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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10520
HEARTLAND PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 36-3606475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/294-0440
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Limited Partnership Units American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Registrant's Class A Limited Partnership Units
held by non-affiliates of the Registrant, computed by reference to the last
reported sales price of the Registrant's units on the American Stock Exchange as
of March 26, 1998, was approximately $27,420 million. On that date there were
2,142,438 units outstanding. For the purposes of this computation, it is
assumed that non-affiliates of the Registrant are all holders other than
directors and officers of Heartland Technology, Inc., the Registrant's General
Partner.
Exhibit index appears on Page 41.
Forward Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Condition and Results of Operation section, and elsewhere in this
Form 10-K, are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and other
important factors, including the risks described in the Management's Discussion
and analysis of Condition and Results of Operations section, and elsewhere in
this Form 10-K. The Company's actual future results, performance or achievement
of results and the value of your stock, may differ materially from any such
results, performance or achievement or value implied by these statements. We
caution you not to put undue reliance on any forward-looking statements. In
addition, we do not have any intention or obligation to update the forward-
looking statements in these documents. The Company claims the protections of
the safe harbor for forward-looking statements contained in Section 21E of the
Securities Exchange Act of 1934.
PART I
ITEM 1. Business
Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in such
capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Rosemount,
Minnesota ("Bloomfield" or "Rosemount"). CMC has a 100% membership interest in
CMC Heartland Partners II ("CMCII"), CMC Heartland Partners III ("CMCIII"), CMC
Heartland Partners IV ("CMCIV"), CMC Heartland Partners V ("CMCV") CMC Heartland
Partners VI ("CMCVI"), CMC Heartland Partners VII ("CMCVII") and CMC Heartland
Partners VIII ("CMCVIII"). CMCII was formed to participate in the Goose Island
Industrial park joint venture in Chicago, Illinois. CMCIII was formed in 1997 to
develop a portion of the Kinzie Station property in Chicago, IL. CMCV was formed
in 1996 to acquire finished lots and to construct and sell houses in Osprey
Cove ("Osprey Cove" or "St. Marys"), a master-planned residential community in
St. Marys, GA. CMCVII was formed in 1998 to acquire and engage in sales,
marketing and construction of homes in the Longleaf Country Club, Southern
Pines, NC ("Southern Pines" or "Longleaf"). CMCIV, CMCVI and CMCVIII were formed
at various times to acquire and hold properties under various stages of
negotiations. CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sales agent in the St. Marys,
Southern Pines and Kinzie Station developments. LCL is also the general
contractor in the St. Marys development. CMC owns 100% of the stock of Lifestyle
Construction Company, Inc. ("LCC") which serves as the general contractor in
North Carolina. Except as otherwise noted herein, references herein to
"Heartland" or the "Company" include CMC, HDC, CMCI, CMCII, CMCIII, CMCIV, CMCV,
CMCVI, CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account such net loss shall be allocated only among partners having positive
balances in their capital account.
The General Partner has the discretion to cause Heartland to make distributions
of Heartland's available cash in an amount equal to 98.5% to the Unitholders,
0.5% to the holder of the Class B Interest and 1% to the General Partner. There
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, which distribution was paid on January 7, 1998. On
December 4, 1997, Heartland's partnership agreement was amended to allow the
General Partner in its discretion to establish a record date for distributions
of the
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last day of any calendar month.
Real Estate Development Activities
At year end 1998, property designated for development, including housing
inventories consisted of 15 sites comprising approximately 915 acres. The book
value of this land is $10.8 million or an average of $11,800 per acre. Heartland
reviews these properties to determine whether to hold, develop, joint venture or
sell them. Heartland's objective for these properties is to maximize unitholder
value over a period of years.
Heartland has a 3.88 acre site in the City of Chicago known as Kinzie Station.
Zoning approval for the construction of 381 dwelling units was received in 1997.
The construction on the first phase of the project started on October 1, 1998.
Phase I consists of 163 units in a Tower Building, 24 units in a Plaza Building
and 6 Townhomes. As of December 31, 1998, the Company has executed sales
contracts on 67 Tower units, 5 Plaza units and 2 Townhomes. The first closings
are expected to occur in the first quarter of the year 2000.
In addition to the 3.88 acre site, the Company owns approximately 11 acres of
land and 4 acres of air rights adjacent to Kinzie Station. This acreage is
currently zoned for industrial and manufacturing uses.
On January 6, 1999, the Kinzie Station loan agreement in the amount of
$29,812,000 was signed with Corus Bank N.A. The loan bears interest at the prime
rate plus one percent. This loan is collateralized by the real estate contained
in the project. In conjunction with the loan, a Construction Contract with the
guaranteed maximum price of $24,710,000 was entered into with a general
contractor. The first draw was completed in January 1999.
Included in the aforementioned 915 acres are approximately 17 acres consisting
of 52 lots purchased for $1.9 million, or an average of $36,500 per lot at
Osprey Cove in St. Marys, GA. The 52 lots consist of 3 completed models, 1
unsold home under construction, 13 sold homes under construction, 2 units sold
not under construction and 33 lots owned. Osprey Cove is a master-planned
residential community with a wide range of natural and recreation amenities
which includes a recreational complex, lakes, a boat dock and a boat launch.
At December 31, 1998, there were 15 homes under contract, 13 of which are under
construction at Osprey Cove. As of December 31, 1998, 15 contracts have closed;
13 in 1998 and two in 1997.
In addition to selling its own units, CMC also sells homes and lots for the
developer of Osprey Cove, and Osprey Cove homeowners. For the year ended
December 31, 1998, CMC has sold 7 homes and 14 lots for these owners.
On December 30, 1998, Heartland entered into a modification agreement to its
December 30, 1996, revolving line of credit agreement in the amount of
$3,000,000 for Osprey Cove to extend the maturity date to June 30, 1999. The
line of credit with NationsBank N.A. ("NB") bears interest at the prime rate of
NB plus 1% (8.75% at December 31, 1998). At maturity, all outstanding advances
and any accrued interest must be paid. In the event the loan is not renewed, it
will be extended for a period of six months to allow for completion of homes
then under construction, but no new construction will be commenced. At December
31, 1998, $2,288,000 has been advanced by NB against the revolving line of
credit.
The Company has signed a contract to be the exclusive homebuilder and sales
agent for the Longleaf Country Club in Southern Pines, North Carolina. CMC will
sell and build 244 homes on lots currently owned by Longleaf Associates Limited
Partnership, an affiliate of General Investment & Development. Heartland assumed
the day to day operations on April 1, 1998. As of December 31, 1998, there were
8 homes under contract at Longleaf. In the first quarter of 1999, the Company
expects to close 3 homes. There are 7 homes under construction at December 31,
1998, of which two are models and five are under contract.
When the Company assumed day to day operations of Longleaf in April 1998, there
were a number of units under construction which were owned by the developer, as
well as resale units, on the market. As of December 31, 1998, the Company has
sold 13 units and 2 lots for these owners.
3
In December 1998 the Company signed a commitment letter for $3,000,000 with NB
to construct homes in the Longleaf community. NB makes individual loans on each
home as it is started. The developer subordinates its lot to NB's construction
loan. The term of each loan is one year and bears interest at the NB prime rate
plus 1% (8.75% at December 31, 1998). At December 31, 1998, $383,000 had been
advanced by NB to the Company.
Heartland is seeking additional opportunities for homebuilding, particularly in
vacation/retirement communities.
Heartland has received approval on the 226 acre site it owns in Rosemount,
Minnesota. The development known as Bloomfield was approved for 226 attached
units and 241 detached single family homes, on 192 acres with the remaining 34
acres reserved for future residential development. This project will be
developed in Phases.
In Rosemount, unlike most areas in the country, the City is responsible for
constructing the infrastructure improvements. It receives reimbursement for its
costs by real estate tax assessments. The City of Rosemount is approximately
eighty percent (80%) complete with the Phase I infrastructure and anticipates
completion by June 1, 1999. Phase I consists of 120 townhomes, 27 single family
homes and 10 twinhomes. At December 31, 1998, two model and four speculatively
built townhomes are currently under construction. The Grand Opening of the
models are planned for the spring of 1999. Phase II of Bloomfield has site plan
approval from the City of Rosemount for the construction of 20 twinhomes and 97
single family homes.
On November 30, 1998, Heartland executed an agreement for a $2,500,000 land loan
with Bank One relating to the Bloomfield project. The loan bears interest at
the prime rate (7.75% at December 31, 1998), $500,000 of the loan was placed in
an interest reserve. Also, Bank One is providing a $1,750,000 land development
loan, a letter of credit for $179,000 to the City of Rosemount and a $4,000,000
revolving credit line for the construction of homes pursuant to final documents
which were signed in February 1999. The Company believes that no additional
financing will be needed for Phase I of the Rosemount community.
