<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File Number: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3606475
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
547 WEST JACKSON BOULEVARD, CHICAGO, ILLINOIS 60661
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(Address of principal executive offices) (Zip Code)
312/294-0440
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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Part 1 of 16
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS:
Cash............................................................... $ 207 $ 44
Restricted cash.................................................... 300 0
Marketable securities (at market).................................. 7,887 5,905
Accounts receivable................................................ 685 762
Accrued interest receivable........................................ 33 126
Prepaid and other assets........................................... 191 257
Notes receivable................................................... 55 0
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Total........................................................... 9,358 7,094
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Properties
Land held for sale................................................. 1,298 1,367
Land held for development.......................................... 8,988 9,337
Buildings and other................................................ 1,614 1,571
Capitalized predevelopment costs................................... 8,672 9,194
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Total property............................................... 20,572 21,469
Less accumulated depreciation...................................... 803 722
------------- ------------
Net properties.................................................. 19,769 20,747
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TOTAL ASSETS.................................................. $ 29,127 $ 27,841
============= ============
LIABILITIES:
Accounts payable and accrued expenses.............................. $ 656 $ 879
Accrued real estate taxes.......................................... 1,274 1,520
Allowance for claims and liabilities............................... 2,227 2,492
Unearned rents and deferred income................................. 539 528
Other liabilities.................................................. 100 114
Note payable to Milwaukee Land Company............................. 1,073 648
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TOTAL LIABILITIES............................................... 5,869 6,181
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PARTNERS' CAPITAL:
Unrealized holding gain on marketable securities................... 20 42
General Partner.................................................... 104 89
Class A Limited Partners - 2,142,438 units authorized, issued and
outstanding...................................................... 13,532 11,935
Class B Limited Partner............................................ 9,602 9,594
------------- ------------
Total partners' capital......................................... 23,258 21,660
------------- ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............................ $ 29,127 $ 27,841
============= ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 2 of 16
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HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
(dollars in thousands except per unit data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------- ------- ------ -------
<S> <C> <C> <C> <C>
REVENUES:
--------
Property sales................................. $5,503 $ 538 $6,834 $ 1,669
Less: Cost of property sales.................. 1,193 291 1,662 637
------ ------ ------ -------
Gross profit on property sales............. 4,310 247 5,172 1,032
Portfolio income............................... 70 204 269 433
Rental income.................................. 240 515 802 1,033
Other revenue.................................. 157 0 165 0
------ ------ ------ -------
TOTAL NET REVENUES........................ 4,777 966 6,408 2,498
------ ------ ------ -------
OPERATING EXPENSES:
------------------
Selling expenses............................... 99 131 328 286
General and administrative expenses............ 1,399 1,181 4,060 5,120
Depreciation and amortization.................. 28 24 82 98
Management fee................................. 106 107 318 319
------ ------ ------ -------
TOTAL EXPENSES............................ 1,632 1,443 4,788 5,823
------ ------ ------ -------
NET INCOME (LOSS)......................... $3,145 $ (477) $1,620 $(3,325)
====== ====== ====== =======
NET INCOME (LOSS) ALLOCATED
TO GENERAL PARTNER........................ $ 30 $ (4) $ 15 $ (33)
====== ====== ====== =======
NET INCOME (LOSS) ALLOCATED TO
CLASS B LIMITED PARTNER................. $ 15 $ (3) $ 8 $ (17)
====== ====== ====== =======
NET INCOME (LOSS) ALLOCATED TO
CLASS A LIMITED PARTNERS................ $3,100 $ (470) $1,597 $(3,275)
====== ====== ====== =======
NET INCOME (LOSS) PER CLASS A
LIMITED PARTNERSHIP UNIT................ $ 1.45 $ (.22) $ .75 $(1.53)
====== ====== ====== =======
</TABLE>
<PAGE>
HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 1,620 $ (3,325)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......................................... 82 98
Amortization of security premium/discount............................. (13) (8)
Gain on sales of properties........................................... (5,172) (1,032)
(Gain) loss on sale of securities..................................... (41) 48
Proceeds from property sales.......................................... 6,834 1,669
Net change in assets and liabilities:
(Decrease) increase in claims and liabilities......................... (265) 764
Decrease (increase) in accounts and interest receivables.............. 170 (466)
(Decrease) increase in accounts payable and accrued liabilities....... (362) 729
(Decrease) increase in management fee due MLC......................... (107) 319
Net change in other assets and liabilities............................ 62 218
---------- ----------
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES................ 2,808 (986)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures including land and development costs............... (765) (741)
(Advance) payment on note receivable.................................... (55) 80
Net (purchases) sales and maturities of marketable securities........... (1,950) 918
---------- ----------
NET CASH FLOW (USED IN) PROVIDED BY INVESTING ACTIVITIES................ (2,770) 257
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Restricted cash......................................................... (300) 0
Proceeds from note payable to affiliate................................. 425 0
---------- ----------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.......................... 125 0
---------- ----------
Increase (decrease) in cash............................................. 163 (729)
Cash at December 31, 1995 and 1994...................................... 44 1,075
---------- ----------
CASH AT SEPTEMBER 30, 1996 AND 1995..................................... $ 207 $ 346
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 16
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
1. CONSOLIDATION
The unaudited condensed consolidated financial statements include the accounts
of: Heartland Partners, L.P. ("Heartland"); CMC Heartland Partners ("CMC"), its
99.99% owned operating partnership; Heartland Development Corporation, 100%
owned by Heartland; and CMC Heartland Partners I, Limited Partnership, 1%
general partnership interest owned by Heartland Development Corporation and 99%
owned by CMC (collectively, the "Company").
