<PAGE>
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 (Fee Required)
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
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. [X]
The aggregate market value of the Registrant's Class A Limited Partnership Units
held by non-affiliates of the Registrant, computed by reference to the last
reported sales price of the Registrant's units on the American Stock Exchange as
of March 10, 1997, was approximately $17.2 million. On that date there were
2,142,438 units outstanding.
Exhibit index appears on Page 37.
<PAGE>
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, development, leasing and
sale of real estate properties. CMC Heartland Partners ("CMC") is an operating
general partnership owned 99.99% by Heartland and .01% by Milwaukee Land Company
("MLC"). MLC 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 Heartland Partners I, Limited Partnership
("CMCI"), a Delaware limited partnership in which HDC has a 1% general
partnership interest and CMC has a 99% limited partnership interest, was formed
to undertake a planned housing development in Minnesota. CMC Heartland Partners
V, LLC ("CMCV"), a limited liability company, in which HDC has a 1% general
partnership interest and CMC has a 99% limited partnership interest, was formed
in 1996 to construct houses in a master-planned residential community in St.
Mary's, GA. CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sale's agent as well as the general
contractor in the St. Mary's development. Except as otherwise noted herein,
references herein to "Heartland" include CMC, HDC, CMCI, CMCV, and LCL.
The 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 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.
When available, the General Partner expects to cause Heartland to make quarterly
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, 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.
Real Estate Development Activities
At year end 1996, property available for development consisted of 19 sites
comprising approximately 940 acres. The book value of this land is $9.7 million
or an average of $10,266 per acre. Heartland continues to monitor the real
estate market through in-house and outside market studies. These studies are
designed to explore all of the available options relative to Heartland's
developable land and, ultimately to produce a flow of income that will maximize
unitholder value over a period of years.
Included in the aforementioned 940 acres are approximately 7 acres consisting of
20 lots purchased for $663,000 on December 30, 1996 at Osprey Cove in St.
Mary's, GA. 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. Osprey Cove also features a Mark
McCumber-designed
2
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championship golf course rated 4 1\2 out of a possible 5 stars by Golf Digest's
1996/97, "Places to Play." The golf course was also rated the seventy-fifth best
modern course in America by Golf Week.
Heartland is considering the acquisition of several additional development
sites, the development of a multi-use site in Chicago, IL, the development of
commercial and industrial build-to-suit projects in Milwaukee,WI, and single
family and commercial developments on certain of its properties in Bozeman, MT,
Fife, WA and Rosemount, MN.
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 16,827 acres of land held for sale are carried at a book value of
approximately $1.3 million, or approximately $76 per acre, and consist mostly of
former railroad rights-of-way, located in rural areas, comprising long strips of
land approximately 100 feet in width. Heartland's land is typically unimproved.
Some of the properties are improved with structures (such as grain elevators or
sheds) erected and owned by lessees. Other properties are improved with
Heartland-owned buildings that are of little or no value.
The management, leasing and sale of Heartland's non-development real estate, is
conducted by Heartland's Sales and Property Management Department. Due to the
less desirable attributes associated with the remaining properties, sales have
slowed. It is anticipated that it may take until the end of the year 2000 to
dispose of most of these properties. Following completion of the disposal of
these properties, Heartland's ongoing property management, leasing and sales
activities will involve those properties which have been developed or are being
held for development, and any residual properties which have not been disposed
of at such time.
Heartland has approximately 200 active leases on its real estate properties
aggregating approximately 1% of Heartland's acreage. The majority of the leases
provide nominal rental income to Heartland. The leases generally require the
lessee to construct, maintain and remove any improvements, pay property taxes,
maintain insurance and maintain the condition of the property. The majority
of the leases are cancelable by either party upon thirty to sixty days notice
and provide nominal rental income to Heartland. Heartland's ability to
terminate or modify certain of its leases is restricted by applicable law and
regulations. 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. The Compton,
California plant, which was leased through March 1, 1999, was sold on February
28, 1994.
Other Activities
At December 31, 1996, the allowance for claims and liabilities established by
Heartland for environmental and other contingent liabilities totaled
approximately $2.7 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 $2.7 million allowance for claims and liabilities.
3
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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, 1996, Heartland employed 24 persons.
Item 2. Properties
At December 31, 1996, real estate holdings consisted of approximately 17,767
acres of scattered land parcels. States in which large land holdings are located
are Illinois, Iowa, Minnesota, Montana, South Dakota, Washington, Wisconsin, and
North Dakota. 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, comprising of long strips of land approximately 100 feet in width. Also
included are former station grounds, rail yards and approximately 900 acres of
land acquired for industrial sites. Certain air and fiber optics development
rights and approximately 70,000 acres of reserved mineral rights are also owned.
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.
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 $94,412 for 1997 and an approximate 1% increase per
year through the lease expiration date of December 31, 1999 and is subject to
operating expense and tax escalations.
Item 3. Legal Proceedings
No material legal proceedings were commenced or terminated in the fourth quarter
ending December 31, 1996. For a discussion of significant legal proceedings to
which Heartland is a party or to which any of its properties is subject, see
Note 8 to the Consolidated Financial Statements.
4
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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, 1996.
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. 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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 Quarter Ended 1995 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $10 7/8 $9 3/4 $8 3/4 $10 1/8 $ 12 $12 5/8 $12 1/4 $11 5/8
- -------------------------------------------------------------------------------------
Low 9 3/8 8 7 3/8 8 10 5/8 11 3/8 11 1/4 8 5/8
- -------------------------------------------------------------------------------------
</TABLE>
Based on records maintained by Heartland's Unit transfer agent and registrar,
there were approximately 650 record holders of Heartland's Units as of March 10,
1997.
The amount of Heartland's cash available for distribution 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 MLC 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, CMCV, and LCL.
When available, the General Partner expects to cause Heartland to make quarterly
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 MLC (or its assignee) all accrued and unpaid management fees pursuant to
the Management Agreement between Heartland and MLC. On December 10, 1996,
Heartland declared a cash distribution in the amount of $2.7 million to
unitholders of record on December 31, 1996, payable on January 3, 1997.