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago based real
estate company, and Wooton Construction, have formed a joint venture to develop
approximately 265,000 square feet of industrial space in the Goose Island
Industrial Park in Chicago, Illinois. As of March 1999, the buildings had been
built and leases had been signed for approximately 260,000 of the 265,000 square
feet.
On December 1, 1998 the Fife property was annexed to the City of Fife. A Local
Improvement District (LID) has been approved in order to support the improvement
and extension of sewers and sewer capacity for the site. Fife has zoned the
property for residential usage. Heartland is in the process of preparing the
preliminary site plan for the site. The Company expects to submit the site plan
in the second quarter of 1999 and expects to receive approval by the end of
1999.
The Company owns Kilbourn Station, a three story, 60,000 square foot office
building and railroad depot in Milwaukee, Wisconsin. Amtrak provides interstate
passenger rail service using the station. The Company has worked with the State
of Wisconsin, the Wisconsin Congressional Delegation and the Milwaukee County
Transit Company (which provides local bus service) on plans to improve Kilbourn
Station. The plans enhance the linkage of the building to Milwaukee's new
"Midwest Express" convention center and to planned local bus routes as well as
updating the design of its interior space. The State has authorized the
expenditure of about $2 million in state funds and the federal government has
authorized about $2 million of federal funds for the improvement of the
facility. The Company expects to begin work on this project in 1999.
The real estate development business is highly competitive. Heartland is subject
to competition from a great number of real estate developers, including
developers with national operations, many of which have greater sales and
financial resources than Heartland.
Property Sales and Leasing Activities
Heartland's current inventory of land held for sale consists of 15,730 acres
located throughout 12 states. The book value of this inventory is approximately
$930,000. The majority of the land is former railroad rights-of-way, long,
narrow
4
strips of land that varies between 50-200 feet wide. Some of Heartland's sites
located in small rural communities or outlying mid-cities are leased to third
parties for agricultural, industrial, retail and residential use. These
properties may be improved with the lessee's structures and include grain
elevators, storage sheds, parking lots and small retail service facilities.
The sale, management and leasing of the Company's non-development real estate
inventory is conducted by Heartland's Sales and Property Management Department.
The volume of Company's sales has slowed over the last five years due to the
less desirable characteristics of the remaining properties. The Company
anticipates that the sale of its remaining parcels may take beyond the year
2001.
The Company has a current active lease portfolio of 188 leases. Less than 1% of
its total acreage is leased. The number of leases declines each year as sales of
properties are made to existing lessee's. Historically, the majority of the
leases provide nominal rental income to Heartland. The leases generally require
the lessee to construct, maintain and remove any improvements, pay property
taxes, maintain insurance and maintain the condition of the property. The
majority of the leases are cancellable by either party upon thirty to sixty days
notice. Heartland's ability to terminate or modify certain of its leases is
restricted by applicable law and regulations.
Other Activities
At December 31, 1998, the allowance for claims and liabilities established by
Heartland for environmental and other contingent liabilities totaled
approximately $2.8 million. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Given the uncertainty inherent
in litigation, resolution of these matters could require funds greater or less
than the $2.8 million allowance for claims and liabilities.
Heartland engages outside counsel to defend it in connection with most of these
claims. Significant claims are summarized in Note 8 to the Consolidated
Financial Statements (See Item 8).
Regulation and Environmental Matters
For a discussion of regulation and environmental matters, see Notes 5 and 8 to
the Consolidated Financial Statements (See Item 8).
Employees
At December 31, 1998, Heartland employed 55 people.
Item 2. Properties
At December 31, 1998, real estate holdings consisted of approximately 16,645
acres of scattered land parcels. States in which large land holdings are located
are Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota, Washington,
and Wisconsin. The remaining acreage is located in Georgia, Idaho, Indiana,
Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprising of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. The Company owns certain air
and fiber optics development rights in the Chicago, Illinois area.
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees's.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Improved properties of value to Heartland include a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin, a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records, and several small, old warehouse buildings in Milwaukee
which are leased to third parties for warehouse use.
5
Heartland's headquarters occupy approximately 9,000 square feet of leased office
space located at 547 West Jackson Boulevard, Chicago, Illinois. The lease
provides for a base rent of $107,688 through the lease expiration date of
December 31, 1999 and is subject to operating expense and tax escalations.
Item 3. Legal Proceedings
On October 1, 1998, the Company entered into a Settlement Agreement with the
Port of Tacoma which calls for the Company to either pay the Port of Tacoma $1.1
million or transfer to the Port of Tacoma real estate to be agreed upon at a
later date.
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest. The Company will not make a claim on its
insurance carriers in this matter because the settlement amount does not exceed
the self insured retention under the applicable insurance policies.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Unitholders of Heartland in the fourth
quarter ended December 31, 1998.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Units are listed and traded on the American Stock Exchange under the symbol
"HTL". The Units began trading on a "when issued" basis on June 20, 1990. The
following table sets forth the high and low sales prices per Unit by quarter for
the years ended December 31, 1998 and 1997.
1998 High Low
First quarter 16 1/4 15
Second quarter 17 3/4 15
Third quarter 18 3/4 15
Fourth quarter 17 12 1/8
1997
First quarter 9 1/4 8 1/8
Second quarter 11 3/4 8
Third quarter 15 3/4 11 3/8
Fourth quarter 16 14 3/4
Based on records maintained by Heartland's Unit transfer agent and registrar,
there were approximately 598 record holders of Heartland's Units as of March 19,
1999.
The amount of Heartland's cash available to be distributed to Unitholders, the
holder of the Class B Interest and the General Partner ("Available Cash Flow")
will be determined by the General Partner, in its sole discretion, after taking
into account all factors deemed relevant by the General Partner, including,
without limitation, general economic conditions and Heartland's financial
condition, results of operations and cash requirements, including (i) the
servicing and repayment of indebtedness, (ii) general and administrative
charges, including fees and expenses payable to HTI under management and other
arrangements, (iii) property and operating taxes, (iv) other costs and expenses,
including legal and accounting fees, and (v) reserves for future growth,
commitments and contingencies.
Heartland's Available Cash Flow will be derived from CMC, CMCI, CMCII, CMCIII,
CMCV, CMCVII and LCL. When available and appropriate, the General Partner
expects to cause Heartland to make distributions of Heartland's Available Cash
Flow in an amount equal to 98.5% to the Unitholders, 0.5% to the holder of the
Class B Interest, and 1% to the General Partner, although there can be no
assurance as to the amount or timing of Heartland's cash distributions or
whether the General Partner will cause Heartland to make a cash distribution if
cash is available. Future lenders to Heartland may impose restrictions on
Heartland's ability to make distributions. In addition, distributions may not be
made to Unitholders until Heartland has paid to HTI (or its assignee) all
accrued and unpaid management fees pursuant to the Management Agreement between
Heartland and HTI. On December 4, 1997, Heartland's partnership agreement was
amended to allow the General Partner in its discretion to establish a record
date for distributions of the last day of any calendar month.
7
Item 6. Selected Financial Data
Following is a summary of Heartland's selected financial data for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 (amounts in thousands except
per Unit data):
Operating Statement Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net revenues $ 3,289 $ 5,172 $6,925 $ 3,525 $ 3,498
Expenses 9,373 7,335 6,537 7,572 6,106
------- ------- ------ ------- -------
Net income (loss) $(6,084) $(2,163) $ 388 $(4,047) $(2,608)
======= ======= ====== ======= =======
Net income (loss) allocated to General
Partner and Class B Interest $ (182) $ (33) $ 6 $ (61) $ (39)
======= ======= ====== ======= =======
Net income (loss) allocated
to Class A units $(5,902) $(2,130) $ 382 $(3,986) $(2,569)
======= ======= ====== ======= =======
Net income (loss) per Class A Unit $ (2.76) $ (0.99) $ 0.18 $ (1.86) $ (1.20)
======= ======= ====== ======= =======
Distribution declared per Class A limited
partnership unit $ -- $ 0.75 $ 1.25 $ -- $ --
======= ======= ====== ======= =======
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
Balance Sheet Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Notes receivable
including Deferred
Capital Contribution $ -- $ -- $ -- $ -- $ 80
Net Properties 28,052 23,196 21,051 20,747 20,552
Total assets 33,231 26,838 28,040 27,841 30,243
Allowance for claims
and liabilities 2,762 2,169 2,660 2,492 1,895
Total liabilities 23,822 11,347 8,755 6,181 4,930
Partners' capital 9,409 15,491 19,285 21,660 25,313
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Condition and Results of Operation section are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and other important factors, including the
risks described in the Management's Discussion and Analysis of Condition and
Results of Operations section. The Company's actual future results, performance
or achievement of results and the value of your stock, may differ materially
from any such results, performance or achievement or value implied by these
statements. We caution you not to put undue reliance on any forward-looking
statements. In addition, we do not have any intention or obligation to update
the forward-looking statements in these documents. The Company claims the
protections of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934.
