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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10520
HEARTLAND PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 36-3606475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
547 West Jackson Boulevard, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/294-0440
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Limited Partnership Units American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [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 12, 1998, was approximately $29.8 million. On that date there were
2,142,438 units outstanding.
Exhibit index appears on Page 40.
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ITEM 1. Business
Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in
such capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Minnesota.
CMC has a 100% membership interest in CMC Heartland Partners II ("CMCII"), CMC
Heartland Partners III ("CMCIII") and CMC Heartland Partners V ("CMCV"). CMCII
was formed to participate in the Goose Island Industrial park joint venture.
CMCIII was formed in 1997 to develop a portion of the Kinzie Station property in
Chicago, IL. CMCV was formed in 1996 to construct houses in a master-planned
residential community in St. Marys, GA. CMC also owns 100% of the common stock
of Lifestyle Communities, Ltd. ("LCL") which serves as the exclusive sales agent
as well as the general contractor in the St. Marys development. Except as
otherwise noted herein, references herein to "Heartland" or the "Company"
include CMC, HDC, CMCI, CMCII, CMCIII, 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 (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 4, 1997,
Heartland's partnership agreement was amended to allow the General Partner in
its discretion to establish a record date for distributions of the last day of
any calendar month.
Real Estate Development Activities
At year end 1997, property available for development consisted of 17 sites
comprising approximately 939 acres. The book value of this land is $10.2 million
or an average of $10,862 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 939 acres are approximately 15 acres consisting
of 44 lots purchased for $1.3 million, or an average of $29,545 per lot at
Osprey Cove in St. Marys, GA. Osprey Cove is a master-planned
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residential community with a wide range of natural and recreation amenities
which includes a recreational complex, lakes, a boat dock, and a boat launch. In
the May 1997 issue of Golf Magazine, Osprey Cove was named one of "The Top 20
Communities to Semi-Retire". Osprey Cove also features a Mark McCumber-designed
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.
Also included is a 3.88 acre site in the City of Chicago known as Kinzie
Station. Zoning approval for the construction of 381 dwelling units was
received in 1997. The current plan calls for two (2) high-rise buildings, three
(3) mid-rise buildings and eighteen (18) townhouses. The first phase is
currently being pre-sold and consists of one (1) twenty-five story high-rise
building, one (1) four story mid-rise building and six (6) townhomes.
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago based real
estate company, and Wooton Construction, have formed a joint venture to develop
approximately 265,000 square feet of industrial space in the Goose Island
Industrial Park over the next three years. A lease for a 150,000 square foot
distribution facility has been signed by the joint venture.
Heartland has received preliminary concept approval on a 226 acre site it owns
in Rosemount, Minnesota. The development known as Bloomfield was approved for
226 attached units and 241 detached single family on 192 acres with the
remaining 34 acres reserved for future residential development.
Heartland is considering the acquisition of several additional development
sites, 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 16,214 acres of land held for sale are carried at a book value of
approximately $1.2 million, or approximately $72 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
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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.
Other Activities
At December 31, 1997, the allowance for claims and liabilities established by
Heartland for environmental and other contingent liabilities totaled
approximately $2.2 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 $2.2 million allowance for claims and liabilities.
Heartland engages outside counsel to defend it in connection with most of these
claims. Significant claims are summarized in Note 8 to the Consolidated
Financial Statements (See Item 8).
Regulation and Environmental Matters
For a discussion of regulation and environmental matters, see Notes 5 and 8 to
the Consolidated Financial Statements (See Item 8).
Employees
At December 31, 1997, Heartland employed 38 persons.
Forward-looking Statements
Certain statements discussed in Item 1 (Business) and Item 7 (Management's
Discussion and Analysis of Financial Condition and Results of Operations) and
elsewhere in this Form 10-K constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievement of results to differ materially from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors are discussed in this Form 10-
K, and include, among others:
Economic, and Other Conditions Generally
- ----------------------------------------
The real estate industry is highly cyclical and is affected by changes in
national, global and local economic conditions and events, such as employment
levels, availability of financing, interest rates, consumer confidence and the
demand for housing and other types of construction. Real estate developers are
subject to various risks, many of which are outside the control of the
developer, including real estate market conditions, changing demographic
conditions, adverse weather conditions and natural disasters, such as
hurricanes, tornados, delays
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in construction schedules, cost overruns, changes in government regulations or
requirements, increases in real estate taxes and other local government fees and
availability and cost of land, materials and labor. The occurrence of any of the
foregoing could have a material adverse effect on the financial conditions of
Heartland.
Access to Financing.
- -------------------
The real estate business is capital intensive and requires expenditures for land
and infrastructure development, housing construction and working capital.
Accordingly, Heartland anticipates incurring additional indebtedness to fund
their real estate development activities. As of December 31, 1997, Heartland's
total consolidated indebtedness was $3,750,000. There can be no assurance that
the amounts available from internally generated funds, cash on hand, Heartland's
existing credit facilities and sale of non-strategic assets will be sufficient
to fund Heartland's anticipated operations. Heartland may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financing and sales of debt or
equity securities. No assurance can be given that such financing will be
available or, if available, will be on terms favorable to Heartland. If
Heartland is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures, development
projects may be delayed or abandoned. Any such delay or abandonment could
result in a reduction in sales and would adversely affect Heartland's future
results of operations.
Period-to-Period Fluctuations.
- -----------------------------
Heartland's real estate projects are long-term in nature. Sales activity varies
from period to period, and the ultimate success of any development cannot always
be determined from results in any particular period or periods. Thus, the
timing and amount of revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage effectively
their cash flows from operations would have an adverse effect on their ability
to service debt, and to meet working capital requirements.
Item 2. Properties
At December 31, 1997, real estate holdings consisted of approximately 17,153
acres of scattered land parcels. States in which large land holdings are located
are Georgia, Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota,
Washington, and Wisconsin. The remaining acreage is located in Idaho, Indiana,
Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprising of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. Certain air and fiber
optics development 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
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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 $95,320 for 1998 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, 1997. 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.
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, 1997.
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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 Quarter Ended 1996 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 $ 9 1/4 $11 3/4 $15 3/4 $16 $10 7/8 $9 3/4 $8 3/4 $10 1/8
Low 8 1/8 8 11 3/8 14 3/4 9 3/8 8 7 3/8 8
</TABLE>
Based on records maintained by Heartland's Unit transfer agent and registrar,
there were approximately 624 record holders of Heartland's Units as of March 12,
1998.