5
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Item 6. Selected Financial Data
Following is a summary of Heartland's selected financial data for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 (amounts in thousands except
per Unit data):
<TABLE>
<CAPTION>
Operating Statement Data: 1996 1995 1994 1993 1992
------------ ------------- ------------- ------------- -------------
<S>.................................. <C> <C> <C> <C> <C>
Net revenues......................... $ 6,925 $ 3,525 $ 3,498 $ 7,304 $ 6,377
Expenses............................ 6,537 7,572 6,106 7,342 6,949
----------- ----------- ----------- ----------- ------------
Net income (loss).................... $ 388 $ (4,047) $ (2,608) $ (38) $ (572)
=========== =========== =========== =========== ===========
Net income (loss) allocated
to General Partner and
Class B Interest.................... $ 6 $ (61) $ (39) $ --- $ (8)
========== =========== =========== =========== ===========
Net income (loss) allocated
to Class A units.................... $ 382 $ (3,986) $ (2,569) $ (38) $ (564)
========== =========== =========== =========== ===========
Net income (loss) per
Class A Unit........................ $ .18 $ (1.86) $ (1.20) $ (.02) $ (.26)
========== =========== =========== =========== ===========
December 31, December 31, December 31, December 31, December 31,
Balance Sheet Data:.................. 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
Notes receivable including
Deferred Capital Contribution....... $ -- $ -- $ 80 $ 80 $ 8,657
Net Properties....................... 21,051 20,747 20,552 23,768 23,044
Total assets......................... 28,040 27,841 30,243 33,687 35,702
Allowance for claims and
liabilities......................... 2,660 2,492 1,895 2,351 2,499
Total liabilities.................... 8,755 6,181 4,930 5,414 7,391
Partners' capital.................... 19,285 21,660 25,313 28,273 28,311
</TABLE>
Item 7. 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, interest income and proceeds from sales of
securities. Cash and marketable securities at amortized cost were $5,992,000
(including $300,000 of restricted cash) at December 31, 1996, $5,907,000 at
December 31, 1995 and $9,043,000 at December 31, 1994. There was no material
change in cash and marketable securities from December 31, 1995 to December 31,
1996; however, on January 3, 1997, Heartland distributed approximately
$2,700,000 in cash to unitholders of record on December 31, 1996. The decrease
of $3,136,000 from December 31, 1994 to December 31, 1995 is attributable to the
use of proceeds from the sale of securities to finance operating activities and
a decrease in proceeds from sales of properties for the year ended December 31,
1995 as compared to prior years (see the Consolidated Statement of Cash Flows).
6
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Cash flow used in operating activities was $4,970,000 in 1996, compared to
$5,178,000 in 1995, and $4,645,000 in 1994. The decrease in cash flow used in
operating activities for 1996 as compared to 1995 is primarily due to a decrease
in payments made relating to the allowance for claims and liabilities of
$290,000. The increase in cash flow used in operating activities for 1995 as
compared to 1994 is due to the increase of $593,000 in payments for claims and
liabilities and the payment of $648,000 to MLC for the management fee due
affiliate, offset by the decrease in payments relating to accounts payable of
$583,000 (see the Consolidated Statement of Cash Flows).
Proceeds from property sales provided cash flow of $6,918,000 in 1996,
$2,316,000 in 1995 and $6,079,000 in 1994. The increase of property sales in
1996 as compared to 1995 is due to the $4,500,000 sale of the Goose Island
property in Chicago, and the $400,000 sale of .7 acres located at North Ave.
Also, the Cherry St. property in Milwaukee, WI sold for $800,000. The decrease
in property sales in 1995 as compared to 1996 and 1994 is due to the fact that
no major parcels were sold in 1995.
As of December 31, 1996, Heartland had approximately $4.8 million (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 1996 was $419,000 compared to
$583,000 for 1995 and $506,000 for 1994. The decrease in 1996 compared to 1995
reflects less excess cash available to invest coupled with the investment of a
greater portion of the portfolio in U.S. Government securities as opposed to
higher yielding Corporate Bonds. Portfolio income for 1995 included
approximately $98,000 from the Soo Line. 1995 and 1994 are not materially
different after the subtraction of the $98,000 Soo Line interest.
Heartland has approximately 200 active leases on its real estate properties,
which generated $1,039,000 of revenue in 1996, $1,331,000 in 1995 and $1,168,000
in 1994. The larger rental income in 1995 as compared to 1996 and 1994 is due
the Soo Line payment of $241,000 in back rent for the period from February 1985
through August 1995. Exclusive of the $241,000 from Soo Line, rental revenue for
1995 was $1,090,000. Rental income for 1997 is expected to decrease as a result
of non-renewal of several leases in Milwaukee.
At December 31, 1996, Heartland had designated 19 sites, or approximately 940
acres with a book value of $9,650,000, for development. Capitalized expenditures
at these sites were $2,051,000 in 1996, $919,000 in 1995 and $1,378,000 in 1994.
At December 31, 1996, capitalized costs on development properties totaled $9.3
million. Expenditures which significantly increase the value and are directly
identified with a specific project are capitalized.
The Company performs annual reviews on major properties to determine that the
capitalized cost of development properties does not exceed the current fair
value without regard to the property's expected net realizable value from
development. If the capitalized cost of any property exceeds the current fair
value, then a loss is recognized and the capitalized cost is reduced in
accordance with FAS 121 (see Item 8 - Note 2 to the Consolidated Financial
Statements). No loss is included in the statement of operations for the years
ended December 31, 1996, 1995 and 1994.
7
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At December 31, 1996, land held for sale consists of 16,827 acres with a book
value of approximately $1.3 million. It will be disposed of in an orderly
fashion. It is anticipated that it may take until the end of the year 2000 to
dispose of most of these properties.
The cost of property sales for 1996 was $1,674,000 or 24% of sales proceeds,
$716,000 or 31% for 1995 and $4,442,000 or 73% for 1994. Heartland sold its
industrial plant in Compton, CA and the two houses built at the residential
development in Hartland, WI in 1994 resulting in a cost of sales of 73% for
1994. It is not expected that future cost of sales ratios for real estate other
than development projects will change materially from ratios experienced in 1996
and 1995, 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 $2.3 million at December 31, 1996 and $2.1 million at December 31,
1995 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.
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, but anticipates the necessity of utilizing outside financing
to fund development projects. In March 1996, CMC signed a line of credit
agreement in the amount of $3 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 $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 March 15, 1997). The agreement terminates
on May 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 (See Note 4 to the Consolidated Financial
Statements).
8
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Results of Operations
For the year ended December 31, 1996, operations resulted in net income of
$388,000 or $.18 per Class A Unit. Operations for the years ended December 31,
1995 and 1994 resulted in losses of $4,047,000 or $1.86 per Class A Unit and
$2,608,000 or $1.20 per Class A Unit, respectively.
Net income in 1996 as compared to the net loss in 1995 is a result of increased
property sales. The increased loss in 1995 as compared to 1994 is primarily a
result of increased environmental expenses. The increase in environmental
expenses is reflected in professional fees on the Consolidated Statement of
Operations and is primarily due to the settlement of the Wheeler Pit litigation
(see Note 8 to the Consolidated Financial Statements).