Liquidity and Capital Resources
Cash flow for operating activities has been derived primarily from proceeds of
property sales, rental income, interest income, commissions and proceeds from
sales of securities. Cash and marketable securities at amortized cost were
$3,828,000 (including $2,564,000 of restricted cash) at December 31, 1998,
$2,757,000 (including $724,000 of restricted cash) at December 31, 1997, and
$5,992,000 (including $300,000 of restricted cash) at December 31, 1996. The
increase of $1,071,000 was due primarily to the four parcels of land sold in
December 1998 for total revenues of $2,165,000. The decrease of $3,235,000 from
December 31, 1996 to December 31, 1997 is mainly attributable to the liquidation
of marketable securities to make the cash distribution of $2.7 million paid
January 3, 1997 to unitholders of record at
8
December 31, 1996 and capital expenditures for land development and construction
costs at Osprey Cove, St. Marys, GA and Kinzie Station, Chicago, IL. On January
7, 1998, Heartland distributed approximately $1,600,000 in cash to unitholders
of record on December 29, 1997. (see the Consolidated Statement of Cash Flows).
Cash used in operating activities was ($6,812,000) in 1998, compared to
($3,035,000) in 1997, and ($99,000) in 1996. The cash used in operating
activities for 1998 compared to 1997 increased ($3,777,000). This is primarily
due to the higher construction and selling costs paid in conjunction with
increased home building activities of $3.3 million. The increase in cash used in
operating activities for 1997 as compared to 1996 is primarily due to the higher
construction and selling costs in conjunction with increased home building
activities of ($4.0 million) (see the Consolidated Statement of Cash Flows).
Proceeds from property sales provided cash flow of $6,231,000 in 1998,
$7,127,000 in 1997, and $6,918,000 in 1996. Sales in 1998 consists of 13 units
in Osprey Cove for $3,141,000 and four parcels of land; Dubuque, IA, $450,000,
Minneapolis, MN, $900,000, Moses Lake, WA $440,000 and St. Paul, MN, $375,000.
These four sales totaled $2,165,000. Significant property sales in 1997 consists
of the $3,000,000 sale of the Humboldt Yard property, the sale of a part
interest in 10.3 acres of the Goose Island property in Chicago for about
$1,458,000 and a sale of a parcel at the Menomonee Valley property of about
$454,000. Also included in 1997 are the sales of the first 2 units in Osprey
Cove which amounted to $507,000. 1996 property sales consist of the $4,500,000
sale of 15.26 acres of the Goose Island property in Chicago, and the $400,000
sale of .7 acres located at North Avenue. The Cherry St. property in Milwaukee,
WI sold for $800,000 in 1996.
As of December 31, 1998, Heartland had approximately $149,000 (fair value)
invested in marketable securities. All securities are invested in direct
obligations of the U.S. Government.
Portfolio income is derived principally from the investment of cash not required
for operating activities ("excess cash") in various U. S. Government and
corporate obligations. Portfolio income for 1998 was $63,000 compared to $62,000
for 1997 and $419,000 for 1996. The decrease in 1997 compared to 1996 reflects
cash used to fund the distribution and capital expenditures associated with
land, development costs, marketing and sales expenses for the development sites.
Heartland has approximately 188 active leases on its real estate properties,
which generated $886,000 of revenue in 1998, $1,104,000 in 1997, and $1,039,000
in 1996. The decrease in rental income between 1997 and 1998 is primarily due to
two tenants who vacated their spaces in the Company's office building in
Milwaukee, WI. New leasing activity is pending finalization of the receipt of
Federal and State agent proceeds, which will be used for the modernization and
restoration of the facility. Rental income for 1997 did not vary significantly
from 1996.
At December 31, 1998, Heartland had designated 15 sites, or approximately 915
acres with a book value of $10,780,000, for development. Capitalized
expenditures at these sites were $9,157,000 in 1998, $5,112,000 in 1997, and
$2,051,000 in 1996. At December 31, 1998, capitalized costs on development
properties including housing inventories totaled $12,933,000. Expenditures which
significantly increase the value and are directly identified with a specific
project are capitalized.
At December 31, 1998, land held for sale consists of 15,730 acres with a book
value of $930,000. It will be disposed of in an orderly fashion. It is
anticipated that it will take beyond the year 2001 to dispose of most of these
properties.
The cost of property sales for 1998 was $4,405,000 or 71% of sales proceeds,
$3,407,000 or 48% for 1997 and $1,674,000 or 24% for 1996. The increase in the
cost of sale ratio for 1998 is due to the 13 home sales in Osprey Cove. The
Osprey Cove revenues represented 50% of total revenues. In 1997 Heartland sold
a development parcel, Humboldt Yard, which carries a higher cost basis than the
typical non-development properties. This resulted in an increase in the cost to
sale ratio in 1997 compared to 1996. It is not expected that future cost of
sales ratios for real estate other than development projects and home sales will
change materially from ratios experienced in 1996, as the balance of Heartland's
real estate other than development projects consists primarily of railroad
properties acquired over the past 140 years at values far lower than current
fair values.
It is the Company's practice to evaluate environmental liabilities associated
with the Company's properties. Heartland monitors the potential exposure to
environmental costs on a regular basis and has recorded a liability in the
amount of
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$2.4 million at December 31, 1998, and $1.8 million at December 31, 1997, for
possible environmental liabilities, including remediation, legal and consulting
fees. A reserve is established with regard to potential environmental
liabilities when it is probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. The amount of any liability
is determined independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated, but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then a reserve in
the minimum amount of the range is accrued.
In addition, Heartland has established an allowance for resolution of non-
environmental claims of $.4 million at December 31, 1998 and 1997.
Heartland does not at this time anticipate that these claims or assessments will
have a material effect on the Company's liquidity, financial position and
results of operations beyond the reserve which the Company has established for
such claims and assessments. In making this evaluation, the Company has assumed
that the Company will continue to be able to assert the bankruptcy bar arising
from the reorganization of its predecessor and that resolution of current
pending and threatened claims and assessments will be consistent with the
Company's experience with similar previously asserted claims and assessments.
While the timing of the payment in respect of environmental claims has not
significantly adversely effected the Company's cash flow or liquidity in the
past, management is not able to reasonably anticipate whether future payments
may or may not have a significant adverse effect in the future.
Heartland's management believes it will have sufficient funds available for
operating expenses and to fund development projects either from internal
operations or third party financing. On May 14, 1997, CMC signed a line of
credit agreement in the amount of $5 million with La Salle National Bank
("LNB"), pursuant to which CMC granted LNB a first lien on certain parcels of
land in Chicago, IL and pursuant to which CMC pledged cash in the amount of
$500,000 as an interest reserve. The agreement terminated on May 1, 1998, but
was extended through June 30, 1998. On June 30, 1998, the loan was amended
extending the maturity date to April 30, 1999, and increasing the line to $8.5
million. The Company has subsequently pledged additional cash in the amount of
$350,000 bringing the total interest reserve to $850,000. On October 23, 1998,
CMC amended the loan temporarily increasing the line to $9,500,000 and reducing
net worth requirements to $8,500,000. The $1,000,000 temporary increase was paid
back in December 1998. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.0% (8.75% at December 31, 1998). At December 31, 1998,
$8,321,000 had been advanced to the Company by LNB against the line of credit.
(See Note 4 to the Consolidated Financial Statements). The Company is currently
in negotiations with LNB to extend the maturity of the loan, modify certain
existing financial covenants, and increase the amount of the credit facility.
While the Company has no reason to believe that the extension, modification of
terms and increased capacity of the credit facility will not be granted, there
can be no assurance that the contemplated transaction will be approved by LNB.
Results of Operations
For the year ended December 31, 1998, operations resulted in a net loss of
$6,084,000 or $2.76 per Class A Unit. Operations for the years ended December
31, 1997 and 1996 resulted in a net loss of $2,163,000 or $0.99 per Class A Unit
and a net income of $388,000 or $0.18 per Class A Unit, respectively.
The net loss in 1998 compared to the net loss in 1997 is due to selling expenses
increasing $973,000 related to Osprey Cove, Kinzie Station, Longleaf and
Rosemount, an increase in the environmental reserve expense of $1,383,000 and a
decrease in net revenues of $1,883,000 offset by a decrease in real estate
tax expense of $304,000.