All adjustments which are in the opinion of management necessary to fairly
present the financial statements have been made and are of a normal recurring
nature. The results of operations for the quarter and nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
Certain reclassifications have been made to the previously reported 1995
statements in order to provide comparability with the 1996 interim statements.
These reclassifications have not changed the 1995 results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the unaudited condensed
consolidated financial statements should be read in connection with Heartland's
audited consolidated financial statements for the fiscal year ended December 31,
1995, including the notes thereto.
2. CONTINGENCIES
In connection with its formation, Heartland assumed primary responsibility and
liability for the resolution and satisfaction of most of the liabilities for
claims remaining under the plan of reorganization of the predecessor of CMC Real
Estate Corporation ("CMCRE", formerly a wholly-owned subsidiary of Chicago
Milwaukee Corporation ("Chicago Milwaukee"), and previously named the Chicago,
Milwaukee, St. Paul and Pacific Railroad Company (the "Railroad")), certain
contingent liabilities with respect to the real estate properties conveyed to
Heartland, and the costs and expenses incurred in connection with such claims
and other contingent liabilities (collectively, the "Heartland Assumed
Liabilities").
It is Heartland's practice to evaluate environmental liabilities associated with
certain of its properties on a regular basis. An allowance is provided with
regard to potential environmental liabilities, including remediation, legal and
consulting fees, and government oversight, 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 from third parties with respect to the liability. 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.
Page 5 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates
based on professional experience but necessarily rely on certain significant
assumptions, including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives.
There is not sufficient information to reasonably estimate all the environmental
liabilities of which management is aware. Accordingly, management is unable to
determine whether environmental liabilities which management is unable to
reasonably estimate will or will not have a material effect on Heartland's
results of operations or financial condition.
At September 30, 1996, Heartland's allowance for claims and liabilities was
approximately $2.2 million of which $.4 million was for the resolution of non-
environmental claims resulting from the reorganization of the Railroad and $1.8
million was for environmental matters.
3. RESTRICTED CASH
On March 15, 1996, CMC signed a line of credit agreement in the amount of $3
million with LaSalle 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 $300,000 as an interest reserve. Advances against
the line of credit bear interest at the prime rate of LNB plus 1.0% (9.25% at
September 30, 1996). The agreement terminates on March 14, 1997, at which time
all outstanding advances and any accrued interest must be paid. Under the terms
of the agreement, CMC is required to maintain a minimum net worth in excess of
$17 million, liquid assets in excess of $1 million, is limited in incurring
additional indebtedness and restricted from making certain distributions. At
September 30, 1996, no advances have been made against the line of credit.
4. PROPERTY SALES
Property sales for the third quarter and the first nine months of 1996 include
$4.4 million for the sale of 15.2 acres of the Goose Island property in Chicago,
IL and $.4 million for the sale of .65 acres located at North Ave in Chicago,
IL. Also included in 1996 property sales is $.8 million for the sale of the
Cherry Street property in Milwaukee, WI, which closed in the second quarter of
1996. Gross profit on the Goose Island and North Ave. sales was $3,346,000 and
on the Cherry Street sale was $367,000.