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 HTI under management and other
arrangements, (iii) property and operating taxes, (iv) other costs and expenses,
including legal and accounting fees, and (v) reserves for future growth,
commitments and contingencies.
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Heartland's Available Cash Flow will be derived from CMC, CMCI, CMCII, CMCIII,
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 HTI (or its assignee) all accrued and unpaid
management fees pursuant to the Management Agreement between Heartland and HTI.
On December 4, 1997, Heartland's partnership agreement was amended to allow the
General Partner in its discretion to establish a record date for distributions
of the last day of any calendar month. On November 24, 1997, Heartland declared
a cash distribution in the amount of $1.6 million to unitholders of record on
December 29, 1997, payable on January 7, 1998.
Item 6. Selected Financial Data
Following is a summary of Heartland's selected financial data for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993 (amounts in thousands except
per Unit data):
<TABLE>
<CAPTION>
Operating Statement Data: 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $ 5,172 $ 6,925 $ 3,525 $ 3,498 $ 7,304
Expenses 7,335 6,537 7,572 6,106 7,342
-------- -------- -------- -------- --------
Net income (loss) $ (2,163) $ 388 $ (4,047) $ (2,608) $ (38)
======== ======== ======== ======== ========
Net income (loss) allocated
to General Partner and
Class B Interest $ (33) $ 6 $ (61) $ (39) $ ---
======== ======== ======== ======== ========
Net income (loss) allocated
to Class A units $ (2,130) $ 382 $ (3,986) $ (2,569) $ (38)
======== ======== ======== ======== ========
Net income (loss) per
Class A Unit $ (.99) $ .18 $ (1.86) $ (1.20) $ (.02)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
Balance Sheet Data: 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Notes receivable including
Deferred Capital Contribution $ -- $ -- $ -- $ 80 $ 80
Net Properties 23,196 21,051 20,747 20,552 23,768
Total assets 26,838 28,040 27,841 30,243 33,687
Allowance for claims and
liabilities 2,169 2,660 2,492 1,895 2,351
Total liabilities 11,347 8,755 6,181 4,930 5,414
Partners' capital 15,491 19,285 21,660 25,313 28,273
</TABLE>
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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 $2,757,000
(including $724,000 of restricted cash) at December 31, 1997, $5,992,000
(including $300,000 of restricted cash) at December 31, 1996, and $5,907,000 at
December 31, 1995. The decrease of $3,235,000 from December 31, 1996 to December
31, 1997 is mainly attributable to the liquidation of marketable securities to
make the cash distribution of $2.7 million paid January 3, 1997 to unitholders
of record at December 31, 1996 and capital expenditures for land development and
construction costs at Osprey Cove, St. Marys, GA and Kinzie Station, Chicago,
IL. On January 7, 1998, Heartland distributed approximately $1,600,000 in cash
to unitholders of record on December 29, 1997. (see the Consolidated Statement
of Cash Flows).
Cash flow used in operating activities was $4,749,000 in 1997, compared to
$4,970,000 in 1996, and $5,178,000 in 1995. The decrease of $221,000 in cash
used for operating activities for 1997 compared to 1996 is due primarily to an
increase payables and accrued liabilities of $234,000. 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. (see the Consolidated Statement of Cash Flows).
Proceeds from property sales provided cash flow of $7,127,000 in 1997,
$6,918,000 in 1996, and $2,316,000 in 1995. Significant property sales in 1997
consists of the $3,000,000 sale of the Humbolt Yard property, the sale of the
final parcel of the Goose Island property in Chicago for about $1,458,000 and a
sale of a parcel at the Menomonee Valley property of about $454,000. Also
included in 1997 are the sales of the first 2 units in Osprey Cove which
amounted to $507,000. 1996 property sales consists of 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 is due to the fact that
no major parcels were sold in 1995.
As of December 31, 1997, Heartland had approximately $141,000 (fair value)
invested in marketable securities. All securities are invested in direct
obligations of the U.S. Government.
Portfolio income is derived principally from the investment of cash not required
for operating activities ("excess cash") in various U. S. Government and
corporate obligations. Portfolio income for 1997 was $62,000 compared to
$419,000 for 1996 and $583,000 for 1995. The decrease in 1997 compared to 1996
reflects cash used to fund the distribution and capital expenditures associated
with land, development costs, marketing and sales expenses for the development
sites. 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.
Heartland has approximately 200 active leases on its real estate properties,
which generated $1,104,000 of revenue in 1997, $1,039,000 in 1996 and $1,331,000
in 1995. Rental income for 1997 did not vary significantly from 1996. The
larger rental income in 1995 as compared to 1996 and is due the Soo Line
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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 1998 is expected to decrease as a result of
non-renewal of several leases in Milwaukee.
At December 31, 1997, Heartland had designated 17 sites, or approximately 939
acres with a book value of $10,171,000, for development. Capitalized
expenditures at these sites were $5,924,000 in 1997, $2,051,000 in 1996 and
$919,000 in 1995. At December 31, 1997, capitalized costs on development
properties totaled $7,916,000. 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, 1997, 1996 and 1995.
At December 31, 1997, land held for sale consists of 16,214 acres with a book
value of $1,163,000. 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 1997 was $3,407,000 or 48% of sales proceeds,
$1,674,000 or 24% for 1996 and $716,000 or 31% for 1995. In 1997 Heartland sold
a development parcel, Humbolt Yard, which carries a higher cost basis than the
typical non-development properties. This resulted in an increase in the cost to
sale ratio in 1997. 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. Current
development activity is not sufficiently completed for accurate estimates of
cost of sales and profit-margins to be determined.
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 $1.8 million at December 31, 1997 and $2.3 million at December 31,
1996 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
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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 May 1997, CMC signed a line of credit
agreement in the amount of $5 million with La Salle National Bank ("LNB"),
pursuant to which CMC granted LNB a first lien on certain parcels of land in
Chicago, IL and pursuant to which CMC pledged cash in the amount of $500,000 as
an interest reserve. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.0% (9.5% at March 12, 1998). The agreement terminates
on May 1, 1998 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 $15 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). The Company is currently in negotiations with LNB to extend the
maturity of the loan, modify certain existing financial covenants, and increase
the amount of the credit facility. While the Company has no reason to believe
that the extension, modification of terms, and increased capacity of the credit
facility will not be granted, there can be no assurance that the contemplated
transaction will be approved by LNB.
The Company believes that it will not have to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The Company presently
believes that the Year 2000 Issue will not pose significant operational problems
for its computer systems. However, there can be no guarantee that the systems of
other companies on which the Company relies will be converted on a timely basis
and would not have an adverse effect on the company.