The net loss in 1997 compared to net income in 1996 is due to decrease in net
revenues of $1,753,000, and selling expense increases of $1,402,000 related to
the Osprey Cove and Kinzie Station projects.
Portfolio income is derived principally from the investment of cash not required
for operating activities ("excess cash") in various U.S. Government and
corporate obligations. Portfolio income for 1998 was $63,000 compared to $62,000
for 1997 and $419,000 for 1996. The decrease in 1997 compared to 1996 reflects
cash used to fund the
10
distribution and capital expenditures associated with land, development costs,
marketing and sales expenses for the development sites.
Heartland has approximately 188 active leases on its real estate properties,
which generated $886,000 of revenue in 1998, $1,104,000 in 1997, and $1,039,000
in 1996. The 1997 rental income is not significantly greater than 1996 rental
income. The decrease in rental income between 1997 and 1998 is primarily due to
two tenants who vacated their spaces in the Company's office building in
Milwaukee, Wisconsin. New leasing activity in that building is pending
modernization and restoration of the facility.
Total expenses for 1998 were $9,373,000 compared to $7,335,000 for 1997 and
$6,537,000 for 1996. The increase of $2,038,000 in 1998 compared to 1997 is
primarily due to increased selling expense of $973,000 in Osprey Cove, Kinzie
Station, Longleaf and Rosemount and increases in the environmental reserve
expense of $1,383,000 offset by a decrease in property taxes of $304,000. The
increase of $798,000 in 1997 compared to 1996 is due to an increase of
$1,402,000 in selling expenses and an increase of $777,000 in general and
administrative expenses offset by a decrease in real estate taxes of $281,000
and a decrease in environmental expenses of $1,063,000.
Economic and Other Conditions Generally
The real estate industry is highly cyclical and is affected by changes in
national, global and local economic conditions and events, such as employment
levels, availability of financing, interest rates, consumer confidence and the
demand for housing and other types of construction. Real estate developers are
subject to various risks, many of which are outside the control of the
developer, including real estate market conditions, changing demographic
conditions, adverse weather conditions and natural disasters, such as
hurricanes, tornados, delays in construction schedules, cost overruns, changes
in government regulations or requirements, increases in real estate taxes and
other local government fees and availability and cost of land, materials and
labor. The occurrence of any of the foregoing could have a material adverse
effect on the financial conditions of Heartland.
Access to Financing
The real estate business is capital intensive and requires expenditures for land
and infrastructure development, housing construction and working capital.
Accordingly, Heartland anticipates incurring additional indebtedness to fund
their real estate development activities. As of December 31, 1998, Heartland's
total consolidated indebtedness was $13,492,000. There can be no assurance that
the amounts available from internally generated funds, cash on hand, Heartland's
existing credit facilities and sale of non-strategic assets will be sufficient
to fund Heartland's anticipated operations. Heartland may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financing and sales of debt or
equity securities. No assurance can be given that such financing will be
available or, if available, will be on terms favorable to Heartland. If
Heartland is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures, development
projects may be delayed or abandoned. Any such delay or abandonment could result
in a reduction in sales and would adversely affect Heartland's future results of
operations.
11
Period-to-Period Fluctuations
Heartland's real estate projects are long-term in nature. Sales activity varies
from period to period, and the ultimate success of any development cannot always
be determined from results in any particular period or periods. Thus, the timing
and amount of revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage effectively their
cash flows from operations would have an adverse effect on their ability to
service debt, and to meet working capital requirements.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at December 31, 1998, is
$13,492,000. The Company pays interest on all its outstanding borrowings under
revolving credit facilities and fixed loan amounts at the prime rate plus 0.00%
to 1.00%. An adverse change of 1.00% in the prime rate would increase the yearly
interest incurred by approximately $135,000.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than 2000. This
could result in a system failure or miscalculations causing disruptions of
operation, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required to
modify or replace significant portions of our software and certain hardware so
that those systems will property recognize dates beyond December 31, 1999. We
believe that with modifications or replacements of existing software and certain
hardware, the Year 2000 issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 issue
could materially affect our operations.
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, remediation, testing and implementation. To date, we have fully
completed our assessment of all systems that could be significantly affected by
the Year 2000. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particularly the
general ledger, billing and inventory systems. Based on a review of our product
line, we have determined that most of the products we have sold and will
continue to sell do not require remediation to be Year 2000 compliant.
Accordingly, we do not believe that the Year 2000 presents a material exposure
as it relates to our products. In addition, we have gathered information about
the Year 2000 compliance status of our significant suppliers and subcontractors
and continue to monitor their compliance.
For its information technology exposures, to date the Company is substantially
complete on the remediation phase and we expect to complete software
reprogramming and replacement no later than June 30, 1999. Once software is
reprogrammed or replaced for a system, we will begin testing and implementation.
These phases run concurrently for different systems. We have begun the testing
and implementation of our remediated systems. Completion of the testing phase
for all significant systems was completed by January 31, 1999, with all
remediated systems fully tested and implemented by June 30, 1999, with 100%
completion targeted for September 30, 1999.
The remediation of operating equipment is significantly more difficult than the
remediation of the information technology systems because some of the
manufacturers of the equipment have not yet provided the necessary remediation
programming. Therefore, we are only 10% complete in the remediation phase of
our operating equipment. Testing of this equipment is more difficult than the
testing of the information technology systems; as a result, the Company has
recently started with the testing of its remediated operating equipment. Once
testing is satisfactorily completed, the operating equipment will be ready for
immediate use. The Company expects to complete its remediation efforts by June
30, 1999. Testing and implementation of affected equipment is expected to be
completed by September 30, 1999.
12
We have begun to query our significant suppliers and subcontractors that do not
share information systems with the Company (external agents). To date, we are
not aware of any external agent with a Year 2000 issue that would materially
impact our results of operations, liquidity, or capital resources. However, we
have no means of ensuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially affect our business or financial results. The
effect of non-compliance by external agents is not determinable.
We will utilize both internal and external resources to reprogram, or replace,
test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $200,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $175,000 ($25,000 expensed and $150,000 capitalized for
new systems and equipment), related to all phases of the Year 2000 project. Of
the total remaining project costs, none of the remaining $25,000 relates to
repair of hardware and software and will be expensed as incurred.
We believe that we have an effective program in place to resolve the Year 2000
issue in a timely manner. As noted above, we have not yet completed all
necessary phases of the Year 2000 program. If we do not complete any additional
phases, the Company would be unable to take customer orders, manufacture
products, finance construction or collect payments. In addition, disruptions in
the economy generally resulting from the Year 2000 issue could also materially
affect the Company. The Company could be subject to litigation for computer
system product failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost reserve
cannot be reasonably estimated at this time.
We currently have no contingency plans in place if we do not complete all phases
of the Year 2000 program. We plan to evaluate the status of completion in June
1999 and determine whether such a plan is necessary. If we are unable to
successfully implement any of the four phases of our Year 2000 plan and we do
not develop a contingency plan to address such problems, or if Year 2000 issues
negatively affect our suppliers, our customers or the economy generally, our
business or financial results may be materially affected.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
See Management's Discussion and Analysis of Financial Condition and Results of
Operations: Economic and Other Conditions and Interest Rate Sensitivity.
13
Item 8. Financial Statement and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Partners and Unitholders of Heartland Partners, L.P.