Page 6 of 16
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HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for operating activities has been derived primarily from proceeds of
property sales, rental income and portfolio income. Cash and marketable
securities at market (excluding restricted cash) approximated $8.1 million at
September 30, 1996. This is a increase of approximately $2.1 million from
December 31, 1995. This increase is comprised of a $163,000 increase in cash
and a $1,982,000 net increase in marketable securities.
Cash flow provided by operating activities was $2,808,000 for the first nine
months of 1996 compared to cash flow used in operations of $986,000 for the
first nine months of 1995. The cash flow statement shows the detail of the
changes in current assets and liabilities.
Proceeds from property sales provided cash flow of $6,834,000 for the first nine
months of 1996 compared to $1,669,000 for the first nine months of 1995. The
1996 proceeds include $5.6 million for the three properties under contract for
sale at March 15, 1996 (referred to in Heartland Partners, L.P. March 31, 1996
Form 10-Q filing) (see Note 4 of Notes to the Condensed Consolidated Financial
Statements).
CMC has entered into a letter of intent for the development of approximately
10.3 acres at Goose Island Industrial Park in Chicago, IL. Under the terms of
the letter of intent, the Company would enter into a joint venture with a
broker/developer and a contractor. The Company would receive $2.25 million by
the end of 1997. The Company expects to close the joint venture in late 1996 or
early 1997.
CMC has also signed letters of intent for a project in Lake Geneva, Wisconsin
which names the Company as the exclusive builder for certain properties
controlled by Geneva National Real Estate Group, LLC and Bank One at Geneva
National in Lake Geneva, WI. Under the terms of the letters of intent, CMC
would build up to 255 homes and would also receive options on property to build
additional units in the future.
In addition, CMC has signed a letter of intent for a project in St. Mary's,
Georgia which names the Company as the exclusive builder for Osprey Cove Inc.
CMC expects to sign a contract with Osprey Cove Inc. prior to the end of
November 1996.
The Goose Island, Lake Geneva and St. Mary's letters of intent contain
contingencies typical in such transactions, some of which are outside of the
control of the Company. In addition, the letters of intent are subject to the
execution of definitive agreements that are mutually acceptable among the
parties.
Portfolio income is derived from the investment of excess cash. As of September
30,1996, CMC had approximately $7.9 million (fair value) invested in marketable
securities. Of this amount, $6.6 million (84%) was invested in U.S. Treasuries
and $1.3 million (16%) was invested in a high yield mutual fund. Portfolio
income for the third quarter and the first nine months of 1996 was $70,000 and
$269,000 respectively compared to $204,000 and $433,000 for the similar periods
of the previous year.
Page 7 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
CMC has approximately 200 active leases on its real estate properties. Rental
income from these leases was $802,000 for the first nine months of 1996 and
$1,033,000 for the first nine months of 1995.
At September 30, 1996, CMC had designated 20 sites, or approximately 931 acres
with a book value of $8,988,000 for development. Capitalized expenditures at
these sites were $259,000 for the three months ended September 30, 1996 compared
to $163,000 for the similar period of 1995. At September 30, 1996, capitalized
costs on development projects totaled $8.7 million. Expenditures which
significantly increase the value and are directly identified to a specific
project are capitalized.
At September 30, 1996, the land held for sale was comprised of approximately
16,208 acres with a book value of approximately $1.3 million. It will be
disposed of in an orderly fashion. Currently, CMC does not foresee disposing of
all of the land before the end of 1998.
It is the Company's practice to evaluate environmental liabilities associated
with certain of 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 $1.8 million at September 30, 1996 for possible environmental
liabilities, including remediation, legal and consulting fees and government
oversight. 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.
Heartland continues to be responsible for the resolution of the Heartland
Assumed Liabilities, totaling $2.2 million at September 30, 1996. Heartland
Assumed Liabilities are comprised of $1.8 million for potential environmental
costs (see preceding paragraph) and $.4 million for resolution of claims
resulting from the reorganization of the Railroad.
Heartland does not at this time anticipate that those claims or assessments for
which Heartland has established a reserve 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 it will continue to be able
to assert the bankruptcy bar arising from the reorganization of the Railroad 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, but anticipates the necessity of utilizing outside financing
to fund development projects. Based on recent discussions with
Page 8 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
outside financing sources, management believes that financing will be available
for projects currently contemplated by Heartland. The Company has established a
$3.0 million line of credit at LaSalle National Bank. At September 30, 1996, no
advances have been made against the line of credit.
