UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3606475
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
330 North Jefferson Court, Chicago, Illinois 60661
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(Address of Principal Executive Offices) (Zip Code)
312/575-0400
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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1
HEARTLAND PARTNERS, L.P.
March 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets...............................3
Consolidated Statements of Operations.....................4
Consolidated Statements of Cash Flows.....................5
Notes to Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....30
Item 4. Controls and Procedures........................................30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................31
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities.............................31
Item 3. Defaults Upon Senior Securities................................31
Item 4. Submission of Matters to a Vote of Securities Holders..........31
Item 5. Other Information..............................................31
Item 6. Exhibits and Reports on Form 8-K...............................32
Signature................................................33
Index to Exhibits........................................34
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
March 31, December 31,
2004 2003
-------------- --------------
Assets:
Cash and cash equivalents $ 4,109 $ 3,926
Accounts receivable (net of allowance of $316
at March 31, 2004 and December 31, 2003) 45 233
Due from affiliate (net of allowance of $5,133 at
March 31, 2004 and December 31, 2003) 4,601 4,601
Prepaid and other assets 746 501
-------------- --------------
Total 9,501 9,261
-------------- --------------
Property:
Land 383 491
Furniture, fixtures and equipment 465 517
Less accumulated depreciation 242 282
-------------- --------------
Net land, furniture, fixtures and equipment 606 726
Land held for sale, scattered land parcels 614 621
Land held for sale, former development properties 1,654 1,838
Capitalized predevelopment costs 4,188 4,545
-------------- --------------
Net properties 7,062 7,730
-------------- --------------
Total assets $ 16,563 $ 16,991
============== ==============
Liabilities:
Accounts payable and accrued expenses $ 861 $ 1,829
Accrued real estate taxes 295 362
Allowance for claims and liabilities 4,027 3,970
Unearned rents and deferred income 946 1,327
Other liabilities 6 12
-------------- --------------
Total liabilities 6,135 7,500
-------------- --------------
Partners' capital:
General Partner 7 (2)
Class A Limited Partners - 2,142 units
authorized and issued and 2,092 outstanding at
March 31, 2004 and December 31, 2003 880 --
Class B Limited Partner 9,541 9,493
-------------- --------------
Total partners' capital 10,428 9,491
-------------- --------------
Total liabilities and partners' capital $ 16,563 $ 16,991
============== ==============
The accompanying notes are an integral part of these financial statements.
3
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per unit data)
(Unaudited)
For the Three Months Ended March 31,
2004 2003
---------- ----------
Income:
Property sales $ 3,115 $ 11,117
Less: Cost of property sales 744 3,817
---------- ----------
Gross profit on property sales 2,371 7,300
---------- ----------
Operating Expenses:
Selling expenses 341 608
General and administrative
expenses 826 780
Interest expense 17 114
Real estate taxes 71 81
Environmental expenses and other charges 486 117
---------- ----------
Total operating expenses 1,741 1,700
---------- ----------
Operating income 630 5,600
Other Income and (Expenses):
Portfolio income 5 7
Rental income 397 58
Other income 20 7
Depreciation (12) (17)
Management fee (103) (103)
---------- ----------
Total other income (expense) 307 (48)
---------- ----------
Net income $ 937 $ 5,552
========== ==========
Net income allocated to General partner $ 9 $ 56
========== ==========
Net income allocated to
Class B limited partner $ 48 $ 28
========== ==========
Net income allocated to
Class A limited partners $ 880 $ 5,468
========== ==========
Net income per Class A
Limited partnership unit $ 0.42 $ 2.61
========== ==========
Weighted average number of Class A limited
partnership units outstanding 2,092 2,092
========== ==========
The accompanying notes are an integral part of these financial statements.
4
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the Three Months Ended March 31,
2004 2003
---------- ----------
Cash Flow from Operating Activities:
Net income $ 937 $ 5,552
Adjustments reconciling net income to net cash
provided by operating activities:
Land write off to cost of sales 108 581
Depreciation 12 17
Net change in allowance for claims and liabilities 57 --
Net change in assets and liabilities:
Decrease in accounts receivable 188 20
Decrease in housing inventories, net -- 3,649
Decrease in land held for sale, scattered land parcels 7 8
Decrease (increase) in land held for sale, former development properties 184 (104)
Decrease (increase) in capitalized predevelopment costs, net 357 (1,394)
Decrease in accounts payable and accrued liabilities (968) (2,067)
Net change in other assets and liabilities (699) (273)
---------- ----------
Net cash provided by operating activities 183 5,989
---------- ----------
Cash Flow from Financing Activities:
Advances on notes payable -- 429
Payoffs on notes payable -- (4,075)
Decrease in restricted cash -- 40
---------- ----------
Net cash used in financing activities -- (3,606)
---------- ----------
Net increase in cash 183 2,383
Cash at beginning of period 3,926 709
---------- ----------
Cash at end of period $ 4,109 $ 3,092
========== ==========
Non-cash Activities:
Write off of furniture, fixtures and equipment and
the related accumulated depreciation $ 52 $ --
========== ==========
The accompanying notes are an integral part of these financial statements.
5
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(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 2003 Annual
Report on Form 10-K (the "2003 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the notes included in the
2003 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. Organization
Organization and Purpose; Recent Asset Sales
Heartland was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement. Heartland was originally organized to
engage in the ownership, purchasing, development, leasing, marketing,
construction and sale of real estate properties. In 2003, Heartland sold several
properties in its real estate portfolio, paid off certain of its liabilities and
distributed some of the proceeds thereof to its partners in accordance with the
terms of its partnership agreement. Heartland is now attempting to sell its
remaining real estate holdings, pursuing recovery on claims it has against local
government units in Wisconsin and foreclosing on the Company's Class B Interest
held by a wholly owned subsidiary of Heartland Technology, Inc. that secures
outstanding loans from the Company to Heartland Technology, Inc. that Heartland
Technology, Inc. has indicated it will be unable to repay. The Company is
additionally undertaking to resolve and pay or make provisions for its remaining
liabilities, most of which are actual or contingent environmental liabilities.
The amount and timing of future cash distributions will depend on generation of
cash from sales and claims, resolution of liabilities and associated costs. The
Company's 2003 distributions were greater than in any past year. Unitholders
should not expect the same level of distributions on an annual basis as occurred
in 2003.
HTI Interests, LLC, a Delaware limited liability company and sole general
partner of Heartland (the "General Partner" or "HTII"), is owned 99.9% by
Heartland Technology, Inc., a Delaware corporation formerly known as Milwaukee
Land Company ("HTI"), and 0.1% by HTI Principals, Inc., a Delaware corporation
owned by two current members and three former members of HTI's board of
directors. CMC Heartland Partners, a Delaware general partnership ("CMC"), is an
operating general partnership owned 99.99% by Heartland and 0.01% by HTII.
6
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth certain entities formed by Heartland since its
inception that currently hold real estate and other assets, the date and purpose
of formation, development location and ownership:
YEAR
COMPANY FORMED BUSINESS PURPOSE
Heartland Development Corporation ("HDC") 1993 General Partner of CMC Heartland Partners I,
Limited Partnership
CMC Heartland Partners III, LLC ("CMCIII") 1997 Owned Kinzie Station Phase I, owns Kinzie Station
Phase II
CMC Heartland Partners IV, LLC ("CMCIV") 1998 Owns approximately 7 acres in Fife, Washington
CMC Heartland Partners VII, LLC ("CMCVII") 1997 Owned lots and homes in the Longleaf Country Club
COMPANY DEVELOPMENT LOCATION OWNERSHIP
HDC Not Applicable 100% (1)
CMCIII Chicago, Illinois 100% (2)
CMCIV Fife, Washington 100% (2)
CMCVII Southern Pines, North Carolina 100% (2)
(1) Stock wholly owned by Heartland.
(2) Membership interest owned by CMC.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCIII,
CMCIV, CMCVII, each 100% owned by CMC. All intercompany transactions have been
eliminated in consolidation.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair values
because of the short maturity of these financial instruments.
Revenue Recognition
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.
7
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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
seven (7) years for office equipment and fixtures to forty (40) years for
building and improvements using the straight-line method.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property. No event occurred during the first three months
of 2004 that resulted in an impairment loss being recognized.
3. Notes Payable
Effective February 11, 2004, CMC executed documents for a line of credit
agreement in the amount of $2,000,000 with LaSalle National Bank ("LNB"). At
March 31, 2004, Heartland, as collateral, had granted LNB a first lien on
certain parcels of land in Chicago, Illinois which had a carrying value of
$5,457,000 and no funds had been advanced to the Company by LNB against the line
of credit. The line of credit interest rate is the prime rate of LNB plus 1.5%
(5.5% at March 31, 2004). LNB also requires the Company to maintain net worth
(defined as assets minus liabilities) of $5,500,000, maintain net income of
$1,000,000 during any fiscal year beginning with the year ended December 31,
2003, not make any advances or distributions to Unitholders or members from
funds borrowed under the line of credit, and adhere to various other covenants
described in the Secured Revolving Note document. The Company was in
default under the line of credit agreement because it did not meet the net
income covenant in 2003. However, a waiver of this default was received from
LNB on May 14, 2004. The line of credit matures December 1, 2004.