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 1996 was $419,000 compared to
$583,000 for 1995 and $506,000 for 1994. The decrease in 1996 compared to 1995
reflects less excess cash available to invest coupled with the investment of a
greater portion of the portfolio in U.S. Government securities as opposed to
higher yielding Corporate Bonds. Portfolio income for 1995 included
approximately $98,000 from the Soo Line. 1995 and 1994 are not materially
different after the subtraction of the $98,000 Soo Line interest.
Heartland has approximately 200 active leases on its real estate properties,
which generated $1,039,000 of revenue in 1996, $1,331,000 in 1995 and $1,168,000
in 1994. The larger rental income in 1995 as compared to 1996 and 1994 is due
the Soo Line payment of $241,000 in back rent for the period from February 1985
through August 1995. Exclusive of the $241,000 from Soo Line, rental revenue
for 1995 was $1,090,000. Rental income for 1997 is expected to decrease as a
result of non-renewal of several major leases in Milwaukee.
Total expenses for 1996 were $6,537,000 compared to $7,572,000 for 1995 and
$6,106,000 for 1994. The decrease of $1,035,000 in 1996 as compared to 1995 is
due to a decrease of approximately $300,000 in compensation, $600,000 in
professional fees and $200,000 in real estate taxes. The increase of $1,466,000
for 1995 as compared to 1994 is primarily due to an increase in professional
fees, primarily due to the settlement of the Wheeler Pit litigation (see Note 8
to the Consolidated Financial Statements).
9
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the 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, 1996 and 1995 and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1996. 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 the
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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, 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 14, 1997
10
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HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS:
- -------
<S> <C> <C>
Cash...................................................................... $ 931 $ 44
Restricted cash........................................................... 300 ---
Marketable securities (amortized cost $4,761 in 1996 and.................. 4,759 5,905
$5,863 in 1995)
Accounts receivable (net of allowance of $107 in 1996 and................. 530 762
$80 in 1995)
Accrued interest receivable............................................... 13 126
Prepaid and other assets.................................................. 456 257
------- -------
Total...................................................... 6,989 7,094
------- -------
Property:
Buildings and other....................................................... 1,633 1,571
Less accumulated depreciation........................................... 853 722
------- -------
Net buildings and other................................................... 780 849
Land held for sale........................................................ 1,286 1,367
Land held for development................................................. 9,650 9,337
Capitalized predevelopment costs.......................................... 9,335 9,194
------- -------
Net Properties.................................................. 21,051 20,747
------- -------
Total Assets.............................................................. $28,040 $27,841
======= =======
LIABILITIES:
- ------------
Accounts payable and accrued expenses..................................... $ 248 $ 454
Management fee due affiliate.............................................. 425 425
Accrued real estate taxes................................................. 1,334 1,520
Allowance for claims and liabilities...................................... 2,660 2,492
Unearned rents and deferred income........................................ 536 528
Dividend payable.......................................................... 2,719 ---
Other liabilities......................................................... 96 114
Short term loans.......................................................... 737 ---
Note payable to Milwaukee Land Company.................................... --- 648
------- -------
Total Liabilities......................................................... 8,755 6,181
------- -------
PARTNERS' CAPITAL:
- ------------------
General Partner........................................................... 66 89
Class A Limited Partners - 2,142
units authorized, issued and outstanding................................ 9,639 11,935
Class B Limited Partner................................................... 9,582 9,594
Unrealized holding (loss) gain on marketable securities................... (2) 42
------- -------
Total partners' capital................................................... 19,285 21,660
------- -------
Total liabilities and partners' capital................................... $28,040 $27,841
======= =======
</TABLE>
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HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1996, 1995, and 1994
(amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
Holding Gain
Class A Class B (Loss) on
General Limited Limited Marketable
Partner Partners Partner Securities Total
------- --------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994........... $155 $18,490 $9,628 $ --- $28,273
Net Loss.............................. (26) (2,569) (13) --- (2,608)
Marketable securities fair
value adjustment..................... --- --- --- (352) (352)
---- ------- ------ ------ -------
Balances at December 31, 1994......... 129 15,921 9,615 (352) 25,313
Net Loss.............................. (40) (3,986) (21) --- (4,047)
Marketable securities fair............ --- --- --- 394 394
value adjustment..................... ---- ------- ------ ------ -------
Balances at December 31, 1995......... 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
==== ======= ====== ====== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements 12
<PAGE>
HEARTLAND PARTNERS, L.P.
========================
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
(amounts in thousands, except for per unit data)
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- ---------
<S> <C> <C> <C>
Revenues:
- ---------
Property sales....................................................... $6,918 $ 2,316 $ 6,079
Less: cost of property sales......................................... 1,674 716 4,442
------ ------- -------
Gross profit on property sales.................................... 5,244 1,600 1,637
Rental income........................................................ 1,039 1,331 1,168
Portfolio income..................................................... 419 583 506
Miscellaneous income................................................. 223 11 187
------ ------- -------
Total net revenues............................................ 6,925 3,525 3,498
------ ------- -------
Expenses:
- ---------
Compensation and benefits............................................ 1,663 1,941 2,023
Professional fees.................................................... 923 1,518 654
Real estate taxes.................................................... 984 1,156 1,145
Management fee, affiliate............................................ 425 425 425
Insurance............................................................ 245 270 277
Selling.............................................................. 501 523 537
General and administrative........................................... 1,665 1,614 838
Depreciation and amortization........................................ 131 125 207
------ ------- -------
Total expenses.................................................... 6,537 7,572 6,106
------ ------- -------
Net income (loss)................................................. $ 388 $(4,047) $(2,608)
====== ======= =======
Net income (loss) allocated to General Partner.................... $ 4 $ (40) $ (26)
====== ======= =======
Net income (loss) allocated to Class B limited partner............ $ 2 $ (21) $ (13)
====== ======= =======
Net income (loss) allocated to Class A limited partners........... $ 382 $(3,986) $(2,569)
====== ======= =======
Net income (loss) per Class A limited partnership unit............ $ .18 $ (1.86) $ (1.20)
====== ======= =======
Average number of Class A limited partnership units outstanding... 2,142 2,142 2,142
====== ======= =======
Distributions declared per Class A limited partnership unit....... $ 1.25 $ --- $ ---
====== ======== ========
</TABLE>
13
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
- ------------------------------------
Net income (loss)..................................................................... $ 388 $(4,047) $(2,608)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization......................................................... 131 125 207
Gain on sales of properties........................................................... (5,244) (1,600) (1,637)
(Accretion) amortization of (discount) premium on securities.......................... (78) (8) 32
Gain on sale of securities............................................................ (79) -- --
Net change in allowance for claims and liabilities.................................... 168 597 (456)
Net change in assets and liabilities:
Decrease (increase) in accounts and accrued interest receivable..................... 345 (256) (199)