We have audited the accompanying consolidated balance sheets of Heartland
Partners, L.P. (the "Partnership") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Partners, L.P. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 26, 1999
14
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(amounts in thousands)
1998 1997
------- -------
ASSETS:
- -------
Cash......................................................................... $ 1,115 $ 1,890
Restricted cash.............................................................. 2,564 724
Marketable securities (amortized cost of $149 in 1998 and $143 in 1997)...... 149 141
Accounts receivable (net of allowance of $416 in 1998 and $205 in 1997)...... 353 251
Due from affiliate........................................................... 442 --
Prepaid and other assets..................................................... 278 358
Investment in joint venture.................................................. 278 278
------- -------
Total..................................................................... 5,179 3,642
------- -------
Property:
Buildings and other.......................................................... 2,231 2,003
Less accumulated depreciation............................................. 931 807
------- -------
Net buildings and other...................................................... 1,300 1,196
Land held for sale........................................................... 930 1,163
Housing inventories.......................................................... 13,978 4,092
Land held for development.................................................... 6,212 8,829
Capitalized predevelopment costs............................................. 5,632 7,916
------- -------
Net Properties............................................................ 28,052 23,196
------- -------
Total Assets................................................................. $33,231 $26,838
======= =======
LIABILITIES:
- ------------
Notes payable................................................................ $13,492 $ 3,750
Accounts payable and accrued expenses........................................ 2,636 724
Management fee due affiliate................................................. 283 425
Accrued real estate taxes.................................................... 1,075 1,092
Allowance for claims and liabilities......................................... 2,762 2,169
Unearned rents and deferred income........................................... 1,862 1,200
Distribution payable......................................................... -- 1,631
Other liabilities............................................................ 1,712 356
------- -------
Total Liabilities......................................................... 23,822 11,347
------- -------
PARTNERS' CAPITAL:
- ------------------
General Partner.............................................................. -- 28
Class A Limited Partners - 2,142 units authorized, issued and outstanding.... -- 5,902
Class B Limited Partner...................................................... 9,409 9,563
Unrealized holding loss on marketable securities............................. -- (2)
------- -------
Total Partners' Capital...................................................... 9,409 15,491
------- -------
Total Liabilities and Partners' Capital...................................... $33,231 $26,838
======= =======
See accompanying notes to Consolidated Financial Statements
15
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996
(amounts in thousands)
Unrealized
Holding Gain
Class A Class B (Loss) on
General Limited Limited Marketable
Partner Partners Partner Securities Total
------- -------- ------- ------------ --------
Balances at January 1, 1996 .................. $ 89 $11,935 $9,594 $ 42 $21,660
Net Income ................................... 4 382 2 -- 388
Distribution ................................. (27) (2,678) (14) -- (2,719)
Marketable securities fair value adjustment .. -- -- -- (44) (44)
----- ------- ------ ----- -------
Balances at December 31, 1996 ................ 66 9,639 9,582 (2) 19,285
Net loss ..................................... (22) (2,130) (11) -- (2,163)
Distribution ................................. (16) (1,607) (8) -- (1,631)
----- ------- ------ ----- -------
Balances at December 31, 1997 ................ 28 5,902 9,563 (2) 15,491
Net Loss ..................................... (28) (5,902) (154) -- (6,084)
Marketable securities fair value adjustment .. -- -- -- 2 2
----- ------- ------ ----- -------
Balances at December 31, 1998 ................ $ -- $ -- $9,409 $ -- $ 9,409
===== ======= ====== ===== =======
See accompanying notes to Consolidated Financial Statements
16
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
(amounts in thousands, except for per unit data)
1998 1997 1996
------- ------- -------
Revenues:
- ---------
Property sales ...................................................... $ 6,231 $ 7,127 $ 6,918
Less: cost of property sales ........................................ 4,405 3,407 1,674
------- ------- -------
Gross profit on property sales .................................. 1,826 3,720 5,244
Rental income ....................................................... 886 1,104 1,039
Portfolio income .................................................... 63 62 419
Miscellaneous income ................................................ 514 286 223
------- ------- -------
Total Net Revenues........................................... 3,289 5,172 6,925
------- ------- -------
Expenses:
- ---------
Selling ............................................................. 2,876 1,903 501
Real estate taxes ................................................... 399 703 984
General and administrative .......................................... 4,088 4,132 3,355
Environmental Expense ............................................... 1,461 78 1,141
Management fee ...................................................... 425 425 425
Depreciation and amortization ....................................... 124 94 131
------- ------- -------
Total Expenses .................................................. 9,373 7,335 6,537
------- ------- -------
Net Income (Loss) ............................................... $(6,084) $(2,163) $ 388
======= ======= =======
Net income (loss) allocated to General Partner .................. $ (28) $ (22) $ 4
======= ======= =======
Net income (loss) allocated to Class B limited partner .......... $ (154) $ (11) $ 2
======= ======= =======
Net income (loss) allocated to Class A limited partners ......... $(5,902) $(2,130) $ 382
======= ======= =======
Net income (loss) per Class A limited partnership unit .......... $ (2.76) $ (0.99) $ 0.18
======= ======= =======
Average number of Class A limited partnership units outstanding . 2,142 2,142 2,142
======= ======= =======
Distributions declared per Class A limited partnership unit ..... $ -- $ 0.75 $ 1.25
======= ======= =======
See accompanying notes to Consolidated Financial Statements
17
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
(amounts in thousands)
1998 1997 1996
------- ------- -------
Cash Flow from Operating Activities:
- ------------------------------------
Net income (loss) ............................................................. $(6,084) $(2,163) $ 388
Adjustments reconciling net income (loss) to net cash used in operating
activities:
Bad debt expense .............................................................. 211 98 27
Depreciation .................................................................. 124 94 131
Accretion of discount on securities ........................................... -- (21) (78)
Loss (Gain) on sale of securities ............................................. -- 3 (79)
Net change in allowance for claims and liabilities ............................ 593 (491) 168
Net change in assets and liabilities:
Decrease (increase) in accounts receivable ................................ (313) 181 205
Increase in housing inventories..... ...................................... (4,852) (3,486) (848)
Decrease in land held for sale ............................................ 233 123 81
Decrease in land held for development ..................................... 790 158 350
(Increase) decrease in capitalized development costs ...................... (923) 1,234 44
Increase (decrease) in accounts payable and accrued liabilities ........... 1,895 476 (208)
(Decrease) increase in management fee due affiliate ....................... (142) -- --
Net change in other assets and liabilities ................................ 1,656 759 (280)
------- ------- -------
Net cash used in Operating Activities ..................................... (6,812) (3,035) (99)
------- ------- -------
Cash Flow from Investing Activities:
- ------------------------------------
Additions to buildings and other .............................................. (228) (510) (62)
Net (purchases) sales and maturities of marketable securities ................. (6) 4,636 1,259
------- ------- -------
Net cash (used in) provided by investing activities ........................... (234) 4,126 1,197
------- ------- -------
Cash Flow from Financing Activities:
- ------------------------------------
(Repayment of) proceeds from note payable to Heartland Technology, Inc. ....... -- -- (648)
Advances on notes payable, net ................................................ 9,742 3,011 737
Increase in restricted cash ................................................... (1,840) (424) (300)
Distribution paid to unitholders .............................................. (1,631) (2,719) --
------- ------- -------
Net cash provided by (used in) financing activities ........................... 6,271 (132) (211)
------- ------- -------
Net (decrease) increase in cash ............................................... (775) 959 887
Cash at beginning of year ..................................................... 1,890 931 44
------- ------- -------
Cash at end of year ........................................................... $ 1,115 $ 1,890 $ 931
======= ======= =======
Supplemental Disclosure of Non Cash Operating Activities:
- ---------------------------------------------------------
Net land held for development and capitalized development costs transferred $ 5,034 $ -- $ --
to housing inventories ...................................................... ======= ======= =======
See accompanying notes to Consolidated Financial Statements
18
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
1. Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in such
capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Rosemount,
Minnesota ("Bloomfield" or "Rosemount"). CMC has a 100% membership interest in
CMC Heartland Partners II ("CMCII"), CMC Heartland Partners III ("CMCIII"), CMC
Heartland Partners IV ("CMCIV"), CMC Heartland Partners V ("CMCV") CMC Heartland
Partners VI ("CMCVI"), CMC Heartland Partners VII ("CMCVII") and CMC Heartland
Partners VIII ("CMCVIII"). CMCII was formed to participate in the Goose Island
Industrial park joint venture in Chicago, Illinois. CMCIII was formed in 1997 to
develop a portion of the Kinzie Station property in Chicago, IL. CMCV was formed
in 1996 to acquire finished lots and to construct and sell houses in Osprey Cove
("Osprey Cove" or "St. Marys"), a master-planned residential community in St.
Marys, GA. CMCVII was formed in 1998 to acquire and engage in sales, marketing
and construction of homes in the Longleaf Country Club, Southern Pines, NC
("Southern Pines" or "Longleaf"). CMCIV, CMCVI and CMCVIII were formed at
various times to acquire and hold properties under various stages of
negotiations. CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sales agent in the St. Marys,
Southern Pines and Kinzie Station developments. LCL is also the general
contractor in the St. Marys development. CMC owns 100% of the stock of Lifestyle
Construction Company, Inc. ("LCC") which serves as the general contractor in
North Carolina. Except as otherwise noted herein, references herein to
"Heartland" or the "Company" include CMC, HDC, CMCI, CMCII, CMCIII, CMCIV, CMCV,
CMCVI, CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account, such net loss shall be allocated only amoung partners having positive
balances in their capital accounts.
The General Partner has the discretion to cause Heartland to make distributions
of Heartland's available cash in an amount equal to 98.5% to the Unitholders,
0.5% to the holder of the Class B Interest and 1% to the General Partner. There
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, which dividend was paid on January 7, 1998. On December 4,
1997, Heartland's partnership agreement was amended to allow the General Partner
in its discretion to establish a record date for distributions of the last day
of any calendar month.