Page 9 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
Operations for the quarter and nine months ended September 30, 1996 resulted in
net income of $3,145,000 and $1,620,000 respectively, of which $3,100,000 and
$1,597,000 was allocated to the Class A limited partners, or $1.45 and $.75 per
Class A unit. Operations for the same quarter and nine months of 1995 resulted
in a loss of $477,000 and $3,325,000 respectively, of which $470,000 and
$3,275,000 was allocated to the Class A limited partners, or $.22 and $1.53 per
Class A unit.
Property sales for the third quarter and first nine months of 1996 were
$5,503,000 and $6,834,000 compared to $538,000 and $1,669,000 for the similar
period of 1995. Third quarter 1996 sales include $4.4 million for the sale of
15.2 acres of the Goose Island property in Chicago, IL and $.4 million for the
sale of .65 acres located at North Ave. in Chicago, IL. The 1995 third quarter
property sales were comprised primarily of undeveloped land.
Portfolio income for the third quarter of 1996 was $70,000 compared to $204,000
for the third quarter of 1995. Portfolio income for the first nine months of
1996 was $269,000 compared to $433,000 for the similar period of 1995.
Portfolio income for 1996 includes a gain on the sale of securities of $41,000.
The similar period of 1995 included a loss on the sale of securities of $48,000.
Net of any gain or loss on sale of securities, portfolio income for the first
nine months of 1996 decreased $253,000 as compared to the first nine months of
1995. This decrease in portfolio income is due to the inclusion of $80,000 in
the third quarter and the first nine months of 1995 for interest received from
the Soo Line related to back rent and to a decrease in interest income resulting
from a decrease in amounts invested in marketable securities.
Rental income for the third quarter and first nine months of 1996 was $240,000
and $802,000 respectively compared to $515,000 and $1,033,000 for the similar
periods of 1995. The decrease in rental income for the third quarter and first
nine months of 1996 as compared to 1995 is due to the inclusion in the third
quarter and first nine months of 1995 of $244,000 of back rent from the Soo
Line.
Total expenses for the third quarter of 1996 were $1,632,000 compared to
$1,443,000 for the same period of 1995. The increase of $189,000 for the third
quarter of 1996 as compared to the third quarter of 1995 is primarily due to an
increase in environmental expenses for the third quarter of 1996 as compared to
1995. Total expenses for the first nine months of 1996 and 1995 were $4,788,000
and $5,823,000 respectively. The decrease of $1,035,000 for the first nine
months of 1996 as compared to 1995 is primarily due to a decrease in
environmental expenses. The first nine months of 1995 includes an accrual for
environmental expenditures at the Janesville, WI Wheeler Pit site which amounted
to approximately $1,100,000. The accrual was done in the second quarter of 1995
and the matter was settled in November 1995 with Heartland agreeing to make
certain payments over several years.
Page 10 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS AND CONTINGENCIES
At September 30, 1996, Heartland's allowance for claims and liabilities was
approximately $2.2 million. During the quarter ended September 30, 1996, a
$321,000 provision was recorded in respect of environmental matters.
Certain litigation, government agency notice or private notice may have been
directed to Chicago Milwaukee due to historical events connected with the
operation of the Railroad. Although such litigation or notice may name Chicago
Milwaukee, the Company, as part of the Heartland Assumed Liabilities, has
assumed any liability and will receive any recovery which may arise out of such
matters. Any such matters which are material are discussed below.
Soo Line Matters
----------------
In April 1990, the Soo Line Railroad Company (the "Soo") filed suit against
Chicago Milwaukee and CMCRE in the United States District Court for the Northern
District of Illinois, asserting claims for certain accounts and disputes arising
out of the sale of certain assets to the Soo pursuant to an Asset Purchase
Agreement and related agreements ("APA"). Certain of these matters were settled
in 1994, with the Company's payment of $153,120 to the Soo. Judgement on the
remainder of the claims was against the Soo in July 1995, for which the Soo paid
the Company $339,368 in November 1995. The Company and the Soo settled the
Company's additional claims for attorney's fees and pre-judgement interest by
the Soo's payment to the Company of $100,000 in July 1996.