(Decrease) increase in accounts payable and accrued liabilities..................... (392) 267 (316)
(Decrease) increase in management fee due affiliate................................. -- (223) 425
Net change in other assets and liabilities.......................................... (209) (33) (93)
-------- ------- -------
Net cash used in operating activities................................................. (4,970) (5,178) (4,645)
-------- ------- -------
Cash Flow From Investing Activities:
- ------------------------------------
Proceeds from sales of properties..................................................... 6,918 2,316 6,079
Capital expenditures including land and development costs............................. (2,109) (1,010) (1,395)
Repayment of notes receivable......................................................... -- 80 --
Purchases of marketable securities.................................................... (25,979) (8,325) (7,095)
Sales and maturities of marketable securities......................................... 27,238 10,438 4,672
-------- ------- -------
Net cash provided by investing activities............................................. 6,068 3,499 2,261
-------- ------- -------
Cash Flow From Financing Activities:
- ------------------------------------
(Repayment of) proceeds from note payable to Milwaukee Land Company................... (648) 648 --
Advances on short term loans.......................................................... 737 -- --
Increase in restricted cash........................................................... (300) -- --
-------- ------- -------
Net cash (used in) provided by financing activities................................... (211) 648 --
-------- ------- -------
Increase (decrease) in cash........................................................... 887 (1,031) (2,384)
Cash at beginning of year............................................................. 44 1,075 3,459
-------- ------- -------
Cash at end of year................................................................... $ 931 $ 44 $ 1,075
======== ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements 14
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
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, development, leasing and
sale of real estate properties. CMC Heartland Partners ("CMC") is an operating
general partnership owned 99.99% by Heartland and .01% by Milwaukee Land Company
("MLC"). MLC 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 Heartland Partners I, Limited
Partnership ("CMCI"), a Delaware limited partnership in which HDC has a 1%
general partnership interest and CMC has a 99% limited partnership interest,
were formed to undertake a planned housing development in Minnesota. HDC also
has a 1% general partnership in CMC Heartland Partners V, LLC ("CMCV"). CMC has
a 99% limited partnership interest in CMCV which was formed in 1996 to construct
houses in a master-planned residential community in St. Mary's, GA. CMC also
owns 100% of the common stock of Lifestyle Communities, Ltd ("LCL") which serves
as the exclusive sale's agent as well as the general contractor in the St.
Mary's development. Except as otherwise noted herein, references herein to
"Heartland" include CMC, HDC, CMCI, CMCV, and LCL.
The 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.
When available, the General Partner expects to cause Heartland to make quarterly
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, 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. On December 10,
1996, Heartland declared a cash distribution in the amount of $2.7 million to
Unitholders of record on December 31, 1996, payable on January 3, 1997.
At December 31, 1996, real estate holdings consisted of approximately 17,767
acres of scattered land parcels. States in which large land holdings are located
are Illinois, Iowa, Minnesota, Montana, South Dakota, Washington, Wisconsin, and
North Dakota. The remaining acreage is located in Idaho, Indiana, Michigan and
Missouri.
15
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
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, rail yards and approximately 900 acres of
land acquired for industrial sites. Certain air and fiber optics development
rights and approximately 70,000 acres of reserved mineral rights are also owned.
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.
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; CMCV, 1% general
partnership interest owned by HDC and 99% owned by CMC; and LCL, 100% owned by
CMC.
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, 1996 and 1995 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 partner's capital.
Partners' capital included an unrealized holding loss on marketable securities
classified as available for sale of $2,000 at December 31, 1996 and an
unrealized holding gain of $42,000 at December 31, 1995. 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 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.
16
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
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 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. Depreciation expense for the years
ended December 31, 1996, 1995, and 1994 was $131,000, $99,000, $154,000,
respectively.
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. Upon
recognition of any impairment loss the Company measures 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. Property is reported at the lower of its
carrying amount or its estimated fair value, less its cost to sell.
Fair Value of Financial Instruments
Management has considered fair value information relating to its financial
instruments at December 31, 1996. 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, 1996, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
Reclassification
Certain reclassifications have been made to the previously reported 1995 and
1994 statements in order to provide comparability with the 1996 statements.
These reclassifications have not changed the 1995 and 1994 results.
17
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
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 (See Note 4).
4. Short Term Loans
Advances against the LNB line of credit as described in Note 3 bear interest at
the prime rate of LNB plus 1.0% (9.25% at December 31, 1996). This loan is
collateralized by certain parcels of land in Chicago, IL which have a carrying
value of $5,158,000 as of December 31, 1996. The agreement terminates on May
14, 1997. 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 December 31, 1996, $300,000 had been advanced
to CMC by LNB against the line of credit.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with NationsBank ("NB") to acquire lots and construct
houses in 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 $848,000 at December 31, 1996. Advances against the revolving
line of credit bear interest at the prime rate of NB plus 1.0% (9.25% at
December 31, 1996). The agreement terminates on December 30, 1997, at which time
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
the completion of homes then under construction, but no new construction shall
be commenced. 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.
At December 31, 1996, $437,000 had been advanced to CMCV by NB against the
revolving line of credit.
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.
18
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
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.
6. Related Party Transactions
CMC has a management agreement with MLC, pursuant to which CMC is required to
pay MLC an annual management fee in the amount of $425,006. On December 29,
1995, MLC advanced CMC approximately $648,000 and on February 14, 1996 MLC
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% (10.75% at December 31, 1996). Interest expense on the note was
approximately $107,000 for 1996 and $400 for 1995. On December 31, 1996, CMC
paid MLC $1,180,400 related to previously accrued management fees including
$107,400 for interest related to the past due amounts. At December 31, 1996, the
management fee accrued and unpaid was approximately $425,000 representing
deferred management fees for the year ended December 31, 1996. On February 14,
1997, CMC paid MLC the $425,000.
Under a management services agreement, MLC reimbursed Heartland for reasonable
and necessary costs and expenses for services totaling $180,000 for the year
ended December 31, 1996, $109,000 for 1995, and $141,000 for 1994.
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.
19
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
Future minimum annual lease income under noncancellable operating leases with
lease terms in excess of one year as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997.......................... $273,000
1998.......................... 59,000
1999.......................... 59,000
2000.......................... 59,000
2001.......................... 59,000
Thereafter.................... 330,000
--------
Total minimum lease income.. $839,000
========
</TABLE>
Heartland leases its office premises and certain equipment under various
operating leases. Future minimum lease commitments under non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997.......................... $116,750
1998.......................... 104,328
1999.......................... 99,070
--------
Total...................... $320,148
========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995, and 1994 was $132,000,
$120,000, and $118,000, respectively.