At December 31, 1998, land held for sale consisted of scattered land parcels.
States in which large land holdings are located are Illinois, Iowa, Minnesota,
Montana, North Dakota, South Dakota, Washington, and Wisconsin. The remaining
acreage is located in Idaho, Indiana, Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprised of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. Certain air rights and fiber
optics development rights are also owned.
19
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Improved properties of value to Heartland include a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin, a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records, and several small, old warehouse buildings in Milwaukee
which are leased to third parties for warehouse use.
At December 31, 1998, property available for development, including housing
inventories, consisted of 15 sites with a book value of land is $10.8 million.
Heartland reviews these properties to determine whether to hold, develop, either
solely or with a third party joint venturer, or sell them. Heartland's objective
for these properties is to maximize unitholder value over a period of years.
Heartland has a 3.88 acre site in Chicago, Illinois known as Kinzie Station
under development. Phase I consists of 163 units in a Tower Building, 24 units
in a Plaza Building and 6 Townhomes. CMC is also selling and building single
family homes in Osprey Cove located in St. Marys, Georgia, Longleaf Country Club
in Southern Pines, North Carolina and the Bloomfield community in Rosemount,
Minnesota. These sites are classified as housing inventories.
2. Summary of Significant Accounting Policies
Consolidation
- -------------
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCI, 1%
general partnership interest owned by HDC and 99% owned by CMC; CMC II, CMC III,
CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC, each 100% owned by CMC. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues from housing and land sales are recognized in the period in which title
passes and cash is received.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Marketable Securities
- ---------------------
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such classification as of each balance sheet
date. Debt securities that the Company does not have the positive intent or
ability to hold to maturity, and all marketable equity securities are classified
as available-for-sale and are carried at fair value. All of Heartland's
marketable securities held at December 31, 1998 and 1997 are classified as
available-for-sale. Unrealized holding gains and losses on securities classified
as available-for-sale are reported as a separate component of partners' capital.
Partners' capital included an unrealized holding loss on marketable securities
classified as available for sale of $2,000 at December 31, 1997. Realized gains
and losses, and declines in value judged to be other than temporary, are
included in net securities gains (losses). Premiums and discounts on marketable
securities are amortized
20
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
on a straight-line basis using the maturity date of the security to determine
the amortization period and such amortization is included in interest income.
The cost of securities sold is based on the specific identification method.
Properties
- ----------
Properties are carried at their historical cost. Expenditures which
significantly improve the values or extend useful lives of the properties are
capitalized. Predevelopment costs including interest, financing fees, and real
estate taxes that are directly identified with a specific development project
are capitalized. Repairs and maintenance are charged to expense as incurred.
Depreciation is provided for financial statement purposes over the estimated
useful life of the respective assets ranging from 7 years for office equipment
and fixtures to 40 years for building and improvements primarily using the
straight-line method.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the particular development property may not be
recoverable. If these events or changes in circumstances are present, the
Company estimates the sum of the expected future cash flows (undiscounted) to
result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss the Company would
measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property.
Housing inventories, (including completed model homes), consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost which is not in excess of fair value. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units sold in
relation to the total anticipated units in the related development project; such
allocation approximates the relative sales value method. Direct construction
costs are allocated to the specific units sold for purposes of determining costs
of sales. Selling and marketing costs, not including those costs incurred
related to furnishing and developing the models and sales office, are expensed
in the period incurred. Costs incurred in the construction of the model units
and related furnishings are capitalized at cost. The Company intends to offer
these units for sale at the completion of a project and, accordingly, no
amortization of direct construction costs is provided. Housing inventories are
reviewed for impairment whenever events or circumstances indicate the fair value
is less than the cost. If these events or changes in circumstances are present,
the Company then would write down the inventory to its fair value.
As of December 31, 1998 and 1997, management is not aware of any impairment
losses in the Company's real estate assets. Accordingly, no impairment losses
were recognized during any of the years presented.
21
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Housing inventories consisted of the following at December 31, 1998, and 1997:
(amounts in thousands)
1998 1997
-------- -------
Land under development............................ $ 4,568 $1,421
Direct construction costs......................... 2,109 1,843
Capitalized project costs......................... 7,301 828
------- ------
$13,978 $4,092
======= ======
Interest, financing fees, and real estate taxes relating to land and
construction in progress are capitalized and, accordingly, are included in the
aggregate cost of housing inventories. These costs are amortized to cost of
sales on a per unit basis in relationship to the total units of the related
development based upon the total estimated budget to be incurred for the
development. This accounting treatment approximates the relative sales value
method. Additionally, the Company provides each home purchaser with a one-year
warranty covering the major components of the unit. The costs associated with
these warranties are immaterial and therefore, expensed as incurred.
Fair Value of Financial Instruments
- -----------------------------------
Management has considered fair value information relating to its financial
instruments at December 31, 1998. For cash and marketable securities, the
carrying amounts approximate fair value. For variable rate debt that reprices
frequently, fair values approximate carrying values. For all remaining financial
instruments, carrying value approximates fair value due to the relatively short
maturity of these instruments.
Income Taxes
- ------------
A publicly-traded partnership generally is not liable for Federal income taxes,
provided that for each taxable year at least 90% of its gross income consists of
certain passive types of income. In such case, each partner includes its
proportionate share of partnership income or loss in its own tax return.
Accordingly, no provision for income taxes is reflected in Heartland's financial
statements.
Heartland's assets are carried at historical cost. At December 31, 1998, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
Segment Reporting
- -----------------
During the fourth quarter of 1998, Heartland adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement No. 131"). Statement No. 131 superseded FASB
Statement of Financial Accounting Standards No. 14, Financial Reporting for
Segments of a Business Enterprise ("Statement No. 14"). Statement No. 131
establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of Statement
No. 131 did not affect Heartland's results of operations or financial position.
The Company has two primary reportable business segments, which consist of land
sales and property development (See Note 11 to the Consolidated Financial
Statements).
22
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Reclassification
- ----------------
Certain reclassifications have been made to the previously reported 1997 and
1996 statements in order to provide comparability with the 1998 statements.
These reclassifications have not changed the 1997 and 1996 results.
3. Restricted Cash
On May 14, 1997, CMC established a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB") pursuant to which CMC pledged cash
in the amount of $500,000 as an interest reserve. During 1998, LNB increased the
line of credit to $8.5 million and extended the maturity date of the loan to
April 30, 1999, pursuant to which CMC pledged additional cash in the amount of
$350,000 as an interest reserve. On December 30, 1997, CMCV renewed a line of
credit agreement in the amount of $3 million with NationsBank ("NB") pursuant to
which CMCV pledged cash in the amount of $100,000 as an interest reserve. This
cash was released in 1998. On November 30, 1998, CMCI executed an agreement for
a $2,500,000 loan with Bank One relating to the Bloomfield project pursuant to
which CMCI has pledged $502,000 in cash as an interest reserve (see Note 4 to
the Consolidated Financial Statements). Restricted cash also includes
purchasers' earnest money escrow deposits of $1,202,000 and $114,000 at December
31, 1998, and 1997, respectively and a $10,000 construction improvement bond
held by the Osprey Cove Homeowners Association. The total restricted cash at
December 31, 1998 and 1997 was $2,564,000 and $724,000, respectively.
4. Notes Payable
On May 14, 1997, CMC signed a line of credit agreement in the amount of $5
million with LNB, pursuant to which CMC granted LNB a first lien on certain
parcels of land in Chicago, IL which had a carrying value of $5,560,000 and
$6,407,000 as of December 31, 1998, and 1997, respectively. Also, pursuant to
the line of credit agreement, CMC pledged cash in the amount of $500,000 as an
interest reserve. The agreement terminated on May 1, 1998, but was extended
through June 30, 1998. On June 30, 1998, the loan was amended extending the
maturity date to April 30, 1999, and increasing the line to $8.5 million. The
Company has subsequently pledged additional cash in the amount of $350,000
bringing the total interest reserve to $850,000. On October 23, 1998, CMC
amended the loan temporarily increasing the line to $9,500,000 and reducing net
worth requirements to $8,500,000. The $1,000,000 temporary increase was paid
back in December 1998. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.0% (8.75% at December 31, 1998). At December 31, 1998,
and 1997, $8,321,000 and $2,000,000 respectively, had been advanced to the
Company by LNB against the line of credit. The Company is currently in
negotiations with LNB to extend the maturity of the loan, modify certain
existing financial covenants, and increase the amount of the credit facility.
While the Company has no reason to believe that the extension, modification of
terms and increased capacity of the credit facility will not be granted, there
can be no assurance that the contemplated transaction will be approved by LNB.