Results of Operations
For the year ended December 31, 1997, operations resulted in a net loss of
$2,163,000 or $0.99 per Class A Unit. Operations for the years ended December
31, 1996 and 1995 resulted in net income of $388,000 or $.18 per Class A Unit
and a loss of $4,047,000 or $1.86 per Class A Unit, respectively.
The net loss in 1997 compared to net income in 1996 is due to a smaller gross
profit margin on property sales resulting in profit reduction of $1,524,000,
selling expenses increased by $1,402,000 related to the Osprey Cove and Kinzie
Station projects and a portfolio income reduction of $357,000. Net income in
1996 as compared to the net loss in 1995 is a result of increased property
sales.
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 1997 was $62,000 compared to
$419,000 for 1996 and $583,000 for 1995. The decrease in 1997 compared to 1996
reflects cash used to fund the distribution and capital expenditures associated
with land, development costs, marketing and sales expenses for the development
sites. 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 is 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 $1,104,000 in 1997, $1,039,000 in 1996 and $1,331,000 in 1995.
The 1997 rental income is not significantly greater than 1996 rental income.
The larger rental income in 1995 as compared to 1996 is due to 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 1998 is expected to decrease as a result of
non-renewal of several major leases in Milwaukee.
10
<PAGE>
Total expenses for 1997 were $7,335,000 compared to $6,537,000 for 1996 and
$7,572,000 for 1995. The increase of $798,000 in 1997 compared to 1996 is due
to an increase of $1,402,000 in selling expenses offset by a decrease in real
estate taxes of $281,000 and a decrease in general and administrative costs of
$286,000. 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.
11
<PAGE>
Item 8. Financial Statement and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Partners and Unitholders of Heartland Partners, L.P.
We have audited the accompanying consolidated balance sheets of Heartland
Partners, L.P. (the "Partnership") as of December 31, 1997 and 1996 and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Partners, L.P. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, 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 24, 1998
12
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS:
- -------
Cash........................................................................... $ 1,890 $ 931
Restricted cash................................................................ 724 300
Marketable securities (amortized cost of $143 in 1997 and $4,761 in 1996)...... 141 4,759
Accounts receivable (net of allowance of $205 in 1997 and $107 in 1996)........ 251 530
Accrued interest receivable.................................................... 3 13
Prepaid and other assets....................................................... 355 456
Investment in joint venture.................................................... 278 --
-------- --------
Total.................................................................. 3,642 6,989
-------- --------
Property:
Buildings and other............................................................ 2,003 1,633
Less accumulated depreciation............................................... 807 853
-------- --------
Net buildings and other........................................................ 1,196 780
Land held for sale............................................................. 1,163 1,286
Housing inventories............................................................ 4,092 848
Land held for development...................................................... 8,829 8,987
Capitalized predevelopment costs............................................... 7,916 9,150
-------- --------
Net Properties.............................................................. 23,196 21,051
-------- --------
Total Assets................................................................... $ 26,838 $ 28,040
======== ========
LIABILITIES:
- -----------
Notes payable.................................................................. $ 3,750 $ 737
Accounts payable and accrued expenses.......................................... 724 248
Management fee due affiliate................................................... 425 425
Accrued real estate taxes...................................................... 1,092 1,334
Allowance for claims and liabilities........................................... 2,169 2,660
Unearned rents and deferred income............................................. 1,200 536
Distribution payable........................................................... 1,631 2,719
Other liabilities.............................................................. 356 96
-------- --------
Total Liabilities.............................................................. 11,347 8,755
-------- --------
PARTNERS' CAPITAL:
- -----------------
General Partner................................................................ 28 66
Class A Limited Partners - 2,142
units authorized, issued and outstanding.................................... 5,902 9,639
Class B Limited Partner........................................................ 9,563 9,582
Unrealized holding (loss) gain on marketable securities........................ (2) (2)
-------- --------
Total Partners' Capital........................................................ 15,491 19,285
-------- --------
Total Liabilities and Partners' Capital........................................ $ 26,838 $ 28,040
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
13
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1997, 1996, and 1995
(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, 1995.......................... $129 $15,921 $9,615 $(352) $25,313
Net Loss............................................. (40) (3,986) (21) --- (4,047)
Marketable securities fair value adjustment.......... --- --- --- 394 394
---- ------- ------ ----- -------
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
Net Loss............................................. (22) (2,130) (11) --- $(2,163)
Distribution......................................... (16) (1,607) (8) --- $(1,631)
---- ------- ------ ----- -------
Balances at December 31, 1997........................ $ 28 $ 5,902 $9,563 $ (2) $15,491
==== ======= ====== ===== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
14
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
(amounts in thousands, except for per unit data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
- ---------
Property sales..................................................... $ 7,127 $6,918 $ 2,316
Less: cost of property sales....................................... 3,407 1,674 716
------- ------ -------
Gross profit on property sales.................................. 3,720 5,244 1,600
Rental income...................................................... 1,104 1,039 1,331
Portfolio income................................................... 62 419 583
Miscellaneous income............................................... 286 223 11
------- ------ -------
Total Net Revenues.......................................... 5,172 6,925 3,525
------- ------ -------
Expenses:
- ---------
Selling............................................................ 1,903 501 523
Real estate taxes.................................................. 703 984 1,156
General and administrative......................................... 4,210 4,496 5,343
Management fee..................................................... 425 425 425
Depreciation and amortization...................................... 94 131 125
------- ------ -------
Total Expenses.................................................. 7,335 6,537 7,572
------- ------ -------
Net Income (Loss)............................................... $(2,163) $ 388 $(4,047)
======= ====== =======
Net income (loss) allocated to General Partner.................. $ (22) $ 4 $ (40)
======= ====== =======
Net income (loss) allocated to Class B limited partner.......... $ (11) $ 2 $ (21)
======= ====== =======
Net income (loss) allocated to Class A limited partners......... $(2,130) $ 382 $(3,986)
======= ====== =======
Net income (loss) per Class A limited partnership unit.......... $ (.99) $ .18 $ (1.86)
======= ====== =======
Average number of Class A limited partnership units outstanding. 2,142 2,142 2,142
======= ====== =======
Distributions declared per Class A limited partnership unit..... $ .75 $ 1.25 $ ---
======= ====== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
15
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995
(amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flow from Operating Activities:
- -----------------------------------
Net income (loss).............................................................. $(2,163) $ 388 $(4,047)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.................................................. 94 131 125