8. Legal Proceedings and Contingencies
At December 31, 1996, Heartland's allowance for claims and liabilities was
approximately $2.7 million. During the year ended December 31, 1996 a $1,141,000
provision was recorded with respect to environmental matters. At December 31,
1995, Heartland's allowance for claims and liabilities was approximately $2.5
million. During the year ended 1995, a $1,860,000 provision was recorded in
respect of environmental matters. Significant legal matters are discussed
below.
Soo Line Matters
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 located in Iowa, Minnesota and
Wisconsin. The Company has denied liability based on the APA.
20
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
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 its predecessor (the "Reorganization Court") to bar claims
asserted by the Union Pacific Railroad Company ("Union Pacific") arising out of
a 1980 sale by its predecessor reorganization trustee of a rail yard in Tacoma,
Washington to Union Pacific. Union Pacific 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
was 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 its predecessor's
reorganization and subsequently denied the Company's motion for rehearing. On
January 21, 1997, the United States Supreme Court denied the Company's petition
for Writ of Certiorari. Counsel for Union Pacific has indicated that Union
Pacific intends to pursue the litigation in the Western District of Washington.
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.
Wheeler Pit, Janesville, Wisconsin
- ----------------------------------
In November 1995 the Company agreed to settle 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 oversite costs; such oversite costs not to exceed $50,000. Payments
of $200,000 were made in 1995 and 1996.
21
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
Miscellaneous Environmental Matters
- -----------------------------------
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 significant, known environmental matters, in
addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is responsible for some or all of the liability to remediate certain
properties in Montana sold by its predecessor's reorganization trustee prior to
the consummation of its predecessor's reorganization. The Company has raised
issues to its liability on grounds similar, but not identical, to the grounds on
which the Company denied liability in the litigation with Union Pacific set
forth above. Following the Supreme Court's denial of the Company's petition for
writ of certiorari, counsel for DEQ has indicated DEQ's intention to file suit
to resolve these issues. 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 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.
The Company has petroleum groundwater remediation projects or long term
monitoring programs 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. 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.
22
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Continued)
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 best estimate at this time is that the remediation
construction may cost between $425,000 and $881,000. The contract sale price is
$773,000.
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.
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
provided for a base salary of $350,000 per year through July 1, 1995, all or a
portion of which could be deferred at the officer's election. On July 2, 1995,
CMC entered into a new employment agreement with the President and Chief
Executive Officer, which provides for an annual base salary of $350,000 through
August 15, 1995 and $275,000 from August 16, 1995 through July 2, 2000, 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. Heartland makes matching
23
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (Concluded)
contributions of 50% of each participant's contribution to the plan.
Employees are fully vested with respect to salary reduction and Heartland's
contributions. 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 $65,000 in 1996, $66,000 in
1995, and $67,000 in 1994 on behalf of all employees.
10. Marketable Securities
The following is a summary of marketable securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
(in thousands)
December 31, 1996
U.S. Treasury securities an obligations of U.S.
government agencies........................... $4,761 $ --- $ (2) $4,759
------ ------------- ---------- ------
Total marketable securities, December 31, 1996.. $4,761 $ --- $ (2) $4,759
====== ============= ========== ======
December 31, 1995
U.S. Treasury securities and obligations of U.S.
government agencies........................... $3,124 $ 31 $ --- $3,155
Corporate debt securities....................... 2,739 58 (47) $2,750
------ ------------- ---------- ------
Total marketable securities, December 31, 1995.. $5,863 $ 89 $ (47) $5,905
====== ============= ========== ======
</TABLE>
At December 31, 1996 and 1995 all marketable securities were classified as
available-for-sale. Proceeds from sale and maturities of debt securities during
1996, 1995, and 1994, were $27,238,000, $10,438,000, and $4,672,00,
respectively. The gain on sale of securities in 1996 was approximately $79,000.
Proceeds from sales in 1995 and 1994 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
$(44,000), $394,000 and $(352,000) for the year ended December 31, 1996, 1995,
and 1994, respectively.
24
<PAGE>
Heartland Partners L. P.
Notes to Consolidated Financial Statements - (Continued)
The cost and estimated fair value of debt securities at December 31, 1996, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
Due in one year or less......................... $ $4,529 $ 4,528
Due after one year through three years.......... 188 187
Due after three years........................... 44 44
-------------- -------------
Total...................................... $ $4,761 $ 4,759
============== =============
</TABLE>
25
<PAGE>
Schedule II
HEARTLAND PARTNERS, L.P.
Notes to Consolidated Financial Statements - (Concluded)
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994
(amounts in thousands)
<TABLE>
<CAPTION>
Additions
Description Balance at Charged to Deductions Balance
beginning costs and at end
of year expenses of year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowance for claims and liabilities.............. $ 2,492 $ 1,141 $ (973)(a) $ 2,660
Year Ended December 31, 1995:
Allowance for claims and liabilities.............. $ 1,895 $ 1,860 $ (1,263)(a) $ 2,492
Year Ended December 31, 1994:
Allowance for claims and liabilities.............. $ 2,351 $ 214 $ (670)(a) $ 1,895
========= ========= ========== ========
</TABLE>
Note: (a) Payments
26
<PAGE>
Schedule III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(amounts in thousands)
<TABLE>
<CAPTION>
Gross Amount at Which
Cost Capitalized Carried
Initial Cost to Subsequent at Close of Period
Heartland to Acquisition (1)
---------------- -------------- --------------------------
Date of
Buildings & Carrying Buildings & Accumulated Completion
Description Land Improvements Improvements(3) Costs (4) Land Improvements Total Depreciation Construction
- ----------- ------- ------------ --------------- --------- ------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Developable Sites
Chicago, IL..........(7) $ 4,555 $ 1 $ 967(6) $ 2,211 $ 4,555 $ 3,179 $ 7,734 $ 3 Various
Milwaukee, WI........ 841 939 1,186(6) 2,846 841 4,971 5,812 377 Various
Fife, WA............. 2,572 - 154 164 2,572 318 2,890 - Various
Rosemount, MN........ 956 - 630 541 956 1,171 2,127 - N/A
Osprey...............(8) 663 - 185 - 663 185 848 - N/A
Other developable
properties less than
5% of total.......... 63 - 102 408 63 510 573 - N/A
------- ------ ------- ------- ------- ------ ------- ----
Total developable
properties........... 9,650 940(5) 3,224(6) 6,170 9,650 10,334 19,984 380
------- ------ ------- ------- ------- ------- ------- -----
Sales Properties..... 1,286 - 10(5) - 1,286 10 1,296 2 Various
------- ------ ------- ------- ------- ------- ------- -----
TOTAL $10,936 $ 940 $ 3,234 $ 6,170 $10,936 $10,344 $21,280 $ 382
======= ======= ======= ======= ======= ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
Life On
Which
Depreciation
In Latest
Income
Date Statement
Description Acquired Is Computed
- ----------- -------- ------------
<S> <C> <C>
Developable Sites
Chicago, IL..........(7) Various (2)
Milwaukee, WI........ Various (2)
Fife, WA............. Various
Rosemount, MN........(8) Various
Osprey............... Various
Other developable
properties less than
5% of total.......... Various
Total developable
properties...........