As of March 31, 2004 and December 31 2003, Heartland's total consolidated
indebtedness was zero. There can be no assurance that the amounts available from
internally generated funds, cash on hand, disposition of the remaining assets of
the Company will be sufficient to fund Heartland's anticipated operations.
Heartland may be required to seek additional capital in the form of bank
financing. No assurance can be given that such bank financing will be available
or, if available, will be on terms favorable to Heartland. If Heartland is not
successful in obtaining sufficient capital to fund the implementation of its
liquidation strategy and for other expenditures, properties might be sold for
far less than their value. Any such discounted sale could adversely affect
Heartland's future financial condition and results of operations. However,
management does not intend to discount the sale of properties for far less than
their value.
8
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Real Estate Sale Activities
Property sales during the three months ended March 31, 2004 totaled $3,115,000
which consists of approximately 2 acres of land in the Kinzie Station
development in Chicago, Illinois for $1,597,000, 6 acres of land at Petit Point
located near Milwaukee, Wisconsin for $1,155,000, and various land held for sale
parcels for approximately $363,000.
Property sales during the three months ended March 31, 2003 totaled $11,117,000
which consisted of 3 acres of land in Kinzie Station North for $9,850,000, 11
acres of land at Plankinton Yard located near Milwaukee, Wisconsin for $383,000,
3 units in Longleaf for $686,000 and various land held for sale parcels for
$198,000.
At March 31, 2004 the Company had remaining property at Kinzie Station in
Chicago, Illinois, approximately 4 acres, a 7-acre parcel in Fife, Washington, a
20 acre property in Glendale, Wisconsin and approximately 13,640 acres of land
scattered over 12 states. In addition, although the Company conveyed its
property in Menomonee Valley located in Milwaukee, Wisconsin to the
Redevelopment Authority of the City of Milwaukee ("RACM") in 2003, it retained
the right to appeal the purchase price and to seek additional consideration. In
April 2004 the Company filed suit against RACM in the Milwaukee County Circuit
Court appealing the compensation paid by RACM in the July 2003 condemnation of
Heartland's property.
5. Related Party Transactions
Management Agreement
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 end December 31, 2004 and 2003. The management agreement terminates on
June 27, 2005. The fee for the three months ended March 31, 2004 has been paid
in full.
Conflicts of Interest of General Partner and its Officers and Directors
The officers and directors of HTI, the officers of Heartland and the managers of
HTII; including Lawrence S. Adelson, Chairman of the Board, President and Chief
Executive Officer of HTI and Chief Executive Officer of Heartland and Richard P.
Brandstatter, President of the Company, will not devote their entire business
time to the affairs of Heartland. The Heartland Partnership Agreement provides
that (i) whenever a conflict of interest exists or arises between the General
Partner or any of its affiliates, on the one hand, and Heartland, or any
Unitholder on the other hand, or (ii) whenever the Heartland Partnership
Agreement or any other agreement contemplated therein provides that the General
Partner shall act in a manner which is, or provide terms which are, fair and
reasonable to Heartland, or any Unitholder, the General Partner shall resolve
such conflict of interest, take such action or provide such terms, considering
in each case the relative interests of each party (including its own interest)
9
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, any customary or accepted industry
practices, and any applicable generally accepted accounting practices or
principles. Thus, unlike the strict duty of a fiduciary who must act solely in
the best interests of his beneficiary, the Heartland Partnership Agreement
permits the General Partner to consider the interests of all parties to a
conflict of interest, including the General Partner. The Heartland Partnership
Agreement also provides that, in certain circumstances, the General Partner will
act in its sole discretion, in good faith or pursuant to other appropriate
standards. The General Partner has sole authority over the timing and amount of
distributions as well as dissolution of the partnership.
Claims Against HTI Purchased by Heartland
On April 16, 2004, the Company purchased the claims that an unrelated third
party had against HTI, the former general partner of Heartland, for $70,000. The
Company bought these claims because it believes the value was reasonable and to
preserve an orderly liquidation of HTI given HTI's ownership of the limited
liability companies which hold the Company's Class B and General Partner
interests.
Other
A senior partner of a law firm who provides services to the Company owns
approximately 7.5% of the stock of HTI. Lawrence S. Adelson also owns 119,500
shares of HTI. Furthermore, Lawrence S. Adelson, C.E.O. of the Company and
Richard P. Brandstatter, President of the Company, are employees and directors
of HTI.
6. Legal Proceedings and Contingencies
At March 31, 2004 and December 31, 2003, Heartland's allowance for claims and
liabilities was approximately $4,027,000 and $3,970,000, respectively.
Edwin Jacobson
On August 19, 2002, the former President and Chief Executive Officer of CMC,
Edwin Jacobson, filed two lawsuits against the Company, CMC and certain officers
and/or managers of the General Partner. One of the lawsuits alleges CMC breached
the terms of his employment contract and that the officers and/or board members
wrongfully interfered with his contract. Mr. Jacobson is seeking compensatory
and punitive damages ($1,000,000 in salary and $11,000,000 in incentive
compensation). Mr. Jacobson asked the court to enforce his contract and enjoin
the Company from selling property or making distributions to the Unitholders
until the Company has appraised its properties and paid him according to the
terms of his employment contract. Mr. Jacobson's second lawsuit was for
defamation. On January 31, 2003, the Company filed motions to dismiss the
amended lawsuits. On May 29, 2003, the court dismissed, with prejudice, the
defamation lawsuit against the Company, CMC and certain officers and/or managers
10
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of the General Partner. At the same time, the court dismissed, with prejudice,
Mr. Jacobson's motion to enjoin the Company from selling its real estate. CMC
has filed a counterclaim alleging breach of fiduciary duty and a motion to
dismiss the tortious interference with a contract count. CMC is vigorously
defending itself against the remaining lawsuit and, in the opinion of
management, has valid defenses against the remaining lawsuit relating to the
Company's alleged breach of Mr. Jacobson's employment contract. At this time,
the probability that a liability will be incurred and the amount of any
potential liability cannot be determined. The Company's 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.
Borax
CMC owns a 4.99 acre site in Minneapolis, Minnesota that is impacted with
arsenic and lead. The Company filed suit against US Borax ("Borax") on July 23,
2003, in the United States District Court for the District of Minnesota for
contribution. Borax, which discontinued operations in 1968, is a former operator
of a pesticide/herbicide facility on the property. The matter has been stayed
pending agreement between the parties and the Minnesota Department of
Agriculture ("MDA") on the appropriate remediation for the site. Subject to a
public comment period, on March 15, 2004, the MDA approved a Response Action
Plan for the property owned by CMC. At March 31, 2004 and December 31, 2003,
Heartland's aggregate allowance for claims and liabilities for this site is
$3,415,000. The Company has also been informed that the United States
Environmental Protection Agency is considering a cleanup of arsenic soils in a
nearby residential neighborhood and may seek to recover cost of the cleanup from
CMC.
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 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 predecessor. 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,
11
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DEQ has not elected to file suit. Since the Company cannot determine if it is
probable that a liability has been incurred and that the amount of any potential
liability cannot be reasonably estimated, 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 three 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.
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, which issued policies to the
Milwaukee Road railroad, 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.
7. Compensation and Benefits
Effective March 1, 2002, an employment agreement with Lawrence S. Adelson, Chief
Executive Officer of CMC, was approved by the HTII Board of Managers. The term
of the employment agreement 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 are
accounted for in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations.
Compensation expense is recognized when the amount of the underlying
distribution is probable and estimable. No compensation expense related to these
Phantom Units has been recorded in the consolidated statements of operations for
the three months ended March 31, 2004. Compensation expense related to these
Phantom Units of $335,000 has been recognized in the consolidated statements of
operations for the year ended December 31, 2003, of which $59,000 has been paid,
as of December 31, 2003. The outstanding balance owed of $276,000 was paid on
January 5, 2004.
12
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") and the Sales Incentive Plan ("Sales Plan") to
provide incentives to attract, retain or motivate highly competent employees of
the Company. The aggregate benefits payable under the CMC Plan were computed by
multiplying 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. The aggregate benefits payable under the Sales Plan were computed by
multiplying 3% for the year 2001 by the net proceeds from the sale of certain
real estate during that year. As of December 31, 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. The outstanding balance owed of $492,000 was paid on
January 5, 2004.