No adjustments related to this uncertainty have been made in the accompanying
financial statements.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with NB to acquire lots and construct houses in the Osprey
Cove subdivision, St. Marys, Georgia, pursuant to which CMC granted a first
mortgage to NB on specific lots in said subdivision with a carrying value of
$5,138,000 and $4,092,000 at December 31, 1998, and 1997, respectively. On
December 30, 1998, Heartland entered into a modification agreement to its
December 30, 1996, revolving line of credit agreement in the amount of $3
million for Osprey Cove to extend the maturity date to June 30, 1999. The line
of credit with NB bears interest at the prime rate of NB plus 1% (8.75% at
December 31, 1998). At maturity, all outstanding advances and any accrued
interest must be paid. In the event the loan is not renewed, it will be extended
for a period of six months to allow for completion of homes then under
construction, but no new construction will be commenced. NB had advanced
$2,288,000 and $1,750,000 at December 31, 1998, and 1997, respectively against
the revolving line of credit facility.
23
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Under the terms of the agreement, CMCV is required to maintain a minimum net
worth of $500,000 and a minimum leverage ratio not to exceed of 4:1.
In December 1998 the Company signed a commitment letter for $3,000,000 with NB
to construct homes in the Longleaf community. NB makes individual loans on each
home at the time construction begins. The third party developer subordinates its
lot to NB's construction loan. As of December 31, 1998, the Company had
outstanding balances on 7 term loans totaling $383,000. The carrying value of
the related inventory at December 31, 1998, totaled $546,000. The term of each
loan is one year and bears interest at the NB prime rate plus 1% (8.75% at
December 31, 1998).
On November 30, 1998, Heartland executed an agreement for a $2,500,000 loan with
Bank One relating to the Bloomfield project. The two year loan bears interest at
the prime rate (7.75% at December 31,1998). $500,000 of the loan was placed in
an interest reserve. The loan is collateralized by the Phase II land with a
carry value of $918,000 at December 31, 1998. In addition, Bank One is providing
a $1,750,000 development loan, a letter of credit for $179,000 to the City of
Rosemount and a $4,000,000 revolving credit line for the construction of homes;
these credit facilities were executed in February 1999. The Company believes
that no additional financing will be needed for Phase I of the Rosemount
community.
On January 6, 1999, the Kinzie Station 2.5 year loan agreement in the amount of
$29,812,000 was signed with Corus Bank N.A. The loan bears interest at the prime
rate plus one percent. This loan is collateralized by the real estate contained
in the project. In conjunction with the loan, a Construction Contract with the
guaranteed maximum price of $24,710,000 was entered into with a general
contractor. The first draw was completed in January 1999.
During the years ended December 31, 1998, 1997, and 1996, the Company incurred
and paid interest on loans in the amount of $802,000, $189,000 and $108,000,
respectively, of which $802,000, $126,000 and $0 was capitalized. Interest
expense in 1997 and 1996 is recorded in general and administrative expense.
5. Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. Environmental costs which are
incurred in connection with Heartland's development activities are expensed or
capitalized as appropriate.
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives. (See Note 8).
There is not sufficient information to reasonably estimate all the environmental
liabilities of which management is aware. Accordingly, management is unable to
determine whether environmental liabilities which management is unable to
reasonably estimate will or will not have a material effect on Heartland's
results of operations or financial condition.
24
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
6. Related Party Transactions
CMC has a management agreement with HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On December 29,
1995, HTI advanced CMC approximately $648,000 and on February 14, 1996 HTI
advanced an additional $425,000 for past due management fees. Each advance was
in the form of a note payable on demand and bore interest at the prime rate plus
2.5%. Interest expense on the note was approximately $107,000 for 1996. On
December 31, 1996, CMC paid HTI $1,180,400 related to previously accrued
management fees including $107,400 for interest related to the past due amounts.
At December 31, 1997, the management fee accrued and unpaid was approximately
$425,000 representing deferred management fees for the year ended December 31,
1997. In February 1998, CMC paid HTI the $425,000 management fee. $142,000 of
the 1998 management fee was paid in 1998.
Under a management services agreement, HTI reimburses Heartland for reasonable
and necessary costs and expenses for services totaling $322,000 for the year
ended December 31, 1998, $228,000 for 1997 and $180,000 for 1996. HTI owes CMC
$442,000 as of December 31, 1998, related to these expenses.
7. Leases
Heartland is a lessor under numerous property lease arrangements with varying
lease terms. The majority of the leases are cancelable by either party upon
thirty to sixty days notice and provide nominal rental income to Heartland. The
leases generally require the lessee to construct, maintain and remove any
improvements, pay property taxes, maintain insurance and maintain the condition
of the property. Heartland has several major leases on buildings and land in
Chicago, Illinois, Milwaukee, Wisconsin and Minneapolis, Minnesota which account
for over half of Heartland's annual rental income.
Heartland is lessor with one non-cancellable operating lease for $114,400 per
year that will continue as long as the lessee operates its railroad line.
Heartland leases its office premises as well as offices at certain development
sites and certain equipment under various operating leases. Future minimum lease
commitments under non-cancellable operating leases are as follows:
1999............................................ $310,000
2000............................................ 192,000
2001............................................ 115,000
2002............................................ 48,000
--------
Total........................................ $665,000
========
Rent expense for the years ended December 31, 1998, 1997, and 1996 was $294,000,
$133,000, and $132,000, respectively.
8. Legal Proceedings and Contingencies
At December 31, 1998, and 1997, Heartland's allowance for claims and liabilities
was approximately $2.8 million and $2.2 million, respectively. During the year
ended December 31, 1998, 1997, and 1996 provisions for, a $1,461,000, $78,000
and $1,141,000, respectively, were recorded with respect to environmental
matters. Significant legal matters are discussed below.
Soo Line Matters
- ----------------
25
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The Soo Line Railroad Company (the "Soo") has asserted that the Company is
liable for certain occupational injury claims filed after the consummation of an
Asset Purchase Agreement and related agreements ("APA") by former employees now
employed by the Soo. The Company has denied liability for each of these claims
based on a prior settlement with the Soo. The Soo has also asserted that the
Company is liable for the remediation of releases of petroleum or other
regulated materials at six different sites acquired from the Company located in
Iowa, Minnesota and Wisconsin. The Company has denied liability based on the
APA.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements on many of these
claims. As a result of Soo's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
- ------------------
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest.
On October 1, 1998, the Company entered into a Settlement Agreement with the
Port in which the Port released all claims and the Company agreed to either pay
$1.1 million or to convey real property to be agreed upon between the parties at
a later date. At December 31, 1998, and 1997, Heartland's allowance for claims
and liabilities for this site was $1,100,000 and $290,000, respectively.
The Company will not make a claim on its insurance carriers in this matter
because the settlement amount does not exceed the self insured retention under
the applicable insurance policies.
Wheeler Pit, Janesville, Wisconsin
- ----------------------------------
In November 1995 the Company settled a claim with respect to the Wheeler Pit
site near Janesville, Wisconsin. The settlement calls for the Company to pay
General Motors $800,000 at $200,000 annually for four years, 32% of the
monitoring costs for twenty-five years beginning in 1997 and 32% of governmental
oversight costs; the oversight costs not to exceed $50,000. Payments of $200,000
were made in 1995, 1996, 1997 and 1998. A payment of $50,000 for past government
oversight costs was made in October 1998. At December 31, 1998, and 1997,
Heartland's allowance for claims and liabilities for this site was $184,000 and
$408,000, respectively, of which $171,000 and $358,000 represents the annual
payments discounted at 4.54% and 6.07% respectively.
Miscellaneous Environmental Matters
- -----------------------------------
Under environmental laws, liability for hazardous substance contamination is
imposed on the current owners and operators of the contaminated site, as well as
the owner or the operator of the site at the time the hazardous substance was
disposed or otherwise released. In most cases, this liability is imposed without
regard to fault. Currently, the Company has known environmental liabilities
associated with certain of its properties arising out of the activities of its
predecessor or certain of its predecessor's lessees and may have further
material environmental liabilities as yet unknown. The majority of the Company's
known environmental liabilities stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad or in operations
conducted by its predecessor's lessees. The following is a summary of material
known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is liable for some or all of the investigation and remediation of
certain properties in Montana sold by its predecessor's reorganization trustee
26
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
prior to the consummation of its predecessor's reorganization. The Company has
denied liability at certain of these sites based on the reorganization bar of
the Company's predecessors. The Company's potential liability for the
investigation and remediation of these sites was discussed in detail at a
meeting with DEQ in April 1997. While DEQ has not formally changed its position,
DEQ has not elected to file suit. Management is not able to express an opinion
at this time whether the cost of the defense of this liability or the
environmental exposure in the event of the Company's liability will or will not
be material.