Gain on sales of properties.................................................... (3,720) (5,244) (1,600)
(Accretion) amortization of (discount) premium on securities................... (21) (78) (8)
(Gain) Loss on sale of securities.............................................. 3 (79) ---
Net change in allowance for claims and liabilities............................. (491) 168 597
Net change in assets and liabilities:
Decrease (increase) in accounts and accrued interest receivable............... 289 345 (256)
(Decrease) increase in accounts payable and accrued liabilities............... 234 (392) 267
(Decrease) increase in management fee due affiliate........................... -- -- (223)
Net change in other assets and liabilities.................................... 1,025 (209) (33)
------- -------- -------
Net cash Used in Operating Activities.......................................... (4,750) (4,970) (5,178)
------- -------- -------
Cash Flow from Investing Activities:
Proceeds from sales of properties.............................................. 7,127 6,918 2,316
Capital expenditures for inventories........................................... (3,909) --- ---
Capital expenditures including land and development costs...................... (2,015) (2,109) (1,010)
Repayment of notes receivable.................................................. --- --- 80
Purchases of marketable securities............................................. (4,379) (25,979) (8,325)
Sales and maturities of marketable securities.................................. 9,015 27,238 10,438
Distribution paid to unitholders............................................... (2,719) --- ---
------- -------- -------
Net cash provided by investing activities...................................... 3,120 6,068 3,499
------- -------- -------
Cash Flow From Financing Activities:
- -----------------------------------
(Repayment of) proceeds from note payable to Milwaukee Land Company............ --- (648) 648
Advances on notes payable...................................................... 3,013 737 ---
Increase in restricted cash.................................................... (424) (300) ---
------- -------- -------
Net cash provided by (used in) financing activities........................... 2,589 (211) 648
------- -------- -------
Increase (decrease) in cash.................................................... 959 887 (1,031)
Cash at beginning of year...................................................... 931 44 1,075
------- -------- -------
Cash at end of year............................................................ $ 1,890 $ 931 $ 44
======= ======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
16
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1996 and 1995
1. Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in
such capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Minnesota.
CMC has a 100% membership interest in CMC Heartland Partners II ("CMCII"), CMC
Heartland Partners III ("CMCIII") and CMC Heartland Partners V ("CMCV"). CMCII
was formed to participate in the Goose Island Industrial park joint venture.
CMCIII was formed in 1997 to develop a portion of the Kinzie Station property in
Chicago, IL. CMCV was formed in 1996 to construct houses in a master-planned
residential community in St. Marys, GA. CMC also owns 100% of the common stock
of Lifestyle Communities, Ltd. ("LCL") which serves as the exclusive sales agent
as well as the general contractor in the St. Marys development. Except as
otherwise noted herein, references herein to "Heartland" or the "Company"
include CMC, HDC, CMCI, CMCII, CMCIII, 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 4,
1997, Heartland's Partnership agreement was amended to allow the General Partner
in its discretion to establish a record date for distributions of the last day
of any calendar month. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, payable on January 7, 1998.
At December 31, 1997, real estate holdings consisted of approximately 17,153
acres of scattered land parcels. States in which large land holdings are
located are Georgia, Illinois, Iowa, Minnesota, Montana, North Dakota, South
Dakota, Washington, and Wisconsin. The remaining acreage is located in Idaho,
Indiana, Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprised of long strips of
17
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
land approximately 100 feet in width. Also included are former station
grounds and rail yards. Certain air rights and fiber optics development rights
are also owned.
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; CMC II, CMC III,
CMCV and LCL, each 100% owned by CMC. All intercompany transactions have been
eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues from housing and land sales are recognized in the period in which title
passes and cash is received.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Marketable Securities
- ---------------------
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such classification as of each balance sheet
date. Debt securities that the Company does not have the positive intent or
ability to hold to maturity, and all marketable equity securities are classified
as available-for-sale and are carried at fair value. All of Heartland's
marketable securities held at December 31, 1997 and 1996 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, 1997 and 1996.
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.
18
<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 including interest, financing fees, and real
estate taxes that are directly identified with a specific development project
are capitalized. Repairs and maintenance are charged to expense as incurred.
Depreciation is provided for financial statement purposes over the estimated
useful life of the respective assets ranging from 7 years for office equipment
and fixtures to 40 years for building and improvements primarily using the
straight-line method. Depreciation expense for the years ended December 31,
1997, 1996, and 1995 was $94,000, $131,000, $99,000, 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.
Housing inventories, (including completed model homes), consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost which is not in excess of fair value. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units sold in
relation to the total anticipated units in the related development project; such
allocation approximates the relatives sales value method. Direct construction
costs are allocated to the specific units sold for purposes of determining costs
of sales. Selling and marketing costs, not including those costs incurred
related to furnishing and developing the models and sales office, are expensed
in the period incurred. Costs incurred in the construction of the model units
and related furnishings are capitalized at cost. The Company intends to offer
these units for sale at the completion of a project and, accordingly, no
amortization of direct construction costs is provided.
Interest, financing fees, and real estate taxes relating to land and
construction in progress are capitalized and, accordingly, are included in the
aggregate cost of housing inventories. These costs are amortized to cost of
sales on a per unit basis in relationship to the total units of the related
development based upon the total estimated budget to be incurred for the
development. This accounting treatment approximates the relative sales value
method. Additionally, the Company provides each home purchaser with a one-year
warranty covering the major components of the unit. The costs associated with
these warranties are immaterial and therefore, expensed as incurred.
Fair Value of Financial Instruments
- -----------------------------------
Management has considered fair value information relating to its financial
instruments at December 31, 1997. 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, 1997, 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 1996 and
1995 statements in order to provide comparability with the 1997 statements.
These reclassifications have not changed the 1996 and 1995 results.
19
<PAGE>
Heartland Partners L. P.
Notes to Consolidated Financial Statements - (continued)
3. Restricted Cash
On May 14, 1997, CMC established a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB") pursuant to which CMC pledged cash in
the amount of $500,000 as an interest reserve (See Note 4). On December 30,
1997, CMCV renewed a line of credit agreement in the amount of $3 million with
NationsBank ("NB") pursuant to which CMCV pledged cash in the amount of $100,000
as an interest reserve (see Note 4). Restricted cash also includes purchasers'
earnest money escrow deposits of $114,000 and a $10,000 construction improvement
bond held by the Osprey Cove Homeowners Association.