Effective January 1, 2002, the CMC Heartland Partners 2002 Incentive Plan ("2002
CMC Plan") was approved by the Company. 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. For the three months ended March 31, 2004, the Company has accrued and
paid in full, $58,000 as compensation expense under the 2002 CMC Plan. As of
December 31, 2003, for the years 2003 and 2002, $581,000 had been accrued as
compensation expense under the 2002 CMC Plan, of which $277,000 had been paid to
the officers as of December 31, 2003. The outstanding balance owed of $304,000
was paid on January 5, 2004. Also, the 2002 CMC Plan granted three officers the
economic (but not tax) equivalent of ownership of 10,000 (non-voting) Heartland
Class A Partnership Units payable at the time of any distributions to the
Unitholders. The Phantom Units awarded under the CMC Plan are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. Compensation expense is
recognized when the amount of the underlying distribution is probable and
estimable. No compensation expense related to these Phantom Units has been
recorded in the consolidated statements of operations for the three months ended
March 31, 2004. Compensation expense related to these Phantom Units of $100,500
has been recognized in the consolidated statement of operations for the year
ended December 31, 2003, of which $19,500 has been paid, as of December 31,
2003. The outstanding balance owed of $81,000 was paid on January 5, 2004.
8. Liquidation of Heartland Partners, L.P.
The Company's management expects to sell to unrelated third parties the
remainder of its properties with a view towards eventually dissolving the
partnership within the next two years. The Unitholders will not have control
over the divestiture of the Company's remaining assets or, if the partnership is
dissolved, the liquidation process. The Company cannot make any assurance that
changes in its policies will serve fully the interests of all Unitholders or
that the Unitholders will receive any liquidating distributions of cash or other
property.
13
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Subsequent Events
On April 16, 2004, the Company purchased the claims that an unrelated third
party had against HTI, the former general partner of Heartland, for $70,000. The
Company bought these claims because it believes the value was reasonable and to
preserve an orderly liquidation of HTI given HTI's ownership of the limited
liability companies which hold the Company's Class B and General Partner
interests.
In April 2004 the Company filed suit against RACM in the Milwaukee County
Circuit Court appealing the compensation paid by RACM in the July 2003
condemnation of Heartland's Menomonee Valley property located in Milwaukee,
Wisconsin.
14
HEARTLAND PARTNERS, L.P.
March 31, 2004
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This report includes forward-looking statements intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements generally can be identified by
phrases such as Heartland or the Company, or its management "believes,"
"expects," "anticipates," "foresees," "forecasts," "estimates," or other words
or phrases of similar import. Similarly, statements in this report that describe
the Company's plans, outlook, objectives, intentions or goals are also
forward-looking statements. Forward-looking statements are not guarantees of
future performance. They involve risks and uncertainties that are difficult to
predict. The Company's actual future results, actions, performance or
achievement of results and the value of the partnership Units may differ
materially from what is forecast in any forward-looking statements. We caution
you not to put undue reliance on any forward-looking statement in these
documents. The Company does not undertake any obligation to update or publicly
release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this report.
Risk Factors
Real Estate Investment Risks; General Economic Conditions Affecting
Real Estate Industry
The Company faces risks associated with local real estate conditions in areas
where the Company owns properties. These risks include, but are not limited to:
liability for environmental hazards; changes in general or local economic
conditions; changes in real estate and zoning laws; changes in income taxes,
real estate taxes, or federal or local taxes; floods, earthquakes, and other
acts of nature; and other factors beyond the Company's control. The illiquidity
of real estate investments generally may impair the Company's ability to respond
promptly to changing circumstances. The inability of management to respond
promptly to changing circumstances could adversely affect the Company's
financial condition and ability to make distributions to the Unitholders.
The real estate industry generally is highly cyclical and is affected by changes
in national, global and local economic conditions and events, such as employment
levels, availability of financing, interest rates, consumer confidence and the
demand for housing and other types of construction. Sellers of real estate are
subject to various risks, many of which are outside the control of the seller,
including real estate market conditions, changing demographic conditions,
adverse weather conditions and natural disasters, such as hurricanes and
tornadoes, changes in government regulations or requirements and increases in
real estate taxes and other local government fees. The occurrence of any of the
foregoing could have a material adverse effect on the financial condition of
Heartland.
15
HEARTLAND PARTNERS, L.P.
March 31, 2004
Environmental Liabilities
Under various federal, state and local laws, ordinances, and regulations, the
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances located on or in, or emanating
from, such property, as well as costs of investigation and property damages.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner or operator's ability
to sell or lease a property or borrow using the property as collateral. Other
statutes may require the removal of underground storage tanks. Noncompliance
with these and other environmental, health or safety requirements may result in
substantial costs to us or may result in the need to cease or alter operations
on the property and may reduce the value of the property or our ability to sell
it.
Environmental laws may impose liability on a previous owner or operator of a
property that owned or operated the property at a time when hazardous or toxic
substances were disposed on, or released from, the property. A conveyance of the
property, therefore, does not relieve the owner or operator from liability. The
Company cannot assure that environmental liability claims will not arise in the
future.
Heartland is subject to federal and state requirements for protection of the
environment, including those for discharge of hazardous materials and
remediation of contaminated sites. Heartland is in the process of assessing its
environmental exposure, including obligations and commitments for remediation of
contaminated sites and assessments of ranges and probabilities of recoveries
from other responsible parties. Because of the regulatory complexities and risk
of unidentified contaminants on its properties, the potential exists for
remediation costs to be materially different from the costs Heartland has
estimated. Some of the property owned by the Company consists of land formerly
used for railroad. Other properties were leased to tenants that used hazardous
materials in their businesses. Any contamination of that property may affect
adversely the Company's ability to sell such property.
Notes Receivable from HTI
HTI owes Heartland, in the aggregate, approximately $9,734,000 under the 2000
Notes and the PG Oldco Notes, both of which are secured by the Class B Interest.
Heartland has recorded an allowance for doubtful accounts of approximately
$5,133,000 related thereto. Upon either the acquisition of the Class B Interest
pursuant to a proposed settlement agreement or the foreclosure on the Class B
Interest, the receivable amount in respect of the 2000 Notes and the PG Oldco
Notes reflected in the "Due from Affiliate" account will be reduced to zero, and
the Class B Interest and the Class B Interest's capital account balance will be
cancelled. If cancelled, the Class B Interest will no longer be entitled to
receive any distributions of cash or other property from Heartland. Although
Heartland's management believes it is unlikely, there can be no assurance that
either the settlement agreement will be approved by HTI's stockholders or that
Heartland will be able to foreclose on the Class B Interest. If the Class B
Interest is not foreclosed upon and cancelled, it will be entitled to receive
distributions in accordance with the terms of the Partnership Agreement.
16
HEARTLAND PARTNERS, L.P.
March 31, 2004
Pending Litigation
The Jacobson litigation described in Part II Item 1. "Legal Proceedings" may not
be resolved in the Company's favor, and the Company may incur significant costs
associated therewith. If the Company is required to pay substantial amounts with
respect to the Jacobson litigation, the Company may not be left with any cash or
other property to distribute to the Unitholders.
Access to Financing
As of March 31, 2004, Heartland's total consolidated indebtedness was zero.
There can be no assurance that the amounts available from internally generated
funds, cash on hand and sale of assets will be sufficient to fund Heartland's
anticipated operations. Heartland may be required to seek additional capital in
the form of bank financing. No assurance can be given that such financing will
be available or, if available, will be on terms favorable to Heartland. If
Heartland is not successful in obtaining sufficient capital to fund the
implementation of its liquidation strategy and for other expenditures,
properties might be sold for far less than their value. Any such discounted sale
could adversely affect Heartland's future results of operations and future cash
flows. However, management does not have any intention to discount the sale of
properties for far less than their value.
Period-to-Period Fluctuations
Heartland's sales activity varies from period to period, and the ultimate
success of this sales activity cannot always be determined from results in any
particular period or periods. Thus, the timing and amount of revenues arising
from this sales activity are subject to considerable uncertainty. The inability
of Heartland to manage effectively their cash flows from operations would have
an adverse effect on their ability to service any future debt, and to meet
working capital requirements.
Liquidation of Assets
The Company's management expects to sell to unrelated third parties the
remainder of its properties. The Unitholders will not have control over the
divestiture of the Company's remaining assets or, if the partnership is
dissolved, the liquidation process. The Company cannot make any assurance that
changes in its policies will serve fully the interests of all Unitholders or
that the Unitholders will receive any liquidating distributions of cash or other
property.
17
HEARTLAND PARTNERS, L.P.
March 31, 2004
Risks Related to the Class A Units
The market value of the Class A units could decrease based on the Company's
performance, market perception and conditions. The market value of the Class A
units may be based primarily upon the market's perception of the Company's
growth potential and current and future cash distributions, and may be
secondarily based upon the real estate market value of the Company's underlying
assets. The market price of the Class A units may be influenced by the
distributions on the Class A units relative to market interest rates. Rising
interest rates may lead potential buyers of the Class A units to expect a higher
distribution rate, which would adversely affect the market price of the Class A
units. In addition, if the Company were to borrow, rising interest rates could
result in increased expense, thereby adversely affecting the cash flow and the
Company's ability to service its indebtedness and make distributions.