Sales Properties..... Various
TOTAL
</TABLE>
(1) See Attachment A to Schedule III for reconciliation of beginning of period
total to total at end of period.
(2) Reference is made to Note 2 to the Consolidated Financial Statements for
information related to depreciation.
(3) Improvements include all costs which increase the net realizable value of
the property except carrying costs.
(4) Carrying costs consists primarily of legal fees and real estate taxes.
(5) These amounts are included in Buildings and other on the Consolidated
Balance Sheet. Also included in the amount shown on the Consolidated
Balance Sheet for Buildings and other is furniture and equipment of $624,
with related accumulated depreciation of $471.
(6) These amounts include $59 that is included in Buildings and other on the
Consolidated Balance Sheet.
(7) Includes certain parcels of land encumbered by a $300,000 short-term loan
(See Note 4 to the Consolidated Financial Statements).
(8) Includes parcels of land encumbered by a $437,000 short-term loan (See Note
4 to the Consolidated Financial Statements).
27
<PAGE>
HEARTLAND PARTNERS, L.P.
Attachment A to Schedule III
Reconciliation of Cost of Real Estate At Beginning
of Year with Total At End of Year
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at January 1............ $20,903 $20,700 $24,021
------- ------- -------
Additions during year:
Other acquisitions............ 663 -- 311
Improvements.................... 1,388 919 1,067
------- ------- -------
Total Additions.............. 2,051 919 1,378
------- ------- -------
Deductions during year:
Cost of real estate sold...... 1,674 716 4,699
------- ------- -------
Total deductions............. 1,674 716 4,699
------- ------- -------
Balance at December 31.......... $21,280 $20,903 $20,700
======= ======= =======
</TABLE>
Reconciliation of Real Estate Accumulated Depreciation
At Beginning of Year with Total At End of Year
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at January 1............ $323 $264 $450
---- ---- ----
Additions during year:
Charged to Expense............ 59 59 71
---- ---- ----
Total Additions.............. 59 59 71
---- ---- ----
Deductions during year:
Cost of real estate sold...... -- -- 257
---- ---- ----
Total deductions............. -- -- 257
---- ---- ----
Balance at December 31.......... $382 $323 $264
==== ==== ====
</TABLE>
28
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers.
Heartland does not have a Board of Directors.
Set forth below is information for each director of MLC, the general partner of
Heartland, and each executive officer of MLC and Heartland. Directors of MLC
are not compensated by Heartland.
<TABLE>
<CAPTION>
Principal Occupation, Business
Name and Age Experience and Directorships
<S> <C>
Lawrence S. Adelson, 47 ..... Vice President and General Counsel of the
Company since June 1990; Vice President and
General Counsel of MLC since October 1988.
Robert S. Davis, 82 ......... Director of MLC (since October 1988); Chairman
of the audit committee of MLC; self-employed
consultant (for more than the past five years);
Senior Vice President (1978-79), St. Paul
Companies (insurance), St. Paul, Minnesota.
Leon F. Fiorentino, 72 ...... Vice President - Finance, Secretary and
Treasurer of MLC (since November, 1985); Vice
President - Finance, Secretary and Treasurer of
CMC (June 1990 - August 1995).
Clarence G. Frame, 78 ....... Chairman (since September 1990); Director of MLC
(since November 1985); member of the executive
and investment committees of MLC; Chairman of
the Board (1984-89) and Chief Executive Officer
(1986-89), Tosco Corporation (oil refiner),
Stamford, Connecticut. Mr. Frame also serves as
a director for Independence One Mutual Funds,
Voyaguer Mutual Funds and Tosco Corporation.
Edwin Jacobson, 67 .......... President and Chief Executive Officer (since
September 1990); Director of MLC (since November
1985); member of the executive and investment
committees of MLC; Chief Executive Officer
(since February 1994) and Chairman of the
Executive Committee since (June 1992) of Avatar
Holdings Inc. (real estate, water and wastewater
utilities operations); formerly President of
Avatar Holdings Inc. (from February 1994 -
February 1997).
Ezra K. Zilkha, 71 .......... Director of MLC (since October 1988); member of
the executive committee and chairman of the
investment committee of MLC; President (since
1957), Zilkha & Sons, Inc. (Investments), New
York, New York. Mr. Zilkha is also a director of
Cigna Corporation, Fortune Bancorp, Inc. and
Newhall Land and Farming Co.
</TABLE>
29
<PAGE>
Item 11. Executive Compensation
The following information is furnished as to all compensation awarded to, earned
by or paid to the Chief Executive Officer of CMC and the one other officer with
1996 compensation greater than $100,000.
<TABLE>
<CAPTION>
Annual Compensation All other
Name and principal position Year Salary Bonus Compensation
---- -------- ------- ------------
<S> <C> <C> <C> <C>
Edwin Jacobson 1996 $275,000 $ --- $4,750
President and Chief 1995 321,875 --- 4,750
Executive Officer 1994 350,000 --- 4,620
Lawrence S. Adelson 1996 $112,500 $ --- $4,750
Vice President and 1995 112,500 --- 4,750
General Counsel 1994 112,500 10,000 4,620
</TABLE>
"All other compensation" is comprised of CMC's contribution on behalf of the
officers to a salary reduction plan qualified under Sections 401(a) and (k) of
the Internal Revenue Code of 1986. Columns for "Other Annual Compensation",
"Restricted Stock Awards", "Options/SARS" and "Payout-LTIP Payout" are omitted
since there was no compensation awarded to, earned by or paid to any of the
above named executives required to be reported in such columns in any fiscal
year covered by the table.
Under a deferred salary arrangement available to all employees, Mr. Adelson
deferred $14,106 of his 1994 salary into 1995, $32,813 of his 1995 salary into
1996, and $35,341 of his 1996 salary into 1997.