Outside the litigation, the Soo has asserted that the Company is liable for
certain occupational injury claims filed after the consummation of the APA by
former Railroad employees now employed by the Soo. The Company has denied
liability for each of these claims based on a prior settlement with the Soo, in
which the Soo agreed to accept liability for occupational disease claims of
former Railroad employees. 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 located in Iowa, Minnesota and Wisconsin. The Company has
denied liability based on the contracts between the parties.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements in 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 November 1991, the Company moved the United States District Court for the
Northern District of Illinois, which acted as the reorganization court for the
reorganization of the Railroad (the "Reorganization Court") to bar claims
asserted by the Union Pacific Railroad Company ("Union Pacific") arising out of
a 1980 sale by the Railroad reorganization trustee of a rail yard in Tacoma,
Washington to Union Pacific. Union Pacific
Page 11 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
asserted claims against the Company under the Comprehensive Environmental
Response Compensation and Liability Act of 1980 ("CERCLA"), state environmental
law and the sale contract. Later in November 1991, Union Pacific filed suit in
the United States District Court for the Western District of Washington
asserting essentially the same claims which the Company moved the Reorganization
Court to bar. The litigation in Washington has been stayed pending resolution
of the Company's motion to bar Union Pacific's claims before the Reorganization
Court.
On August 18, 1993, the Seventh Circuit affirmed the bar with respect to Union
Pacific's claims under CERCLA and remanded the matter back to the Reorganization
Court for further findings with respect to Union Pacific's claims under state
law. On February 28, 1996, the Seventh Circuit held that the Union Pacific's
claim under Washington environmental law was not barred by the Railroad's
reorganization and subsequently denied the Company's motion for rehearing. The
Company has filed a petition for Writ of Certiorari to the United States Supreme
Court. On October 7, 1996, the Supreme Court invited the Solicitor General of
the United States to submit a brief on whether the Supreme Court should grant
certiorari.
A draft feasibility study dated November 1994, submitted to the Washington
Department of Ecology on behalf of a proposed purchaser of the site estimates
that the selected remedial alternative for a portion of the site may cost
approximately $3.65 million.
Management is not able to reasonably predict the outcome of this matter or, in
the event of an adverse outcome, to reasonably estimate the amount of the
Company's liability. Accordingly, management has only recorded a reserve in the
amount of estimated attorney fees. Management believes it has meritorious
defenses in this matter and intends to pursue them vigorously.
Cook County, Illinois Tax Issue
-------------------------------
By undated letters delivered to the Company on March 1, 1996, the Office of the
Assessor of Cook County, Illinois gave notice that the Assessor intended to levy
back taxes on certain of the Company's properties due to alleged previously
untaxed assessments. This matter was resolved in August 1996, with the agreed
assessment resulting in a final back tax of $6,056.
Miscellaneous Environmental Matters
-----------------------------------
The Company has known environmental liabilities associated with certain of its
properties arising out of the activities of the Railroad or certain of the
Railroad'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 Railroad lessees. The
following is a summary of material, known environmental matters, in addition to
those described above.
At eleven 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.
Page 12 of 16
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HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
The Company has petroleum groundwater remediation projects underway at Austin,
Minnesota, Miles City, Montana, and Milwaukee, Wisconsin.
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 named at this site.
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. The Army
Corps of Engineers is performing sampling for materials which the Air Force may
have released during its operation of the base. Preliminary testing 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 the
wellfield which was placed on the national priority list in October 1992. The
Company has not been named as a PRP.
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 the Railroad's insurers of certain of the
Company's environmental liabilities. Due to the high deductibles on these
policies, the Company has not yet demanded that any insurer indemnify or defend
the Company. Consequently, management has not formed an opinion regarding the
legal sufficiency of the Company's claims for insurance coverage.
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K; No report on Form 8-K was filed during the quarter
ended September 30, 1996.
Page 13 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
(Registrant)
Date: November 14, 1996 BY: /s/ Edwin Jacobson
----------------------------
Edwin Jacobson
President and Chief Executive Officer
Milwaukee Land Company
the General Partner
Date: November 14, 1996 BY: /s/ Leon F. Fiorentino
----------------------------
Leon F. Fiorentino
Vice-President, Secretary
and Treasurer of
Milwaukee Land Company,
the General Partner
Page 14 of 16
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 1996
EXHIBIT INDEX
-------------
Exhibit Number Description Sequential Page Number
- -------------- ----------- ----------------------
27 Financial Data Schedule 15
Page 15 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 507
<SECURITIES> 7,887
<RECEIVABLES> 685
<ALLOWANCES> 0
<INVENTORY> 20,572
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 803
<TOTAL-ASSETS> 29,127
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 23,258
<TOTAL-LIABILITY-AND-EQUITY> 29,127
<SALES> 6,834
<TOTAL-REVENUES> 8,070
<CGS> 1,662
<TOTAL-COSTS> 1,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,620
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