The Class A units have been traded since June 20, 1990. The Company believes
that factors such as (but not limited to) announcements of developments related
to the Company's business, fluctuations in the Company's quarterly or annual
operating results, failure to meet expectations, and general economic
conditions, could cause the price of the Company's units to fluctuate
substantially. In recent years the stock market has experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Such fluctuations could adversely affect the market price of
the Class A units.
The Class A units are currently traded on the American Stock Exchange under the
symbol "HTL". The Class A units are thinly traded. There are no assurances that
the Company will maintain its listing on the exchange. If the Class A units
should be delisted from the exchange, it is likely that it could materially
and/or adversely effect any future liquidity in the Class A units.
Summary of Significant Accounting Estimates
The Company's most significant accounting estimates relate to the net realizable
value of assets, potential environmental liabilities, the Jacobson litigation
and the treatment of certain loans from Heartland to the General Partner.
Net Realizable Value of Assets
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property. No event occurred during the three months ended
March 31, 2004 that resulted in an impairment loss being recognized. In the
fourth quarter of 2003, an impairment loss of $250,000 was recognized as a
component of cost of sales on Kinzie Station Phase II as the Company was able to
quantify the costs associated with the disposal of the property.
18
HEARTLAND PARTNERS, L.P.
March 31, 2004
Potential Environmental Liabilities
Heartland evaluates environmental liabilities associated with its properties on
a regular basis. An allowance is provided with regard to potential environmental
liabilities, including remediation, legal and consulting fees, when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. The amount of any liability is evaluated independently
from any claim the company may have for recovery. If the amount of the liability
cannot be reasonably estimated but management is able to determine that the
amount of the liability is likely to fall within a range, and no amount within
that range can be determined to be 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. By reserving at the
low end of possible results, it is likely that the actual costs of environmental
claims will be higher than the reserve on the Company's books, because it is
unlikely that, as a whole, the claims will be less expensive to resolve than the
low end of the range, and more likely that the claims will cost more than the
best case amount. Also, the Company does not reserve any amounts for unknown
claims. This means that as new claims arise additional reserves will need to be
added. Estimates can be affected by various uncertainties including future
changes in technology, changes in regulations or requirements of local
governmental authorities, third party claims, the scope and cost to be performed
at each site, the portion of costs that may be shared and the timing of the
remediation work. Environmental costs that are incurred in connection with
Heartland's development activities are expensed or capitalized as appropriate.
In the event the Company believes a third party was responsible for the
contamination, it attempts to have that third party assume the responsibility
for the costs of cleaning up the site. Sometimes there are funds available from
state programs for clean up. These funds can be available for contamination
resulting from railroad operations as well as those from third parties. The
Company seeks these funds when they are available. Potential recoveries from
third parties or government programs are not considered in the environmental
reserve. At March 31, 2004, Heartland's allowance for environmental claims and
liabilities was approximately $4,027,000. Significant matters related to the
Company's reserve for environmental claims are discussed below.
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.
19
HEARTLAND PARTNERS, L.P.
March 31, 2004
From time to time contaminants are discovered on property the Company now owns.
Some of these may have resulted from the historical activities of the Milwaukee
Road railroad. In other cases the property was leased to a tenant who released
contaminants onto the property. The Company's property may also be polluted by a
release or migration of contaminants onto the Company's property by unrelated
third parties. The Company has not investigated all of its properties and does
not know how many of them may be contaminated.
The Company's practice when it sells land is to sell the property "as is, where
is" without any representation or indemnification for environmental conditions;
however, the Company has one active site, Miles City, Montana, where it has
agreed to indemnify the buyer for known environmental concerns. There are other
cases in which the Company has had a claim arising out of alleged contamination
on sold property. In some, but not all, of these instances, the Company has been
successful in asserting the bar arising out of the bankruptcy proceedings of the
Milwaukee Road railroad.
The Company may be responsible for certain liabilities that arise from the
historical operations of the Milwaukee Road railroad that have nothing to do
with the ownership of property. The Company has been, for example, named as a
"potentially liable party" in a number of landfill-clean-up cases in which there
is an allegation that the Milwaukee Road railroad sent materials to the
landfill. Additional claims may arise in the future. In some, but not all, of
these cases, the Company has been successful in asserting the bar arising out of
the bankruptcy proceedings of the Milwaukee Road railroad.
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 predecessor. 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. Since the Company cannot determine if it is
probable that a liability has been incurred and the amount of any potential
liability cannot be reasonably estimated, the Company's 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 three 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.
20
HEARTLAND PARTNERS, L.P.
March 31, 2004
CMC owns a 4.99 acre site in Minneapolis, Minnesota that is impacted with
arsenic and lead. The Company filed suit against US Borax on July 23, 2003, in
the United States District Court for the District of Minnesota for contribution.
US Borax is a former operator of a pesticide/herbicide facility on the property;
its operations were discontinued in 1968. The matter has been stayed pending
agreement between the parties and the Minnesota Department of Agriculture
("MDA") on the appropriate remediation for the site. Subject to a public comment
period, on March 15, 2004, the MDA approved a Response Action Plan for the
property owned by CMC. At March 31, 2004, Heartland's aggregate allowance for
claims and liabilities for this site is $3,415,000. The Company has also been
informed that the United States Environmental Protection Agency is considering a
cleanup of arsenic soils in a nearby residential neighborhood and may seek to
recover cost of the cleanup from CMC.
The Canadian Pacific Railroad, formerly known as the Soo Line Railroad Company,
has asserted that the Company is liable for, among other things, the remediation
of releases of petroleum or other regulated materials at six different sites
located in Iowa, Minnesota and Wisconsin that Canadian Pacific acquired from the
Company. The Company has denied liability based on the underlying asset purchase
agreement. The environmental claims are all currently being handled by Canadian
Pacific, and the Company understands that Canadian Pacific has paid settlements
on certain of these claims. Because Canadian Pacific has been handling these
matters exclusively, the Company has made no determination as to the merits of
the claims and is unable to determine their materiality.
In November 1995, the Company settled a claim with respect to the so-called
"Wheeler Pit" site near Janesville, Wisconsin. The Company's only outstanding
obligation under the settlement is to pay 32% of the monitoring costs for
twenty-five years beginning in 1992. At March 31, 2004, Heartland's allowance
for claims and liabilities for this site is $142,000.
In addition to the environmental matters set forth above, there may be other
properties with environmental liabilities not yet known to the Company, with
potential environmental liabilities for which the Company has no reasonable
basis to estimate, or for which the Company believes it is not reasonably likely
to ultimately bear responsibility for the liability but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to insurers, which issued policies to the Milwaukee
Road railroad 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.
In the event the Company is dissolved, the Company will have to make a provision
for its potential environmental liabilities. It will have to provide for known
liabilities and also for those likely to arise or become known within ten years
after the date of dissolution. The Company's management believes it may be in
the best interests of the Company to purchase environmental insurance or
contract with a third party to assume the Company's environmental liabilities if
it appears that the cost to do so will be less than maintaining the Company's
overhead to resolve these liabilities going forward. The Company has hired an
insurance consultant and broker to help determine the best alternative to
provide for these potential liabilities. The cost of any transfer of
environmental liabilities and insurance policy is likely to be greater than the
amount of the reserve, and the cost of such transfer and insurance is not
reflected in the environmental reserve.
21
HEARTLAND PARTNERS, L.P.
March 31, 2004
Treatment of Certain Loans from HTI to Heartland
As of March 31, 2004, HTI owes Heartland and CMC an aggregate of $8,464,000
under promissory notes issued in December 2000 (the "2000 Notes"). The notes are
collateralized by a security interest in the Class B Interest (the "Collateral")
and bear interest at 13% per annum. The Company also received as additional
consideration for the 2000 Notes 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 was trading in the over-the-counter market (after its
delisting from the American Stock Exchange) at less than $0.01 per share as of
December 31, 2003. On February 25, 2002, the Company and CMC demanded immediate
payment in full of all obligations due under the 2000 Notes from HTI.
PG Oldco, Inc., a creditor of HTI under notes in an aggregate principal amount
of $2,200,000 ("PG Oldco Notes"), also had a security interest in the Collateral
and had commenced steps to protect its interest. Under a Lien Subordination and
Inter-Creditor Agreement ("Inter-Creditor Agreement") by and among Heartland,
CMC, PG Oldco, Inc. and HTI, Heartland and CMC had 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). 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. On May 23, 2003
Heartland purchased from PG Oldco, Inc. the PG Oldco Notes 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. This note and accrued
interest were paid in full on October 31, 2003. The purchase price of $1,270,000
for the PG Oldco Notes was recorded as an increase in "Due from Affiliate" on
the Company's financial statements.
At March 31, 2004, HTI owes Heartland and CMC, in the aggregate, approximately
$9,734,000. Heartland has recorded an allowance for doubtful accounts of
approximately $5,133,000 on the 2000 Notes and PG Oldco Notes receivable balance
of $9,734,000. Heartland has recorded an allowance for doubtful accounts against
the 2000 Notes and PG Oldco Notes because HTI has indicated to Heartland that it
does not have the means to repay the amounts owed under the 2000 Notes and PG
Oldco Notes.