An employment agreement with the President and Chief Executive Officer of CMC
provided for a base salary of $350,000 per year through July 1, 1995, all or a
portion of which could be deferred at the officer's election. On July 2, 1995,
CMC entered into a new employment agreement with the President and Chief
Executive Officer, which provides for an annual base salary of $350,000 through
August 15, 1995 and $275,000 from August 16, 1995 through July 2, 2000, 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 does not maintain any pension, profit-sharing, bonus or similar plan
for its employees. Insurance benefit programs are non-discriminatory. CMC
sponsors a Group Savings Plan, which is a salary reduction plan qualified under
Sections 401(a) and (k) of the Internal Revenue Code of 1986. All full-time
permanent employees of CMC are eligible to participate in the plan. In 1994, a
participating employee could authorize contributions to the plan in the form of
salary reductions of up to $9,500. CMC makes matching contributions of 50% of
each participant's contribution to the plan. Employees are fully vested with
respect to salary reduction and CMC's contributions. 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 a
showing of financial hardship.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
Set forth below is certain information concerning persons who are known by
Heartland to be beneficial owners of more than 5% of Heartland's outstanding
Units at March 10, 1997:
<TABLE>
<CAPTION>
Number of
Name and Address of Beneficial Owner (i) Units Owned Percent
- ---------------------------------------- ----------- -------
<S> <C> <C>
Lehman Brothers Holdings, Inc. (ii)
American Express Tower
3 World Financial Center
New York, New York 10285.................. 187,400 8.7%
Cowen & Company (iii)
Financial Square
New York, New York 10285.................. 156,300 7.3%
Edwin Jacobson (iv)
547 W. Jackson
Chicago, Illinois 60661................... 135,000 6.3%
</TABLE>
(i) Nature of ownership is direct, except as otherwise indicated herein.
(ii) Based on a statement filed on Schedule 13G, as amended through December
31, 1994, Lehman Brothers Holdings Inc., through its subsidiary, Lehman
Brothers Inc., a registered broker/dealer, has sole voting and
dispositive power with respect to such Units.
(iii) Based on a statement filed on Schedule 13G dated February 12, 1997, Cowen
& Company, a registered broker/dealer and investment adviser, has sole
voting power of 15,000 Units, shared voting power of 141,300 Units, sole
dispositive power of 15,000 Units and shared dispositive power of 141,300
Units.
(iv) Included in the table are 500 units held by Mr. Jacobson's wife as to
which Mr. Jacobson shares voting and dispositive power.
31
<PAGE>
Security Ownership of Management
Set forth below is certain information concerning the beneficial ownership of
Units by each current director of MLC, the General Partner of Heartland, by each
named executive officer of CMC and by all directors and executive officers of
MLC and all executive officers of CMC as a group, as of March 10, 1997:
<TABLE>
<CAPTION>
Name of Beneficial
Owner and Number of Number of
Persons in Group Units Owned Percent
------------------- ----------- -------
<S> <C> <C>
Clarence G. Frame.......................... --- ---%
Robert S. Davis............................ --- ---%
Edwin Jacobson (ii)........................ 135,000 6.3%
Ezra K. Zilkha (iii)....................... 97,000 4.5%
Lawrence S. Adelson........................ --- ---%
All directors and executive officers
as a group (6 persons)................... 232,000 10.8%
</TABLE>
(i) Nature of ownership is direct, except as otherwise indicated herein.
Unless shown, ownership is less than 1% of class.
(ii) Included in the table are 500 units held by Mr. Jacobson's wife as to
which Mr. Jacobson shares voting and dispositive power.
(iii) Included in the table are 1,500 Units held by Mr. Zilkha's wife as to
which Mr. Zilkha shares voting and dispositive power. Also included are
24,500 Units owned by Zilkha & Sons, Inc., with respect to which Mr.
Zilkha may be deemed to be the beneficial owner.
Item 13. Certain Relationships and Related Transactions
CMC has a management agreement with MLC, pursuant to which CMC is required to
pay MLC an annual management fee in the amount of $425,006. On December 31,
1996, CMC paid MLC $1,180,400 related to previously accrued management fees
including $107,400 for interest related to the past due amounts.
Under a management services agreement, MLC reimbursed Heartland for reasonable
and necessary costs and expenses for services totaling $180,000 for the year
ended December 31, 1996, $109,000 for 1995, and $141,000 for 1994.
The officers of MLC and Heartland, including Edwin Jacobson, President and Chief
Executive Officer of MLC and Heartland, will not devote their entire business
time to the affairs of Heartland. The Heartland Partnership Agreement provides
that (i) whenever a conflict of interest exists or arises between the General
Partner or any of its affiliates, on the one hand, and Heartland, or any
Unitholder on the other hand, or (ii) whenever the Heartland Partnership
Agreement or any other agreement contemplated therein provides that the General
Partner shall act in a manner which is, or provide terms which are, fair and
reasonable to Heartland, or any Unitholder, the General Partner shall resolve
such conflict of interest, take such action or provide such terms, considering
in each case the relative interests of each party (including its own interest)
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, any customary or accepted industry
practices, and any applicable generally accepted accounting practices or
principles. Thus, unlike the strict duty of a
32
<PAGE>
fiduciary who must act solely in the best interests of his beneficiary, the
Heartland Partnership Agreement permits the General Partner to consider the
interests of all parties to a conflict of interest, including the General
Partner (although it is not clear under Delaware law that such provisions would
be enforceable). The Heartland Partnership Agreement also provides that, in
certain circumstances, the General Partner will act in its sole discretion, in
good faith or pursuant to other appropriate standards.
33
<PAGE>
PART IV
=======
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed or incorporated by reference as part of
this report:
1. Financial statements
--------------------
The financial statements of Heartland Partners, L.P. are included in Part II,
Item 8:
REPORT OF INDEPENDENT AUDITORS.............................................. 10
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995................................................ 11
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1996, 1995, and 1994..................... 12
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994...................... 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994..................... 14
Notes to Consolidated Financial Statements.................................. 15
2. Financial statement schedules
-----------------------------
VALUATION AND QUALIFYING ACCOUNTS........................................... 26
REAL ESTATE AND ACCUMULATED DEPRECIATION.................................... 27
Attachment A to Schedule III................................................ 28
The financial statement schedules are not included in the Annual Report provided
to Unitholders. Other schedules are omitted because they are not required or not
applicable, or the required information is included in the consolidated
financial statements or notes thereto.
34
<PAGE>
<TABLE>
<CAPTION>
3. Exhibits
--------
<C> <S>
3.1 Certificate of Limited Partnership, dated as of October 4, 1988,
incorporated by reference to Exhibit 3.1 to Heartland's Annual
Report on Form 10-K for the year ended December 31, 1990.
3.2 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by
reference to Exhibit 3.2 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 1990.
4. Unit of Limited Partnership Interest in Heartland Partners, L.P.,
incorporated by reference to Exhibit 4 to Heartland's Annual Report
on Form 10-K for the year ended December 31, 1990.
10.1 Conveyance Agreement, dated as of June 27, 1990, by and among
Chicago Milwaukee Corporation, Milwaukee Land Company, CMC
Heartland Partners and Heartland Partners, L.P., incorporated by
reference to Exhibit 10.1 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 1990.