4. Notes Payable
Advances against the LNB line of credit as described in Note 3 bear interest at
the prime rate of LNB plus 1.0% (9.50% at December 31, 1997). This loan is
collateralized by certain parcels of land in Chicago, IL which have a carrying
value of $6,407,000 as of December 31, 1997. The agreement terminates on May 1,
1998. Under the terms of the agreement, CMC is required to maintain a minimum
net worth in excess of $15 million, liquid assets in excess of $1 million, is
limited in incurring additional indebtedness and restricted from making certain
distributions. At December 31, 1997, $2,000,000 had been advanced to CMC by LNB
against the line of credit. The Company is currently in negotiations with LNB to
extend the maturity of the loan, modify certain existing financial covenants,
and increase the amount of the credit facility. While the Company has no reason
to believe that the extension, modification of terms, and increased capacity of
the credit facility will not be granted, there can be no assurance that the
contemplated transaction will be approved by LNB. No adjustments related to this
uncertainty have been made in the accompanying financial statements.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with NationsBank ("NB") to acquire lots and construct
houses in the Osprey Cove subdivision, St. Marys, Georgia, pursuant to which CMC
granted a first mortgage to NB on specific lots in said subdivision with a
carrying value of $4,092,000 at December 31, 1997. Advances against the
revolving line of credit bear interest at the prime rate of NB plus 1.0% (9.50%
at December 31, 1997). The agreement was modified to extend its original
maturity date of December 30, 1997 to December 30, 1998. At that 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, 1997, $1,750,000 had been advanced to CMCV by NB against the
revolving line of credit. During the year ended December 31, 1997, the Company
incurred and paid interest on loans in the amount of $189,387 of which $125,976
was capitalized. In 1996 and 1995, interest paid amounted to $108,248 and $382
respectively; all such interest was charged to expense in those respective
years.
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.
20
<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 HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On December 29,
1995, HTI advanced CMC approximately $648,000 and on February 14, 1996 HTI
advanced an additional $425,000 for past due management fees. Each advance was
in the form of a note payable on demand and bore interest at the prime rate plus
2.5% (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 HTI $1,180,400 related to previously accrued management fees including
$107,400 for interest related to the past due amounts. At December 31, 1997,
the management fee accrued and unpaid was approximately $425,000 representing
deferred management fees for the year ended December 31, 1997.
Under a management services agreement, HTI reimbursed Heartland for reasonable
and necessary costs and expenses for services totaling $227,850 for the year
ended December 31, 1997, $180,000 for 1996 and $109,000 for 1995.
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.
Future minimum annual lease income under noncancellable operating leases with
lease terms in excess of one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................. $ 47,889
1999.................................. 59,000
2000.................................. 59,000
</TABLE>
21
<PAGE>
Heartland Partners L. P.
Notes to Consolidated Financial Statements - (continued)
<TABLE>
<S> <C>
2001.................................. 59,000
2002.................................. 59,000
Thereafter............................ 282,443
--------
Total minimum lease income $566,332
========
</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>
<S> <C>
1998.................................. $112,219
1999.................................. 105,472
2000.................................. 5,242
--------
Total.............................. $222,933
========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996, and 1995 was $133,000,
$132,000 and $120,000, respectively.
8. Legal Proceedings and Contingencies
At December 31, 1997, Heartland's allowance for claims and liabilities was
approximately $2.2 million. During the year ended December 31, 1997, a $78,000
provision was recorded in respect to environmental matters. At December 31,
1996, Heartland's allowance for claims and liabilities was approximately $2.7
million. During the year ended 1996, a $1,141,000 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 acquired from the Company located in
Iowa, Minnesota and Wisconsin. The Company has denied liability based on the
APA.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements on many of these
claims. As a result of Soo's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
- ------------------
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United
States District Court for the Western District of Washington alleging that the
Company was liable under Washington state law for the cost of the Port's
remediation of a railyard sold in 1980 by the bankruptcy trustee for the
Company's predecessor to the Port's predecessor in interest.
Between 1991 and 1997, the Company, the Port and the Port's predecessor in
interest, litigated the
22
<PAGE>
Heartland Partners L. P.
Notes to Consolidated Financial Statements - (continued)
Company's motion to bar liability arising out of the sale of the railyard due to
the reorganization of the Company's predecessor before the United States
District Court for the Northern District of Illinois, which served as the
reorganization court for the company's predecessor. On February 28, 1996, the
United States Court of Appeals for the Seventh Circuit ruled that claims under
certain Washington state environmental laws were not barred by the
reorganization of the Company's predecessor. The United States Supreme Court
subsequently denied a petition for Writ of Certiorari.
A draft feasibility study dated November 1994, submitted to the Washington
Department of Ecology on behalf of the Port 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 of $250,000. Management believes it has
meritorious defenses in this matter and intends to pursue them vigorously.
At December 31, 1997, Heartland's allowance for claims and liabilities for this
site was approximately $290,000.
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; not to exceed $50,000. Payments of $200,000 were
made in 1995, 1996 and 1997.
At December 31, 1997, Heartland's allowance for claims and liabilities for this
site was approximately $408,000, of which $358,000 represents the annual
payments discounted at a rate of 6.07%.
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 material 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 the Port of Tacoma
set forth above. Following the Supreme Court's denial of the Company's petition
for Writ of Certiorari in January 1997, counsel for DEQ indicated DEQ's
intention to file suit to resolve these issues. The Company's potential
liability for the investigation and remediation of these sites was discussed in
detail at a meeting with ADEA in April 1997. While MDEQ has not formally
charged its position, MDEQ has not elected to file suit. Management is not able
to express an opinion at this time whether the cost of the defense of this
liability or the environmental exposure in the event of the Company's liability
will or will not be material.
23
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (continued)
At twelve separate sites, the Company has been notified that releases arising
out of the operations of a lessee, former lessee or other third party have been
reported to government agencies. At each of these sites, the third party is
voluntarily cooperating with the appropriate agency by investigating the extent
of any such contamination and performing the appropriate remediation, if any.
The Company has petroleum groundwater remediation projects or long term
monitoring programs at Austin, Minnesota, Farmington, Minnesota, Miles City,
Montana, and Milwaukee, Wisconsin.
At December 31, 1997 Heartland's aggregate allowance for claims and liabilities
for these sites was approximately $187,000.
In December 1989, the Minnesota Pollution Control Agency ("MPCA") added a site
which includes the Company's Pig's Eye Yard site in St. Paul, Minnesota to its
Permanent List of Priorities based on historical records and an initial
investigation of soil and groundwater conditions adjacent to Pig's Eye Yard.