22
HEARTLAND PARTNERS, L.P.
March 31, 2004
The $5,000,000 allowance for doubtful accounts that was recorded in the
fourth quarter of 2003 was a result of the Company's closing the sale of its
Fife, Washington property at a price of $13,250,000 and then distributing $2.30
a Unit in December 2003 which reduced the estimated amount of potential future
distributions distributable to the Class B Interest. Because Heartland intends
to acquire the Class B Interest from HTI either pursuant to a proposed
settlement agreement between HTI and certain of its creditors or upon a
foreclosure of the Class B Interest, as discussed below, Heartland has
determined that the amount of the allowance for doubtful accounts should reflect
the value of the Class B Interest based on the estimated amount of potential
future cash distributions distributable in respect of the Class B Interest upon
a liquidation of Heartland (assuming that the Class B Interest is not cancelled
and remains outstanding). Such estimated potential distributions were based on a
variety of assumptions made by Heartland's management. If a proposed settlement
agreement is entered into among all of HTI's creditors (with the exception of
Heartland and Edwin Jacobson) and is approved by HTI's stockholders, Heartland
will acquire the Class B Interest from HTI in exchange for a release of HTI's
obligations under the 2000 Notes and PG Oldco Notes. In the event that the
proposed settlement agreement is not approved by HTI's stockholders, Heartland
anticipates that it will exercise its rights under the 2000 Notes, the PG Oldco
Notes, the related security agreements and applicable law to foreclose on the
Class B Interest. Upon either the acquisition of the Class B Interest pursuant
to the proposed settlement agreement or the foreclosure on the Class B Interest,
the receivable amount in respect of the 2000 Notes and the PG Oldco Notes
reflected in the "Due from Affiliate" account will be reduced to zero, and the
Class B Interest and the Class B Interest's capital account balance will be
cancelled. If cancelled, the Class B Interest will no longer be entitled to
receive any distributions of cash or other property from Heartland. Although
Heartland's management believes it is unlikely, there can be no assurance that
either the settlement agreement will be approved by HTI's stockholders or that
Heartland will be able to foreclose on the Class B Interest. If the Class B
Interest is not foreclosed upon and cancelled, it will be entitled to receive
distributions in accordance with the terms of the partnership agreement.
Jacobson Litigation
Edwin Jacobson, the former President and C.E.O. of CMC, has sued the Company
claiming that it owes him additional salary and incentive compensation based on
the terms of his employment contract. He has demanded $12,000,000 ($1,000,000
salary and $11,000,000 incentive compensation) in damages. The Company has
denied Mr. Jacobson's claims and has countersued to recover past payments made
to him and to collect $332,000 in principal and interest under a note Jacobson
made to the Company (this matter is explained in greater detail in Part II Item
1. "Legal Proceedings"). The Company offered to settle the lawsuits in exchange
for forgiving Jacobson's debt to the Company. When it made the offer, the
Company established an allowance against the Note Receivable of $316,000. CMC
has made no other provision for this potential liability.
23
HEARTLAND PARTNERS, L.P.
March 31, 2004
Critical Accounting Policies
The Company's accounting policies are described in more detail in Note 2 to
Consolidated Financial Statements. The following section is a summary of
critical accounting policies that require management estimates and judgements.
The Company provides an allowance for doubtful accounts against the portion
of accounts receivable that is estimated to be uncollectible. Accounts
receivable in the consolidated balance sheets are shown net of an allowance
for doubtful accounts of $316,000 as of March 31, 2004. Due from affiliate on
the consolidated balance sheets are shown net of an allowance for doubtful
accounts of $5,133,000 as of March 31, 2004.
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.
Heartland evaluates environmental liabilities associated with its properties
on a regular basis. An allowance is provided with regard to potential
environmental liabilities, including remediation, legal and consulting fees,
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim the company may have for recovery. If
the amount of the liability cannot be reasonably estimated but management is
able to determine that the amount of the liability is likely to fall within a
range, and no amount within that range can be determined to be the better
estimate, then an allowance in the minimum amount of the range is
established.
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 first three
months of 2004 that resulted in an impairment loss being recognized. In the
fourth quarter of 2003, an impairment loss of $250,000 was recognized as a
component of cost of sales on Kinzie Station Phase II as the Company was able
to quantify the costs associated with the disposal of the property.
Results of Operations
Operations for the three months ended March 31, 2004 and 2003 resulted in net
income of $937,000 and $5,552,000 or $0.42 and $2.61 per Class A Unit,
respectively.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Property Sales. Property sales decreased $8,002,000, or 72% to $3,115,000 for
the three months ended March 31, 2004 from $11,117,000 for the three months
ended March 31, 2003. This decrease was primarily the result of the sale in 2003
of approximately 3 acres of land in Kinzie Station North ("Kinzie North
Acreage") for $9,850,000.
Cost of Property Sales. Cost of property sales decreased $3,073,000, or 81% to
$744,000 for the three months ended March 31, 2004 from $3,817,000 for the three
months ended March 31, 2003. This decrease was primarily the result of the
decrease in the cost of property sales related to the Kinzie North Acreage sale
which totaled approximately $3,111,000.
24
HEARTLAND PARTNERS, L.P.
March 31, 2004
Gross Profit on Property Sales. Gross profit on property sales decreased
$4,929,000, or 68% to $2,371,000 for the three months ended March 31, 2004 from
$7,300,000 for the three months ended March 31, 2003. This decrease was
primarily the result of the decrease in the gross profit recognized of
approximately $6,739,000 on the Kinzie North Acreage sale.
Selling Expenses. Selling expenses decreased $267,000, or 44% to $341,000 for
the three months ended March 31, 2004 from $608,000 for the three months ended
March 31, 2003. This decrease was primarily the result of the decrease in broker
sales commissions of $47,000 because of decreased sales in 2004, the decrease in
the Longleaf community sales expenses of $117,000 resulting from the Company's
sale of all of its property in Longleaf in December 2003, and the decrease of
$96,000 in legal, consulting, security, architecture and surveying expenses from
2003 to 2004 because of reduced activity in 2004.
General and Administrative Expenses. General and administrative expenses
increased $46,000, or 6% to $826,000 for the three months ended March 31, 2004
from $780,000 for the three months ended March 31, 2003. This was primarily the
result of an increase of $36,000 in insurance expense from 2003 to 2004. There
was a substantial increase in the Company's premium for partnership liability
insurance that was renewed in September 2003.
Interest Expense. Interest expense decreased $97,000, or 85% to $17,000 for the
three months ended March 31, 2004 from $114,000 for the three months ended March
31, 2003. This decrease was primarily the result of no outstanding debt during
the three months ended March 31, 2004. However, the Company in March 2004 paid a
fee to LaSalle National Bank related to the line of credit agreement.
Real Estate Taxes. Real estate taxes decreased $10,000, or 12% to $71,000 for
the three months ended March 31, 2004 from $81,000 for the three months ended
March 31, 2003. The decrease was the result of the Company owning fewer
properties in 2004 due to the number of sales that took place in 2003.
Environmental Expenses and Other Charges. Environmental expenses and other
charges increased $369,000, or 315% to $486,000 for the three months ended March
31, 2004 from $117,000 for the three months ended March 31, 2003. This increase
was primarily the result of $352,000 expended for an environmental consultant
that is evaluating and preparing reports related to the remediation of the Lite
Yard site located in Minneapolis, MN.
Rental Income. Total rental income increased $339,000, or 584% to $397,000 for
the three months ended March 31, 2004 from $58,000 for the three months ended
March 31, 2003. This increase was primarily the result of the Company
recognizing $360,000 of deferred rental income as rental income in January 2004
related to the sale of the Petit Point property located near Milwaukee,
Wisconsin to an unrelated third party. The Company had received prepaid rent
from a lease on this property that it was able to retain as a condition of the
closing.
25
HEARTLAND PARTNERS, L.P.
March 31, 2004
Net Income. Net income decreased $4,615,000, or 83% to $937,000 for three months
ended March 31, 2004 from $5,552,000 for three months ended March 31, 2003. This
was the result of a decrease in gross profit on property sales from the sale of
former development properties in 2004 compared to 2003, primarily the $6,739,000
gross profit on the Kinzie North Acreage sale.
Liquidity and Capital Resources
Cash flow for operating activities has been derived primarily from proceeds of
property sales, rental income and interest income. Cash was $4,109,000 at March
31, 2004 and $3,926,000 at December 31, 2003.
Net cash provided by operating activities was $183,000 and $5,989,000 for the
three months ended March 31, 2004 and 2003, respectively. Cash provided by
operating activities in 2004 compared to 2003 decreased by $5,806,000 which is
primarily attributable to the sale in February 2003 of the Kinzie North Acreage
at a price of $9,850,000 with no comparable closing taking place in 2004.