10.2 Management Agreement, dated as of June 27, 1990, by and among
Chicago Milwaukee Corporation, Heartland Partners, L.P. and CMC
Heartland Partners, incorporated by reference to Exhibit 10.2 to
Heartland's Annual Report on Form 10-K for the year ended December
31, 1990.
10.3 Amended and Restated Partnership Agreement of CMC Heartland
Partners, dated as of June 27, 1990, between Heartland Partners,
L.P. and Milwaukee Land Company, incorporated by reference to
Exhibit 10.3 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1990.
10.4 Employment Agreement, dated July 1, 1990, by and between Edwin
Jacobson and CMC Heartland Partners, incorporated by reference to
Exhibit 10.4 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1990.*
10.5 First Amendment to Employment Agreement, dated July 1, 1993, by and
between Edwin Jacobson and CMC Heartland Partners incorporated by
reference to Exhibit 10.5 to Heartland's Annual Report on Form 10-K
for the year ended December 31, 1994*.
10.6 Second Amendment to Employment Agreement, dated as of July 1, 1995
between CMC Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.6 to Heartland's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.*
10.7 Employment Agreement, dated July 2, 1995, between CMC Heartland
Partners and Edwin Jacobson, incorporated by reference to Exhibit
10.7 to Heartland's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995.*
21 Subsidiaries of Heartland Partners, L.P (filed herewith).
27 Financial Data Schedule (filed herewith).
------------------------------------------------
</TABLE>
* Management contract required to be filed as a exhibit pursuant
to Item 14(c).
(b) Reports on Form 8-K
-------------------
No reports were filed by Heartland with the Securities and Exchange Commission
during the last quarter of 1996.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
========================================
(Registrant)
By /s/ Edwin Jacobson
----------------------------------------
Edwin Jacobson
President and Chief Executive Officer of
Milwaukee Land Company, General Partner
(Principal Executive Officer)
By /s/ Leon F. Fiorentino
----------------------------------------
Leon F. Fiorentino
Vice President-Finance, Treasurer and
Secretary of Milwaukee Land Company,
General Partner
(Principal Financial and Accounting
Officer)
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the dates indicated.
/s/ Robert S. Davis /s/ Edwin Jacobson
- ------------------------------------ ------------------------------------
Robert S. Davis Edwin Jacobson
(Director of Milwaukee Land Company) (Director of Milwaukee Land Company)
March 31, 1997 March 31, 1997
/s/ Clarence G. Frame /s/ Ezra K. Zilkha
- ------------------------------------ ------------------------------------
Clarence G. Frame Ezra K. Zilkha
(Director of Milwaukee Land Company) (Director of Milwaukee Land Company)
March 31, 1997 March 31, 1997
36
<PAGE>
HEARTLAND PARTNERS, L.P.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
- ------ ----------- -----------
<C> <S> <C>
3.1 Certificate of Limited Partnership, dated as of October 4,
1988, incorporated by reference to Exhibit 3.1 to
Heartland's Annual Report on Form 10-K for the year ended
December 31, 1990.
3.2 Amended and Restated Agreement of Limited Partnership of
Heartland Partners, L.P., dated as of June 27, 1990,
incorporated by reference to Exhibit 3.2 to Heartland's
Annual Report on Form 10-K for the year ended
December 31, 1990.
4 Unit of Limited Partnership Interest in Heartland Partners,
L.P., incorporated by reference to Exhibit 4 to Heartland's
Annual Report on Form 10-K for the year ended
December 31, 1990.
10.1 Conveyance Agreement, dated as of June 27, 1990, by and among
Chicago Milwaukee Corporation, Milwaukee Land Company, CMC
Heartland Partners and Heartland Partners, L.P., incorporated
by reference to Exhibit 10.1 to Heartland's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.2 Management Agreement, dated as of June 27, 1990, by and among
Chicago Milwaukee Corporation, Heartland Partners, L.P. and
CMC Heartland Partners, incorporated by reference to Exhibit
10.2 to Heartland's Annual Report on Form 10-K for the year
ended December 31, 1990.
10.3 Amended and Restated Partnership Agreement of CMC Heartland
Partners, dated as of June 27, 1990, between Heartland
Partners, L.P. and Milwaukee Land Company, incorporated by
reference to Exhibit 10.3 to Heartland's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.4 Employment Agreement, dated July 1, 1990, by and between
Edwin Jacobson and CMC Heartland Partners, incorporated by
reference to Exhibit 10.4 to Heartland's Annual Report on
Form 10-K for the year ended December 31, 1990.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
- ------ ----------- -----------
<C> <S> <C>
10.5 First Amendment to Employment Agreement, dated July 1, 1993,
by and between Edwin Jacobson and CMC Heartland Partners
incorporated by reference to Exhibit 10.5 to Heartland's
Annual Report on Form 10-K for the year ended
December 31, 1994.
10.6 Second Amendment to Employment Agreement, dated as of
July 1, 1995 between CMC Heartland Partners and Edwin
Jacobson, incorporated by reference to Exhibit 10.6 to
Heartland's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995.
10.7 Employment Agreement, dated July 2, 1995, between CMC
Heartland Partners and Edwin Jacobson, incorporated by
reference to Exhibit 10.7 to Heartland's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995.
21 Subsidiaries of Heartland Partners, L.P. (filed herewith). 39
27 Financial Data Schedule (filed herewith). 40
</TABLE>
38
<PAGE>
Exhibit 21
Subsidiaries of Registrant
The following is a list of all the registrant's direct and indirect
subsidiaries, state of incorporation or organization and the percentage
ownership by Heartland of each.
<TABLE>
<CAPTION>
Name of Subsidiary State Ownership
- ------------------ ----- ---------
<S> <C> <C>
CMC Heartland Partners N/A 99.99%
Heartland Development Corporation Delaware 100%
CMC Heartland Partners I, Limited Partnership Delaware (a)
CMC Heartland Partners II, LLC Delaware (a)
CMC Heartland Partners III, LLC Delaware (a)
CMC Heartland Partners V, LLC Delaware (a)
CMC Heartland Partners VI, LLC Delaware (a)
Lifestyle Communities, Ltd. Delaware (b)
</TABLE>
(a) CMC Heartland Partners I, II, III, V, and VI are owned by CMC Heartland
Partners sole limited partner and Heartland Development Corporation sole general
partner.
(b) Lifestyle Communities, Ltd. is 100% owned by CMC Heartland Partners.
39
<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-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,231
<SECURITIES> 4,759
<RECEIVABLES> 530
<ALLOWANCES> 0
<INVENTORY> 21,904
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 853
<TOTAL-ASSETS> 28,040
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,285
<TOTAL-LIABILITY-AND-EQUITY> 28,040
<SALES> 6,918
<TOTAL-REVENUES> 8,599
<CGS> 1,674
<TOTAL-COSTS> 1,674
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 388
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