Portions of this site had been leased to the City of St. Paul for a landfill and
to the Metropolitan Waste Control Commission for disposal of incinerator ash.
The site, which includes portions of the adjacent municipal waste water
treatment plant, was placed on the Superfund Accelerated Clean Up Model list in
1993. No potentially responsible parties ("PRPs") have been formally named at
this site.
The Company has an interest in property at Moses Lake, Washington previously
owned and used by the United States government as an Air Force base. Sampling
by the Army Corps of Engineers has indicated the presence of various regulated
materials, primarily in the groundwater, which were most likely released as a
result of military or other third party operations. A portion of the Company's
property is located over a well field which was placed on the national priority
list in October 1992. The Company has not been named as a PRP.
The Company is voluntarily investigating the environmental condition of a
property in Minneapolis, Minnesota in connection with a contract to sell the
property. The investigation has indicated certain metal impacts in the soil and
groundwater. The Company's best estimate at this time is that the remediation
construction may cost between $425,000 and $881,000. The contract sale price is
$730,000.
At December 31, 1997 Heartland's aggregate allowance for claims and liabilities
for these sites was approximately $472,000.
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
24
<PAGE>
Heartland Partners L.P.
Notes to Consolidated Financial Statements - (continued)
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 provided 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. On January 2, 1998,
the term of Mr. Jacobson's agreement was extended until May 30, 2002. 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 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
$60,000 in 1997, $65,000 in 1996, and $66,000 in 1995 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
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury securities an obligations of U.S.
government agencies........................ $ 143 $ --- $(2) $ 141
------ ------ ---- ------
Total marketable securities, December 31, 1997.. $ 143 $ --- $(2) $ 141
====== ====== ==== ======
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury securities and obligations of U.S.
government agencies........................ $4,761 $ --- $(2) $4,759
------ ------ ---- ------
Total marketable securities, December 31, 1996.. $4,761 $ --- $(2) $4,759
====== ====== ==== ======
</TABLE>
At December 31, 1997 and 1996 all marketable securities were classified as
available-for-sale. Proceeds from sale and maturities of debt securities during
1997, 1996, and 1995, were $9,015,000, $27,238,000 and $10,438,000,
respectively. The gain on sale of securities in 1997 was approximately $3,000.
Proceeds from sales in 1996 and 1995 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
$0, $(44,000) and $394,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
The cost and estimated fair value of debt securities at December 31, 1997, 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.................. $143 $141
Due after one year through three years... --- ---
Due after three years.................... --- ---
---- ----
Total............................... $143 $141
==== ====
</TABLE>
26
<PAGE>
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1997, 1996 AND 1995
(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, 1997:
Allowance for claims and liabilities... $2,660 $ 78 $ (569))(a) $2,169
====== ====== ============= ======
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
====== ====== ============= ======
</TABLE>
Note: (a) Payments
27
<PAGE>
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Gross Amount at Which
Cost Capitalized Carried
Initial Cost to Subsequent at Close of Period
Heartland to Acquisition (1)
---------------------- ------------------------- ---------------------------------
Building,
Buildings & Carrying Improvement and
Description Land Improvements Improvements(3) Costs(4) Land and Carrying Costs Total
- ----------- -------- ------------ --------------- -------- ------- ------------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Developable Sites
Chicago, IL....................(7) $ 4,434 $ 1 $ 2,111(6) $ 1,685 $ 4,434 $ 3,797 $ 8,231
Milwaukee, WI.................. 803 939 1,299(6) 971 803 3,209 4,012
Fife, WA....................... 2,573 -- 198 232 2,573 430 3,003
Rosemount, MN.................. 956 -- 865 407 956 1,272 2,228
Osprey.........................(8) 1,342 -- 2,750 -- 1,342 2,750 4,092
Other developable properties
less than 5% of total.......... 63 -- 142 38 63 180 243
-------- ------- ---------- -------- ------- ----------- -------
Total developable
properties..................... 10,171 940(5) 7,365 3,333 10,171 11,638 21,809
-------- ------- ---------- -------- ------- ----------- -------
Sale Properties................ 1,163 -- 10(5) 1,163 10 1,173
-------- ------- ---------- -------- ------- ----------- -------
TOTAL $ 11,334 $ 940 $ 7,375 $ 3,333 $11,334 $ 11,648 $22,982
======== ======= ========== ======== ======= =========== =======
<CAPTION>
Life On
Which
Depreciation
In Latest
Date of Income
Accumulated Completion of Date Statement
Depreciation Construction Acquired Is Computed
-------------- --------------- ---------- --------------
<S> <C> <C> <C> <C>
Developable Sites
Chicago, IL....................(7) $ 15 Various Various (2)
Milwaukee, WI.................. 423 Various Various (2)
Fife, WA....................... -- Various Various
Rosemount, MN.................. -- N/A Various
Osprey.........................(8) -- N/A Various
Other developable properties
less than 5% of total.......... -- N/A Various
----------
Total developable
properties..................... 438
----------
Sale Properties................ 2 Various Various
----------
TOTAL $ 440
==========
</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 $1,021,
with related accumulated depreciation of $367.
(6) These amounts include a total of $32 that is included in Buildings and
other on the Consolidated Balance Sheet.
(7) Includes certain parcels of land encumbered by a $2,000,000 short-term loan
(See Note 4 to the Consolidated Financial Statements).
(8) Includes parcels of land encumbered by a $1,750,000 short-term loan (See
Note 4 to the Consolidated Financial Statements).
28
<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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1......... $21,280 $20,903 $20,700
------- ------- -------
Additions during year:
Other acquisitions......... 1,125 663 ---
Improvements................. 3,987 1,388 919
------- ------- -------
Total Additions............. 5,112 2,051 919
------- ------- -------
Deductions during year:
Cost of real estate sold... 3,410 1,674 716
------- ------- -------
Total deductions......... 3,410 1,674 716
------- ------- -------
Balance at December 31....... $22,982 $21,280 $20,903
======= ======= =======
</TABLE>
Reconciliation Of Real Estate Accumulated Depreciation
At Beginning of Year with Total At End of Year
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Balance at January 1........ $ 382 $ 323 $ 264
----- ----- -----
Additions during year:
Charged to Expense........ 61 59 59
----- ----- -----
Total Additions......... 61 59 59
----- ----- -----
Deductions during year:
Cost of real estate sold.. 3 --- ---
----- ----- -----
Total deductions........ 3 --- ---
----- ----- -----
Balance at December 31...... $ 440 $ 382 $ 323
===== ===== =====
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
29
<PAGE>
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 HTI, the general partner of
Heartland, and each executive officer of HTI and Heartland. Directors of HTI
are not compensated by Heartland.