No distributions were made during the first quarter of 2004. As of March 31,
2004, the Unitholders' capital account balance was $880,000, the Class B
Interest's capital account balance was $9,541,000, and the General Partner's
capital account balance was $7,000.
Proceeds from property sales were $3,115,000 and $11,117,000 for the three
months ended March 31, 2004 and 2003, respectively. During the period between
2004 and 2006, the Company expects proceeds from property sales to consist
primarily of the sale of the remaining Kinzie Station North acreage, Kinzie
Station Phase II property, remaining sites in Wisconsin and Minnesota that in
prior years had been designated as development properties and land held for sale
acreage (13,640 acres of scattered land parcels located in 12 states).
The cost of property sales for the three months ended March 31, 2004 and 2003
was $744,000 or 24% of sales proceeds and $3,817,000 or 34% of sales proceeds,
respectively. It is not expected that future cost of sales ratios for the
remaining real estate sales will change materially from ratios experienced in
the prior three years, as the balance of Heartland's real estate, other than
development projects, consists primarily of railroad properties acquired over
the past 150 years at values far lower than current fair values. The Company is
no longer selling, building or closing homes in any homebuilding communities as
of December 31, 2003.
As of March 31, 2004, Heartland had designated 4 sites, or approximately 94
acres with a book value of approximately $1,654,000, for sale which in prior
years had been designated for development. This is an average of $17,600 per
acre.
At March 31, 2004, land held for sale consists of 13,640 acres of scattered land
parcels with a book value of $614,000. Land held for sale (scattered land
parcels) will be disposed of in an orderly fashion; however, it is anticipated
that the disposal of such properties may extend beyond the year 2005. The
Company is also exploring the sale of these properties as a whole to a third
party.
26
HEARTLAND PARTNERS, L.P.
March 31, 2004
Heartland's management believes it will have sufficient funds available from its
land sales activities for operating and selling expenses as it liquidates the
remaining assets of the Company. However, effective February 11, 2004, Heartland
obtained a $2,000,000 line of credit with LaSalle National Bank ("LNB"). As of
March 31, 2004, the Company had not drawn on the line of credit. The line of
credit will mature December 1, 2004 and bears interest at the LNB prime rate
plus 1.5% (5.5% at March 31, 2004). The LNB line of credit is secured by the
Kinzie Station North and Kinzie Station Phase II properties that are located in
Chicago, Illinois. LNB also requires the Company to maintain net worth (defined
as assets minus liabilities) of $5,500,000, maintain net income of $1,000,000
during any fiscal year beginning with the year ended December 31, 2003, not make
any advances or distributions to Unitholders or members from funds borrowed
under the line of credit, and adhere to various other covenants described in the
Secured Revolving Note document. The Company was in default under the line
of credit agreement because it did not meet the net income covenant in 2003.
However, a waiver of this default was received from LNB on May 14, 2004.
Real Estate Sale Activities
The Company sold several properties in its real estate portfolio in 2003,
including its last active development project, which was located in North
Carolina. At March 31, 2004 the Company had remaining property at Kinzie Station
in Chicago, Illinois, approximately 4 acres, a 7-acre parcel in Fife,
Washington, a 20-acre property in Glendale, Wisconsin, and approximately 13,640
acres of land scattered over 12 states. In addition, although the Company
conveyed its property in Menomonee Valley to the Redevelopment Authority of the
City of Milwaukee ("RACM") in 2003, it retained the right to appeal the purchase
price and to seek additional consideration. The Company exercised such right to
appeal in April 2004 by filing suit in the Milwaukee County Circuit Court
against RACM appealing the condemnation award.
Kinzie Station
Heartland has developed a 2.68 acre site in the City of Chicago, part of a
larger development known as Kinzie Station, which is bisected by railroad tracks
running east and west. 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. At December 31, 2003 on the south side of
the tracks, Heartland had the following two (2) parcels of land: an industrial
parcel, which the Company sold on February 26, 2004 for $1,597,000, and a parcel
known as Kinzie Station Phase II, which consists of 1.45 acre site on which the
Company has appropriate zoning to construct a 267 unit residential tower
building. The Company has a contract, subject to certain contingencies, to sell
Kinzie Station Phase II to a developer for $4,200,000.
27
HEARTLAND PARTNERS, L.P.
March 31, 2004
To the north, the Company owned approximately seven (7) acres of land and four
(4) acres of air rights as of January 1, 2003 ("Kinzie Station North"). Kinzie
Station North consisted of three (3) parcels (roughly four (4) acres) zoned for
residential units, one parcel zoned for a grocery store, and another parcel for
a city park. A consortium of residential developers has entered into an
agreement with the Company to purchase the Kinzie Station North residential
acreage. On February 11, 2003, this consortium closed the sale of the two
parcels for an aggregate purchase price of $9,850,000. The remaining residential
site is under contract for $2,850,000 but is contingent on the vacation of a
city street by the City of Chicago. The Company's management believes that this
vacation could take place during 2004. The Company has entered into an
agreement, subject to certain contingencies, to sell the grocery store site.
Fife, Washington
In Fife, Washington, the Company continues to own approximately seven (7) acres
along which the Wapato creek runs. This property is under contract but is
subject to contingencies typical of such contracts.
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 RACM announced it would seek to acquire the Company's 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 in cash and a
release for all environmental matters related to the property from RACM, and the
Company conveyed title to the property to RACM. The Company obtained an
appraisal in the amount of $10,500,000. The Company reserved the right to bring
suit for additional consideration. The Company exercised such right in April
2004 by filing suit in the Milwaukee County Circuit Court against RACM appealing
the condemnation award. Any additional compensation received in the future 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 83 miles of rail right of way running from downtown Chicago west to
Elgin, Illinois and northwest to Fox Lake, Illinois. The Company shall receive
2/3 of the proceeds of any sale.
28
HEARTLAND PARTNERS, L.P.
March 31, 2004
The remainder of Heartland's inventory of land currently held for sale consists
of approximately 13,640 acres of scattered land parcels located throughout 12
states. The book value of this inventory is approximately $614,000. The majority
of the land (former railroad rights-of-way) comprises 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 may be improved with the lessee's structures.
The sale, management and leasing of the approximate 13,640 acres of scattered
land parcels 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 relatively low book value, and the Company
anticipates that the sale of the remaining parcels may not occur until 2005 or
later. The Company is also exploring the sale of these properties as a whole to
a third party.
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 cancelable by either party upon
thirty to sixty days notice. Heartland's ability to terminate or modify certain
of these leases is restricted by applicable law and regulations. As of March 31,
2004, Heartland had eight locations under lease, which yield less than $20,000 a
year in rental income.
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. Sellers of real estate are subject
to various risks, many of which are outside the control of the seller, including
real estate market conditions, changing demographic conditions, adverse weather
conditions and natural disasters, such as hurricanes and tornadoes, changes in
government regulations or requirements, increases in real estate taxes and other
local government fees and availability and cost of land. The occurrence of any
of the foregoing could have a material adverse effect on the financial condition
and results of operations of Heartland.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at March 31, 2004 was zero. The
Company paid interest on its outstanding borrowings during the period ended
March 31, 2004 under revolving credit facilities at the LNB prime rate plus
1.5%. As of March 31, 2004 the Company did not have any other financial
instruments for which there was a significant exposure to interest rate changes.
29
HEARTLAND PARTNERS, L.P.
March 31, 2004
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Access to Financing," "Economic and Other Conditions Generally"
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
Evaluation of Disclosure Controls and Procedures
Heartland's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures as of the end of the period
covered by this report and they have concluded that these controls and
procedures are adequate to ensure that information required to be disclosed by
Heartland in the reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during the first quarter of 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
30
HEARTLAND PARTNERS, L.P.
March 31, 2004
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 2004, Heartland's allowance for claims and liabilities was
approximately $4,027,000.
There have been no legal proceedings instituted against the Company during the
three months ended March 31, 2004, and no material developments in the legal
proceedings disclosed in the Company's 2003 Form 10-K.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
31
HEARTLAND PARTNERS, L.P.
March 31, 2004
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- ---------------------------------------------------------------
10.70* $2,000,000 Secured Revolving Note between CMC Heartland Partners,
Heartland Partners, L.P. and LaSalle Bank National Association
dated February 11, 2004.
31.1* Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
*Attached hereto.
(b) Reports on Form 8-K:
None.
32
HEARTLAND PARTNERS, L.P.
