $37,000 in expenses in respect to environmental
matters. Material legal matters are discussed below.
Canadian Pacific Railroad Matters
The Canadian Pacific Railroad ("CPRR"), formerly the Soo Line Railroad Company,
has asserted that the Company is liable for certain occupational injury claims
filed after the consummation of an Asset Purchase Agreement and related
agreements ("APA") by former employees now employed by the CPRR. The Company has
denied liability for each of these claims based on a prior settlement with CPRR.
CPRR has also asserted that the Company is liable for the remediation of
releases of petroleum or other regulated materials at six different sites
acquired from the Company located in Iowa, Minnesota and Wisconsin. The Company
has denied liability based on the APA.
The occupational and environmental claims are all currently being handled by the
CPRR, and the Company understands the CPRR has paid settlements on many of these
claims. As a result of CPRR's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest. On October 1, 1998, the Company entered
into a Settlement Agreement with the Port, subsequently modified December 19,
2002, in which the Port released all claims and the Company agreed either to,
(a) pay $1,100,000 on or before December 31, 2003, plus interest from January 1,
1999 or, (b) to convey to the Port real property to be agreed upon at a later
date. At September 30, 2003, interest owed to the Port had been paid to date. At
September 30, 2003, Heartland's allowance for claims and liabilities for this
site was $1,110,000. The Company will not make a claim on its insurance carriers
in this matter because the settlement amount does not exceed the self insured
retention under the applicable insurance policies.
32
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Wheeler Pit, Janesville, Wisconsin
In November 1995, the Company settled a claim with respect to the Wheeler Pit
site near Janesville, Wisconsin. The Company's only outstanding obligation under
the settlement is to pay 32% of the monitoring costs for twenty-five years
beginning in 1992.
Other Environmental Matters
Under environmental laws, liability for hazardous substance contamination is
imposed on the current owners and operators of the contaminated site, as well as
the owner or the operator of the site at the time the hazardous substance was
disposed or otherwise released. In most cases, this liability is imposed without
regard to fault. Currently, the Company has known environmental liabilities
associated with certain of its properties arising out of the activities of its
predecessor or certain of its predecessor's lessees and may have further
material environmental liabilities as yet unknown. The majority of the Company's
known environmental liabilities stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad or in operations
conducted by its predecessor's lessees. The following is a summary of material
known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is liable for some or all of the investigation and remediation of
certain properties in Montana sold by its predecessor's reorganization trustee
prior to the consummation of its predecessor's reorganization. The Company has
denied liability at certain of these sites based on the reorganization bar of
the Company's predecessors. The Company's potential liability for the
investigation and remediation of these sites was discussed in detail at a
meeting with DEQ in April 1997. While DEQ has not formally changed its position,
DEQ has not elected to file suit. Management is not able to express an opinion
at this time whether the cost of the defense of this liability or the
environmental exposure in the event of the Company's liability will or will not
be material.
At four 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.
Environmental sampling in 1995, at a 4.99 acre parcel in Minneapolis, Minnesota,
disclosed that the parcel was impacted by releases of regulated materials from
the 1960s operations of a former lessee. The Company continues to investigate
the environmental condition of the property under the direction of the Minnesota
Department of Agriculture. The Company filed suit against the former lessees of
the site in the United States District of Minnesota in July 2002.
33
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Sampling performed in November 2000, indicated the presence of solvents in the
soil and groundwater under certain property owned by the Company in Milwaukee,
Wisconsin. On July 30, 2003, this property was conveyed to the Redevelopment
Authority of the City of Milwaukee, ("RACM"). As part of the transaction, RACM
released the Company from all environmental liability associated with the
property.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company, or
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
Edwin Jacobson Litigation
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 board members. One of the lawsuits alleges CMC violated the terms of his
employment contract and that the officers and/or board members interfered with
his contract. Mr. Jacobson is seeking compensatory and punitive damages. Mr.