Name and Age Principal Occupation, Business
Experience and Directorships
Lawrence S. Adelson, 48..... Vice President and General Counsel of the Company
since June 1990; Vice President and General Counsel
of HTI since October 1988.
Alan Andreini, 51........... Director of HTI (since September 1997); President
and Chief Operating Officer (since May 1977),
InterWorld Corporation (internet software), New
York, New York; Executive Vice President (1994-
1997) and Senior Vice President (1986-1994)
Comdisco (technology services), Rosemount,
Illinois; Vice President (1973-1978), Salomon
Brothers, New York, New York and London, England.
Mr. Andreini also serves as a Director of Comdisco,
International Corporation.
Robert S. Davis, 83......... Director of HTI (since October 1988); Chairman of
the audit committee of HTI; 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, 73...... Vice President - Finance, Secretary and Treasurer
of HTI (since September, 1990); Vice President -
Finance, Secretary and Treasurer of CMC (June 1990-
August 1995).
Edwin Jacobson, 68.......... President and Chief Executive Officer of the
Company (since September 1990); Director of HTI
(since November 1985); member of the executive and
investment committees of HTI; Director and Chairman
of the Executive Committee (since June 1992) and
formerly President (from February 1994- February
1997) and Chief Executive Officer (from February
1994 - July 1997) of Avatar Holdings Inc. (Real
estate, water, and wastewater utilities
operations.)
30
<PAGE>
John R. Torell III, 58...... Director of HTI (since September 1997); Chairman
(since 1990), Torell Management Inc. (financial
advisory) New York, New York; and Special Director
of the Zilkha & Company group of companies
(merchant banking); Chairman and Chief
Executive Officer (1990-1994), Fortune Bancorp
(banking), Tampa, Florida; Chairman, President and
Chief Executive Officer (1983-1989), CalFed,
Inc.(banking), Los Angeles, California; President
(1982-1988), Manufacturers Hanover corporation
(banking), New York, New York. Mr. Torell also
serves as a Director of American Home Products
Corporation, Claremount Technology Group Inc.,
Paine Webber Group, Inc. and Volt Information
Sciences, Inc.
Ezra K. Zilkha, 72.......... Director of HTI (since October 1988); member of the
executive committee and audit committee and
chairman of the investment committee of HTI;
President and Director (since 1956), Zilkha & Sons,
Inc. (Investments), New York, New York. Mr. Zilkha
is a director of Newhall Land and Farming Co. and
was a Director of Cigna Corporation until April 24,
1996.
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 executive
officer with 1997 compensation greater than $100,000.
Name And Annual Compensation All Other
Principal Position Year Salary Bonus Compensation
---- ------ ----- ------------
Edwin Jacobson 1997 $275,000 $ --- $4,750
President and Chief 1996 275,000 --- 4,750
Executive Officer 1995 321,875 --- 4,750
Lawrence S. Adelson 1997 $112,500 $25,000 $4,750
Vice President and 1996 112,500 --- 4,750
General Counsel 1995 112,500 --- 4,750
"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 $32,813 of his 1995 salary into 1996, $35,341 of his 1996 salary into
1997 and $37,817 of his 1997 salary into 1998.
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.
31
<PAGE>
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 May
30, 2002, all or a portion of which may be deferred at the officer's election.
On January 2, 1998, the term of Mr. Jacobson's agreement was extended until May
30, 2002. 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 1997, 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.
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 23, 1998:
Number of
Name and Address of Beneficial Owner (i) Units Owned Percent
- ---------------------------------------- ----------- -------
Lehman Brothers Holdings, Inc. (ii)
American Express Tower
3 World Financial Center
New York, New York 10285........... 187,400 8.7%
Waveland Partners, L.P. (v)
333 West Wacker Drive, Suite 1600
Chicago, IL 60606.................. 185,435 8.7%
Cowen & Company (iii)
Financial Square
New York, New York 10285........... 183,100 8.5%
Edwin Jacobson (iv)
547 W. Jackson
Chicago, Illinois 60661............ 138,000 6.4%
32
<PAGE>
(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 as amended through December
31, 1997, Cowen & Company, a registered broker/dealer and investment
adviser, Cowen Incorporated and Joseph Cohen have shared voting power of
132,900 Units, and shared dispositive power of 183,100 Units.
(iv) Included in the table are 8,000 units held by Mr. Jacobson's wife as to
which Mr. Jacobson shares voting and dispositive power.
(v) Based on a statement filed on Schedule 13D, as amended through March 23,
1998, Waveland Partners, L.P., Waveland Capital Management, L.P. and
Clincher Capital Corporation share voting and dispositive power with
respect to such Units.
33
<PAGE>
Security Ownership of Management
Set forth below is certain information concerning the beneficial ownership of
Units by each current director of HTI, the General Partner of Heartland, by each
named executive officer of CMC and by all directors and executive officers of
HTI and all executive officers of CMC as a group, as of March 23, 1998:
Name of Beneficial
Owner and Number of Number of
Persons in Group Units Owned Percent
- -------------------------------------- ----------- -------
Lawrence S. Adelson................... --- ---%
Alan Andreini......................... --- ---%
Robert S. Davis....................... --- ---%
Edwin Jacobson (ii)................... 138,000 6.4%
John R. Torell III.................... --- ---%
Ezra K. Zilkha (iii).................. 97,000 4.5%
All directors and executive officers
as a group (7 persons)................ 235,000 10.9%
(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 8,000 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 HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On December 31,
1996, CMC paid HTI $1,180,400 related to previously accrued management fees
including $107,400 for interest related to the past due amounts.
Under a management services agreement, HTI reimbursed Heartland for reasonable
and necessary costs and expenses for services totaling $227,850 for the year
ended December 31, 1997, $180,000 for 1996 and $109,000 for 1995.
The officers of HTI and Heartland, including Edwin Jacobson, President and Chief
Executive Officer of HTI 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
34
<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.
35
<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:
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS...................................................................... 12
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996........................................................................ 13
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1997, 1996, and 1995............................................. 14
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995.............................................. 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995............................................. 16
Notes to Consolidated Financial Statements.......................................................... 17
<CAPTION>
2. Financial statement schedules
-----------------------------
<S> <C>
VALUATION AND QUALIFYING ACCOUNTS................................................................... 27
REAL ESTATE AND ACCUMULATED DEPRECIATION............................................................ 28
Attachment A to Schedule III........................................................................ 29
</TABLE>
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.