March 31, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
(Registrant)
Date: May 17, 2004 By /s/ Lawrence S. Adelson
-----------------------
Lawrence S. Adelson
Chief Executive Officer
Date: May 17, 2004 By /s/ Daniel L. Bernardi
----------------------
Daniel L. Bernardi
Chief Financial Officer
33
EXHIBIT INDEX
Exhibit No. Description
- ----------- ---------------------------------------------------------------
10.70 $2,000,000 Secured Revolving Note between CMC Heartland Partners,
Heartland Partners, L.P. and LaSalle Bank National Association
dated February 11, 2004*.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
34
Exhibit 10.70
SECURED REVOLVING NOTE
Executed this 11th of February, 2004
Amount Up to $2,000,000 Due: As described below
FOR VALUE RECEIVED, on or before December 1, 2004 (the "Maturity Date"),
each of the undersigned, CMC Heartland Partners, a Delaware general partnership
("CMC") and Heartland Partners, L.P., a Delaware limited partnership
("Heartland"; Heartland and CMC are collectively referred to as the
"Borrowers"), jointly and severally, promise to pay to the order of LASALLE BANK
NATIONAL ASSOCIATION, a national banking association (the "Bank"), the principal
sum of TWO MILLION and 00/100 DOLLARS ($2,000,000.00), or if less, the aggregate
unpaid principal amount of all loans made by Bank to the Borrowers. Capitalized
terms used herein but not otherwise defined will have the meanings assigned to
such terms on Exhibit A attached hereto and made a part hereof. The unpaid
principal amount hereof shall bear interest at the Prime Rate plus one and
one-half percent (1.5%) (referred to herein as the "Interest Rate"). Interest
shall be payable from the date hereof on the aggregate unpaid principal amount
of all loans made by Bank to the Borrowers hereunder (collectively, the "Loans")
monthly in arrears on the last Business Day of each calendar month commencing on
February 29, 2004 and at the Maturity Date. Interest after maturity (whether by
reason of acceleration or otherwise) shall be paid on the unpaid balance at the
Interest Rate plus 3% per annum. Each change in the Interest Rate hereon shall
take effect on the effective date of the change in the Prime Rate. Bank shall
not be obligated to give notice of any change in the Prime Rate and any notice
to which the Borrowers may be entitled is hereby waived. The Interest Rate and
the Unused Portion Fee (as defined below) shall be computed on the basis of a
year consisting of 360 days and shall be paid for the actual number of days
elapsed, unless otherwise specified herein.
Each Borrower hereby authorizes Bank to charge any account of any Borrower
for all sums due hereunder. Principal payments submitted in funds not available
until collected shall continue to bear interest until collected. If payment
hereunder becomes due and payable on a Saturday, Sunday or legal holiday under
the laws of the United States or the State of Illinois, the due date thereof
shall be extended to the next succeeding business day, and interest shall be
payable thereon at the rate specified during such extension.
This Note is executed pursuant to a revolving line of credit under which
the Borrowers are indebted to Bank and evidences the aggregate unpaid principal
amount of all advances made or to be made by Bank to the Borrowers under this
Note. All advances and repayments hereunder shall be evidenced by entries on the
books and records of Bank which shall be presumptive evidence of the principal
amount and interest owing and unpaid on this Note, or any renewal or extension
hereof. The failure to so record any such amount or any error in so recording
any such amount shall not, however, limit or otherwise affect the obligations of
the Borrowers hereunder to repay the principal amount of the liabilities
together with all interest accruing thereon.
Subject to the terms and conditions of this Note, Bank agrees that during
the period from the date hereof to, but not including, the Maturity Date, it
will make loans to the Borrowers in an aggregate amount not to exceed $2,000,000
less the aggregate outstanding principal amount of all Loans and the stated
amount of all Letters of Credit outstanding hereunder from time to time
(referred to herein as the "Revolving Loan Commitment").
To compensate Bank for the cost of reserving funds to be made available to
Borrowers under this Note, Borrowers shall pay to Bank, on the last day of each
fiscal quarter an unused revolving line fee (the "Unused Portion Fee") equal to
the sum of the daily amounts by which the maximum aggregate principal amount of
the Revolving Loan Commitment exceeds the actual principal amount of all Loans
made hereunder. The Unused Portion Fee is calculated for each applicable day of
such quarter in an amount equal to the excess of the maximum aggregate principal
amount of the Revolving Loan Commitment over the principal amount of all
outstanding advances under the Loans on such day, multiplied by one-quarter of
one percent (1/4%). All fees and charges imposed on Borrowers pursuant to this
Note including, without limitation, the Unused Portion Fee accrued through the
date of termination, shall be nonrefundable to Borrowers, notwithstanding any
prepayment and termination by Borrowers of this Agreement.
35
CMC (referred to herein as the "Representative") shall give written notice
to the Bank of each proposed borrowing of Loans not later than 11:00 a.m.,
Chicago time, on the proposed date of such borrowing. Each such notice shall be
effective upon receipt by the Bank, shall be irrevocable, and shall specify the
date and amount of the borrowing therefore together with a written certification
that (i) no Default (as hereinafter defined) has occurred and is continuing,
(ii) the amount requested to be so advanced hereunder and (iii) the specific
corporate purpose for which such advance shall be used (each a "Borrowing
Notice"). Upon receipt of such Borrowing Notice, Bank shall advance funds under
this Note; provided, however, that the aggregate unpaid principal amount of all
Loans under this Note made by Bank to the Borrowers shall at no time exceed the
Revolving Loan Commitment as of any date. Each such Loan shall normally be made
to the operating account maintained by the Borrowers with Bank no later than
3:00 p.m. (Chicago, Illinois time) (i) on the Business Day following the
submission by the Representative of the Borrowing Notice to Bank; provided that
all of the conditions to making such Loan set forth above have been satisfied
and, provided further, that the Borrowing Notice is received by Bank prior to
11:00 a.m. (Chicago, Illinois time) on the required day. Interest shall begin to
accrue when each Loan hereunder is made to the Borrowers' operating account.
Each borrowing shall be on a Business Day.
The Bank will issue standby and trade letters of credit hereunder, in each
case containing such terms and conditions as are permitted by this Secured
Revolving Note and are satisfactory to the Bank (each a "Letter of Credit"), at
the request of and for the account of each Borrower from time to time before the
date which is 30 days prior to the Maturity Date; provided that (i) the
aggregate stated amount of all Letters of Credit shall not at any time exceed
Three Hundred Thousand Dollars ($300,000) and (ii) the outstanding aggregate
principal amount of all Loans plus the stated amount of all outstanding Letters
of Credit may not exceed the Revolving Loan Commitment (after giving effect to
the issuance of each Letter of Credit).
The Representative shall give notice to the Bank of the proposed issuance
of each Letter of Credit on a Business Day which is at least three (3) Business
Days (or such lesser number of days as the Bank shall agree in any particular
instance in its sole discretion) prior to the proposed date of issuance of such
Letter of Credit. Each such notice shall be accompanied by an L/C Application,
duly executed by the applicable Borrower and in all respects satisfactory to the
Bank, together with such other documentation as the Bank may request in support
thereof, it being understood that each L/C Application shall specify, among
other things, the date on which the proposed Letter of Credit is to be issued,
the expiration date of such Letter of Credit (which shall not be later than the
earlier to occur of (x) one year after the date of issuance thereof and (y)
thirty days prior to the scheduled Maturity Date); and whether such Letter of
Credit is to be transferable in whole or in part. So long as the Bank has not
determined that the conditions precedent set forth herein with respect to the
issuance of such Letter of Credit have not been satisfied, the Bank shall issue
such Letter of Credit on the requested issuance date. In the event of any
inconsistency between the terms of any L/C Application and the terms of this
Note, the terms of this Note shall control.
Each Borrower hereby unconditionally and irrevocably agrees to reimburse
the Bank for each payment or disbursement made by the Bank under any Letter of
Credit honoring any demand for payment made by the beneficiary thereunder, in
each case on the date that such payment or disbursement is made. Any amount not
reimbursed on the date of such payment or disbursement shall bear interest from
the date of such payment or disbursement to the date that the Bank is reimbursed
by the Borrowers therefore, payable on demand, at a rate per annum equal to the
Interest Rate from time to time in effect. The Bank shall notify the
Representative whenever any demand for payment is made under any Letter of
Credit by the beneficiary thereunder; provided that the failure of the Bank to
so notify the Representative shall not affect the rights of the Bank in any
manner whatsoever.
In determining whether to pay under any Letter of Credit, the Bank shall
not have any obligation to the Borrowers or any lender other than to confirm
that any documents required to be delivered under such Letter of Credit appear
to have been delivered and appear to comply on their face with the requirements
of such Letter of Credit. Any action taken or omitted to be taken by the Bank
under or in connection with any Letter of Credit, if taken or omitted in the
absence of gross negligence and willful misconduct, shall not impose upon the
Bank any liability to any Borrower or Bank and shall not reduce or impair the
Borrowers' reimbursement obligations hereunder.
36
Any such advances shall be conclusively presumed (absent manifest error) to
have been made by Bank to or for the benefit of the Borrowers. Each Borrower
hereby irrevocably confirms, ratifies and approves all such advances by Bank and
hereby indemnifies Bank against losses and expenses (including court costs,
attorneys' and paralegals' fees) and shall hold Bank harmless with respect
thereto. If Bank elects to bill the Borrowers for any amount due hereunder, such
amount shall be immediately due and payable, with interest accruing thereon
daily at the Interest Rate determined in accordance with this Note and in effect
from time to time.