Jacobson also asked the court to reinstate his contract and to enjoin the
Company from selling property or making distributions to Unitholders until it
has appraised its properties and paid him according to the terms of his
employment contract. Mr. Jacobson's second lawsuit was for defamation. He
alleged he was defamed by statements in a Company press release advising
investors of various pending business transactions and describing Heartland's
termination of his contract. He was seeking $1,000,000 in compensatory damages
and $5,000,000 in punitive damages. Edwin Jacobson v. CMC Heartland Partners et
al., Case No. 02 CH 15160, consolidated with Case No. 02 L 010591, Circuit Court
of Cook County, Illinois. On October 24, 2002, the Company filed motions to
dismiss the lawsuits. On January 3, 2003, Mr. Jacobson filed amended complaints
alleging the same and seeking the same relief. 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 board members. At the same time, the court dismissed
with prejudice Mr. Jacobson's motion to enjoin the Company from selling its real
estate. Mr. Jacobson has filed a motion for reconsideration of the dismissals.
CMC is vigorously defending itself against the remaining lawsuit and, in the
opinion of management, has good defenses against the remaining lawsuit arising
out of Mr. Jacobson's employment contract as its actions were consistent with
its duties and in conformance with the law. The Company has not recorded a loss
contingency related to this action because at this time it cannot be determined
if it is probable that a liability has been incurred and the amount of any
possible liability cannot be determined.
34
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Other Legal Matters
Pursuant to the terms of a conveyance agreement dated June 27, 1990, the Company
agreed to assume all liability for certain claims in reorganization pending
against the Chicago Milwaukee St. Paul and Pacific Railroad Company, ("Milwaukee
Road"). By order dated June 25, 2003, the US Federal District Court for the
Northern District of Illinois, sitting as the Milwaukee Road Reorganization
Court granted the Company's motion to dismiss those pending claims.
CMCVII, per the Longleaf lot Purchase and Sale Agreement, dated December 12,
2000, was required on April 1, 2002, November 1, 2002, April 1, 2003 and
November 1, 2003 to pay $135,000, $250,000, $135,000 and $250,000, respectively,
to Maples Properties, Inc. ("Maples"), the owner and operator of the golf course
and club house located at the Longleaf Country Club in Southern Pines, North
Carolina. Since the four payments were not made, this constitutes an event of
default under the agreement. The Company believes Maples is in default of its
obligations. In addition, Longleaf Associates Limited Partnership ("LALP"), the
seller of the Longleaf lots, has not notified CMCVII that it is in default. LALP
would be entitled to seek specific performance and/or other remedies as provided
for in the contract. However, due to its belief that Maples has breached the
contract, CMCVII does not intend to make these payments at this time. On June
19, 2003, Maples included CMCVII 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. Maples is seeking $3,515,000 in
compensatory damages from the defendants. CMCVII is vigorously defending itself
against this action and at this time the Company has not recorded a loss
contingency because it cannot be determined if it is a probable that a liability
has been incurred and the amount of any possible liability cannot be determined.
Also, management is not able to express an opinion on whether this action will
or will not adversely affect the Company's future financial condition or results
of operations.
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
35
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- ---------------------------------------------------------------
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 (filed herewith).
99.11 Certification by Lawrence S. Adelson, Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
November 12, 2003 (filed herewith).
99.12 Certification by Daniel L. Bernardi, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
November 12, 2003 (filed herewith).
(b) Reports on Form 8-K;
None.
36
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
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)
Date: November 12, 2003 By /s/ Lawrence S. Adelson
-------------------------
Lawrence S. Adelson
(Manager of HTI Interests, LLC,
General Partner)
CERTIFICATIONS
I, Lawrence S. Adelson, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Heartland Partners,
L.P.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934,
as amended) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
37
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
c) disclosed in this quarterly report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors of internal control over financial reporting:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2003
By /s/ Lawrence S. Adelson
-----------------------
Lawrence S. Adelson
Chief Executive Officer
I, Daniel L. Bernardi, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Heartland Partners,
L.P.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934,
as amended) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
38
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors of internal control over financial
reporting:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2003
By /s/ Daniel L. Bernardi
----------------------
Daniel L. Bernardi
Chief Financial Officer
39
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2003
EXHIBIT INDEX
Exhibit No. Description
- ----------- --------------------------------------------------------------
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.
99.11 Certification by Lawrence S. Adelson, Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
November 12, 2003.
99.12 Certification by Daniel L. Bernardi, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
November 12, 2003.
40