36
<PAGE>
3. Exhibits
--------
3.1 Certificate of Limited Partnership, dated as of October 4, 1988,
incorporated by reference to Exhibit 3.1 to Heartland's Current Report
on Form 8-K dated January 5, 1998.
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 Current Report on Form 8-K dated January 5,
1998.
3.3 Amendment, dated as of December 4, 1997, to the Amended and Restated
Agreement of Limited Partnership of Heartland Partners, L.P.,
incorporated by reference to Exhibit 3.3 to Heartland's Current report
on Form 8-K dated January 5, 1998.
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.*
10.8 First Amendment to Employment Agreement, dated as of January 2, 1998
between CMC Heartland Partners and Edwin Jacobson (filed herewith).*
21 Subsidiaries of Heartland Partners, L.P (filed herewith).
27 Financial Data Schedule (filed herewith).
-----------------------------
37
<PAGE>
* Management contract required to be filed as an 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 1997.
38
<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
Heartland Technology, Inc., General
Partner (Principal Executive Officer)
By /s/ Leon F. Fiorentino
--------------------------------------
Leon F. Fiorentino
Vice President-Finance, Treasurer and
Secretary of Heartland Technology,
Inc., General Partner (Principal
Financial and Accounting Officer)
Date: March 31, 1998
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.
<TABLE>
<S> <C>
/s/ Robert S. Davis /s/ Edwin Jacobson
- ------------------------------------------ ----------------------------------------
Robert S. Davis Edwin Jacobson
(Director of Heartland Technology, Inc.) (Director of Heartland Technology, Inc.)
March 31, 1998 March 31, 1998
/s/ Alan Andreini /s/ Ezra K. Zilkha
- ------------------------------------------ ----------------------------------------
Alan Andreini Ezra K. Zilkha
(Director of Heartland Technology, Inc.) (Director of Heartland Technology, Inc.)
March 31, 1998 March 31, 1998
/s/ John R. Torell III
- ------------------------------------------
John R. Torell III
(Director of Heartland Technology, Inc.)
March 31, 1998
</TABLE>
39
<PAGE>
HEARTLAND PARTNERS, L.P.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
- ------ ----------- -----------
<S> <C> <C>
3.1 Certificate of Limited Partnership, dated as of October 4, 1988,
incorporated by reference to Exhibit 3.1 to Heartland's Current Report
on Form 8-K dated January 5, 1998.
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 Current Report on Form 10-K for the year
ended December 31, 1990.
3.3 Amendment, dated as of December 4, 1997, to the Amended and Restated
Agreement of Limited Partnership of Heartland Partners, L.P.,
incorporated by reference to Exhibit 3.3 to Heartland's Current report
on Form 8-K dated January 5, 1998.
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>
40
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
<S> <C> <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.
10.8 First Amendment to Employment Agreement, dated as of January 2, 1998
between CMC Heartland Partners and Edwin Jacobson (filed herewith). 42
21 Subsidiaries of Heartland Partners, L.P. (filed herewith). 43
27 Financial Data Schedule (filed herewith). 44
</TABLE>
41
<PAGE>
Exhibit 10.8
CMC HEARTLAND PARTNERS
547 West Jackson Boulevard
Chicago, Illinois 60661
January 2, 1998
Mr. Edwin Jacobson
2575 South Bayshore Drive
Penthouse A
Coconut Grove, Florida 33133
Re: First Amendment to Employment Agreement
Dear Mr. Jacobson:
We are writing with respect to your employment by CMC Heartland
Partners (the "Company") as President and Chief Executive Officer of the
Company, pursuant to an Employment Agreement, dated July 2, 1995 (the
"Employment Agreement"), the term of which expires on July 2, 2000. The Company
acknowledges and recognizes the value of your experience and abilities to the
Company since the beginning of your employment with the Company, and the Company
desires to continue to retain and make secure for itself such experience and
abilities through May 30, 2002. Therefore, as of the date hereof, (i) Section 1
of the Employment Agreement is hereby amended to delete the clause "the fifth
anniversary of the date hereof" and substitute therefor the date "May 30, 2002"
and (ii) Section 7(d)(i) of the Employment Agreement is hereby amended to delete
the clause "the fifth anniversary of the date of the commencement of your
employment hereunder" and substitute therefor the date "May 30, 2002". Except
as amended by this letter, the Employment Agreement remains in full force and
effect in accordance with its terms.
If the foregoing is satisfactory, would you please so indicate by
signing and returning to the Company the enclosed copy of this letter whereupon
this will constitute our agreement on the subject.
CMC HEARTLAND PARTNERS
By: Heartland Technology, Inc,
as General Partner
By: /s/ Leon F. Fiorentino
----------------------------
Name: Leon F. Fiorentino
Title: Vice President-Finance
ACCEPTED AND AGREED TO:
/s/ Edwin Jacobson
- ---------------------------
Edwin Jacobson
42
<PAGE>
Exhibit 21
Subsidiaries of Registrant
The following is a list of all of the registrant's direct and indirect
subsidiaries, state of incorporation or organization and the percentage
ownership by Heartland of each.
Name of Subsidiary State Ownership
- ------------------ ----- ---------
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 (b)
CMC Heartland Partners III, LLC Delaware (b)
CMC Heartland Partners V, LLC Delaware (b)
CMC Heartland Partners VI, LLC Delaware (b)
Lifestyle Communities, Ltd. Delaware (b)
(a) CMC Heartland Partners I is owned by CMC Heartland Partners as sole limited
partner and Heartland Development Corporation as sole general partner.
(b) CMC Heartland Partners II, III, V, VI and Lifestyle Communities, Ltd. are
all 100% owned by CMC Heartland Partners.
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,890 931
<SECURITIES> 141 4,759
<RECEIVABLES> 459 653
<ALLOWANCES> 205 107
<INVENTORY> 4,092 0
<CURRENT-ASSETS> 2,640 6,689
<PP&E> 24,003 21,904
<DEPRECIATION> 807 853
<TOTAL-ASSETS> 26,838 28,040
<CURRENT-LIABILITIES> 7,978 5,559
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,491 19,285
<TOTAL-LIABILITY-AND-EQUITY> 26,838 28,040
<SALES> 7,127 6,918
<TOTAL-REVENUES> 8,579 8,599
<CGS> 3,407 1,674
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,335 6,537
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,163) 388
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,163) 388
<EPS-PRIMARY> (.99) .18
<EPS-DILUTED> 0 0
</TABLE>