If either (i) the introduction of or any change in or change in the
interpretation of any law or regulation or (ii) compliance by Bank with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law) affects or would affect the amount of
capital required or expected to be maintained by Bank or any corporation
controlling Bank and Bank determines that the amount of such capital is
increased solely by or solely based upon the existence of Bank's commitment to
lend hereunder and other commitments of this type, then, upon demand by Bank,
the Borrowers shall immediately pay to Bank, from time to time as specified by
Bank, additional amounts sufficient to compensate Bank in the light of such
circumstances, to the extent that Bank reasonably determines such increase in
capital to be allocable to the existence of Bank's commitment to lend hereunder.
As security for the payment of this Note and any and all other liabilities,
obligations, costs, fees and expenses of or owing by the Borrowers to Bank,
however created, arising or evidenced, and howsoever owned, held or acquired,
whether now or hereafter existing, whether now due or to become due, whether
direct or indirect, absolute or contingent, and whether several, joint or joint
and several made by the Borrowers in favor of Bank (all of the foregoing are
hereinafter referred to as the "Obligations"), the Borrowers have executed and
delivered (i) a Mortgage and Security Agreement, (ii) an Assignment of Rents and
Leases and (iii) an Environmental Indemnity Agreement, each of even date
herewith and in favor of Bank, with respect to two (2) parcels of real property
known as the Fifield B Mortgaged Property and the Jewel Mortgaged Property
(collectively, the "Collateral") located in Cook County, Illinois (the foregoing
documents, together with all amendments, modifications and restatements of the
foregoing, are referred to herein as the "Loan Documents"). The cancellation or
surrender of this Note shall not affect the right of Bank or any assignee to
retain the Collateral under any of the Loan Documents for any of the Obligations
so long as any such Obligations remain outstanding or if any commitment to lend
remains in effect hereunder.
Each Borrower represents and warrants to Bank that: (a) each Borrower is a
general or limited partnership, as applicable, duly organized, validly existing
and in good standing under the laws of the State of Delaware and is duly
qualified to do business and is in good standing under the laws of each state in
which the ownership of its properties and the nature and extent of the
activities transacted by it makes such qualification necessary; (b) each
Borrower has all requisite partnership power and authority to conduct its
activities as presently conducted, to own its properties and to perform its
obligations under the Loan Documents to which it is a party; (c) each Borrower
has the partnership power and authority to enter into, deliver and be bound by
this Note and the other Loan Documents to which it is a party and has duly
executed and delivered the Loan Documents to which it is a party; (d) the
execution and delivery by each Borrower of the Loan Documents and each
Borrower's performance of all its obligations under and the consummation of the
transactions contemplated under the Loan Documents do not conflict with or
violate any applicable law or any ruling, judgment or order of any court or
other governmental authority, and do not conflict with or result in or
constitute any breach or default under or result in the creation or imposition
of any lien, charge or encumbrance under any material agreement, indenture or
undertaking concerning the Collateral except with respect to which appropriate
waivers or consents have been obtained; (e) no approval, consent or
authorization of any governmental authority is required in connection with any
Borrower entering into or performing its obligations under the Loan Documents;
(f) the Loan Documents constitute the legal, valid and binding obligation of
each Borrower, enforceable against each Borrower in accordance with their
respective terms except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, or other similar laws
affecting enforcement of creditors' rights generally, and by general principles
of equity;
37
(g) other than as set forth on Schedule 1 hereto, there is no pending or, to
the best knowledge of any Borrower any threatened action, suit, inquiry,
investigation, or proceeding against any Borrower before any court, governmental
agency or arbitrator, which, in any case, may (i) if adversely determined,
materially and adversely effect the financial condition of any Borrower, (ii)
seek to restrain or otherwise have a material adverse affect on the transactions
contemplated herein, or (iii) affect the validity or enforceability of the Loan
Documents; (h) the consolidated financial statements and balance sheet
(including the notes thereto) of Heartland and its consolidated subsidiaries as
of June 30, 2003, and the related consolidated statements of income and equity
and consolidated statements of cash flows of Heartland and its consolidated
subsidiaries, are complete and correct and fairly present the financial
condition of Heartland and its consolidated subsidiaries and the results of
operations of Heartland and its consolidated subsidiaries at such date, in
accordance with GAAP, there has been no material adverse change in Heartland or
any consolidated subsidiary's financial condition, business, properties or
operations; and (i) except as set forth on Schedule 2 hereto, no Borrower has
any indebtedness for borrowed money except in favor of Bank. In extending
financial accommodations to the Borrowers, Bank is expressly acting and relying
upon the aforesaid representations and warranties.
As a condition to Bank providing any financial accommodations to the
Borrowers, the Borrowers have agreed that they shall cause to be prepared and
furnished to Bank the following (all to be kept and prepared in accordance with
GAAP applied on a consistent basis):
(a) as soon as possible, but not later than ninety (90) days after
the close of fiscal year ended December 31, 2003 and each fiscal
year of Heartland thereafter, consolidated financial statements
of Heartland certified by Heartland's certified independent
public accountants (acceptable to Bank in its sole discretion)
in accordance with GAAP and fairly presenting the consolidated
financial position and results of operations of Heartland and its
consolidated subsidiaries for such year as of the end of such
year, certified by the principal financial officer of Heartland;
(b) as soon as possible, but not later than forty-five (45) days after
close of each fiscal quarter of Borrower and beginning with the
fiscal quarter ending March
31, 2004, consolidated financial statements (including, but not
limited to, a balance sheet, income statement and statement of cash
flows) of Heartland prepared in accordance with GAAP and fairly
presenting the financial position and results of operations of
Heartland and its consolidated subsidiaries for such fiscal quarter
as of the end of such fiscal quarter, certified by the principal
financial officer of Heartland;
(c) together with each annual delivery of financial statements, a
calculation of the financial covenants required hereunder as of the
end of such fiscal year certified by the principal financial officer
of the Borrowers;
(d) such other data and information (financial and otherwise) as Bank,
from time to time, may reasonably request, bearing upon or related
to the Loan or the Collateral, any Borrower's financial condition or
results of operations, including, without limitation, (i) federal
income tax returns of each Borrower, (ii) accounts payable ledgers
and bank statements of each Borrower and (iii) accounts receivable
ledgers and reports of construction in progress, each in form and
substance acceptable to Bank in its sole discretion.
Each Borrower will do or cause to be done all things reasonably necessary
to preserve and keep in full force and effect the existence of its business and
no Borrower shall, without Bank's prior written consent thereto, which Bank may
or may not give based upon its reasonable discretion, concurrently or
thereafter: (i) seek to dissolve or liquidate its business; or (ii) without the
prior written consent of Bank, convey, transfer, lease (other than in the
ordinary course of business) or otherwise dispose of (whether in one transaction
or in a series of transactions) any ownership or economic interest in any
Collateral to any person; or (iii) incur any Indebtedness other than the Loans,
or (iv) grant a lien, claim, encumbrance or security interest in the Collateral
to any person or entity other than the Bank; or (v) engage in any transaction
out of the ordinary course of business; or (vi) guaranty, endorse or otherwise
in any way directly, indirectly or contingently become liable for the
obligations or liabilities of any other person or entity other than the Bank,
except endorsements of negotiable instruments for collection in the ordinary
course of business. In addition to the foregoing, the Borrowers covenant and
agree with Bank to (i) maintain Capital Funds of at least $5,500,000 at all
times; (ii) not allow Net Losses to exceed $100,000 during any fiscal year
beginning with the fiscal year ended December 31, 2003; (iii) maintain Net
Income of at least $1,000,000 during any fiscal year of Borrowers beginning with
the fiscal year ended December 31, 2003; (iv) maintain all of each Borrower's
operating and cash management accounts with Bank as long as the Obligations
remain outstanding; and (v) not allow any advances or distributions to
shareholders or members from funds borrowed hereunder.
38
All covenants, conditions and agreements contained in each Loan Document
are hereby incorporated herein by express reference and a default or event of
default thereunder shall be and constitute a Default (as hereinafter defined)
under this Note.
Bank shall have exercised reasonable care in the custody and preservation
of the Collateral if it takes such action for that purpose as the Borrowers
shall reasonably request in writing, provided that such request shall not be
inconsistent with Bank's status as a secured party, but the failure to comply
with any such request shall not be deemed a failure to exercise reasonable care.
No failure of Bank to preserve or protect any rights with respect to the
Collateral against prior or third parties, or to do any act with respect to
preservation of the Collateral, not so requested by the Borrowers shall be
deemed a failure to exercise reasonable care in the custody or preservation of
the Collateral.
All Obligations of the Borrowers and all rights, powers and remedies of
Bank expressed herein shall be in addition to, and not in limitation of, those
provided by law or in any written agreement or instrument (other than this Note)
relating to any of the Obligations or any security therefore including, without
limitation, the Loan Documents. In addition to all other rights possessed by it,
Bank may, except a