At twelve separate sites, the Company has been notified that releases arising
out of the operations of a lessee, former lessee or other third party have been
reported to government agencies. At each of these sites, the third party is
voluntarily cooperating with the appropriate agency by investigating the extent
of any such contamination and performing the appropriate remediation, if any.
The Company has petroleum groundwater remediation projects or long term
monitoring programs at Austin, Minnesota, Farmington, Minnesota, and Miles City,
Montana. At December 31, 1998, and 1997, Heartland's aggregate allowance for
claims and liabilities for these sites were approximately $41,000 and $187,000,
respectively.
In December 1989, the Minnesota Pollution Control Agency ("MPCA") added a site
which includes the Company's Pig's Eye Yard site in St. Paul, Minnesota to its
Permanent List of Priorities based on historical records and an initial
investigation of soil and groundwater conditions adjacent to Pig's Eye Yard.
Portions of this site had been leased to the City of St. Paul for a landfill and
to the Metropolitan Waste Control Commission for disposal of incinerator ash.
The site, which includes portions of the adjacent municipal waste water
treatment plant, was placed on the Superfund Accelerated Clean Up Model list in
1993. No potentially responsible parties ("PRPs") have been formally named at
this site. The Company has reached an agreement to sell its interest in this
property to the city of St. Paul for $630,000, subject to final documentation.
The Company has an interest in property at Moses Lake, Washington previously
owned and used by the United States government as an Air Force base. Sampling by
the Army Corps of Engineers has indicated the presence of various regulated
materials, primarily in the groundwater, which were most likely released as a
result of military or other third party operations. A portion of the Company's
property is located over a well field which was placed on the national priority
list in October 1992. The Company has not been named as a PRP.
The Company is voluntarily investigating the environmental condition of a
property in Minneapolis, Minnesota in connection with a contract to sell the
property. The investigation has indicated certain metal impacts in the soil and
groundwater. The Company's estimate at this time is that the remediation
construction may cost between $425,000 and $881,000. The contract sale price is
$562,000. At December 31, 1998, and 1997, Heartland's aggregate allowance for
claims and liabilities for these sites was approximately $518,000 and $472,000,
respectively.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company, or
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
27
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
9. Compensation and Benefits
An employment agreement with the President and Chief Executive Officer of CMC
provides for a base salary of $275,000 through May 30, 2002, all or a portion of
which may be deferred at the officer's election. The contract provides incentive
compensation equal to 10% of the value of all amounts distributed to Unitholders
and the holder of the Class B Interest in excess of the "Capital Amount" as
defined. The Capital Amount approximates the average market value of the Units
for the first 30 trading days after the Distribution Date, subject to adjustment
as set forth in the contract. During or after the term of employment, incentive
payments will be made with respect to distributions by Heartland during
Heartland's term of existence, and if distributions are made subsequent to such
officer's death, payments will be made to his designee or estate. The contract
also provides that in the event of a "change of control of Heartland" during or
after the term of employment, the officer shall receive a lump sum payment of
$1,250,000.
Heartland sponsors a Group Savings Plan, which is a salary reduction plan
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986.
All full-time permanent employees of Heartland are eligible to participate in
the plan. A participating employee can authorize contributions to the plan in
the form of salary reductions of up to the maximum allowed by the Internal
Revenue Code in any plan year. In 1998 Heartland made matching contributions of
50% of each participant's contribution to the plan. Beginning January 1, 1999,
Heartland will make matching contributions of 25%. Participating 1998 employees
are fully vested with respect to salary reduction and Heartland's contributions.
For all future participants, they are fully vested with respect to salary
reduction immediately but the matching contribution vests at 20% per year.
Benefits are normally distributed upon retirement (on or after age 65), death or
termination of employment, but may be distributed prior to termination of
employment upon showing of financial hardship. Heartland contributed to the plan
approximately $80,000 in 1998, $60,000 in 1997, and $65,000 in 1996 on behalf of
all employees.
10. Marketable Securities
The following is a summary of marketable securities:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
December 31, 1998
U.S. Treasury securities and obligations of U.S.
government agencies............................... $ 149 $ -- $ -- $ 149
======= ========== ======= ========
At December 31, 1998 and 1997 all marketable securities were classified as
available-for-sale. Proceeds from sale and maturities of debt securities during
1998, 1997, and 1996, were $297,000, $9,015,000, and $27,238,000, respectively.
The gain on sale of securities in 1997 was approximately $3,000. Proceeds from
sales in 1998 and 1996 approximated cost for all securities at the date of sale.
The net adjustment to unrealized holding gains (losses) on marketable securities
included as a separate component of partners' capital was $2,000, $0 and
$(44,000) for the years ended December 31, 1998, 1997 and 1996, respectively.
28
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The cost and estimated fair value of debt securities at December 31, 1998, by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because the issuers of the securities may have the right
to prepay obligations without prepayment penalties.
Estimated
Amortized Fair
Cost Value
-------------- --------------
(in thousands) (in thousands)
Due in one year or less................. $149 $149
Due after one year through three years.. --- ---
Due after three years................... --- ---
---- ----
Total................................ $149 $149
==== ====
11. Reportable Segments
The following tables set forth the reconciliation of net income and total assets
for Heartland's reportable segments for the years ended December 31, 1998, 1997
and 1996 (See Note 2 to the Consolidated Financial Statements).
Property
1998 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- ---------------------------------- -------------- --------------- ------------- ------------
Revenues:
- ---------
Property sales.................... $1,814 $ 4,417 $ 0 $ 6,231
Less: cost of property sales...... 215 4,190 0 4,405
------ ------- ------- -------
Gross profit on property sales. 1,599 227 0 1,826
Rental income..................... 886 0 0 886
Portfolio income.................. 0 0 63 63
Miscellaneous income.............. 0 514 0 514
------ ------- ------- -------
Total Net Revenues............. 2,485 741 63 3,289
------ ------- ------- -------
Expenses:
- ---------
Selling........................... 0 2,876 0 2,876
Real estate taxes................. 209 190 0 399
General and administrative........ 986 327 2,775 4,088
Environmental Expense............. 248 25 1,188 1,461
Management fee.................... 0 0 425 425
Depreciation and amortization..... 0 84 40 124
------ ------- ------- -------
Total Expenses................. 1,443 3,502 4,428 9,373
------ ------- ------- -------
Net Income (Loss).............. $1,042 $(2,761) $(4,365) $(6,084)
====== ======= ======= =======
Properties, net of accumulated
depreciation............... $ 937 $26,296 $ 819 $28,052
====== ======= ======= =======
Total assets................... $1,290 $29,403 $ 2,538 $33,231
====== ======= ======= =======
29
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Property
1997 (amounts in thousands) Land Sales(1) Development(2) Corporate (3) Consolidated
- ----------------------------------- ------------- -------------- ------------- ------------
Revenues:
- ---------
Property sales..................... $1,708 $ 5,419 $ 0 $ 7,127
Less: cost of property sales....... 125 3,282 0 3,407
------ ------- ------- -------
Gross profit on property sales.. 1,583 2,137 0 3,720
Rental income...................... 1,104 0 0 1,104
Portfolio income................... 0 0 62 62
Miscellaneous income............... 0 286 0 286
------ ------- ------- -------
Total Net Revenues............ 2,687 2,423 62 5,172
------ ------- ------- -------
Expenses:
- ---------
Selling............................ 0 1,903 0 1,903
Real estate taxes.................. 182 521 0 703
General and administrative......... 565 50 3,517 4,132
Environmental Expense.............. 0 78 0 78
Management fee..................... 0 0 425 425
Depreciation and amortization...... 0 67 27 94
------ ------- ------- -------
Total Expenses................ 747 2,619 3,969 7,335
------ ------- ------- -------
Net Income (Loss)............. $1,940 $ (196) $(3,907) $(2,163)
====== ======= ======= =======
Properties, net of accumulated
depreciation................ $1,171 $21,371 $ 654 $23,196
====== ======= ======= =======
Total assets.................. $1,422 $21,854 $ 3,562 $26,838
====== ======= ======= =======
30
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Property
1996 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- ----------------------------------- -------------- --------------- ------------- ------------
Revenues:
- ---------
Property sales...................... $1,218 $5,700 $ 0 $6,918
Less: cost of property sales........ 81 1,593 0 1,674
------ ------ ------- ------
Gross profit on property sales... 1,137 4,107 0 5,244
Rental income....................... 1,039 0 0 1,039
Portfolio income.................... 0 0 419 419
Miscellaneous income................ 0 223 0 223
------ ------ ------- ------
Total Net Revenues............... 2,176 4,330 419 6,925
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