<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 36-3606475
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
547 WEST JACKSON BOULEVARD, CHICAGO, ILLINOIS 60661
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(Address of principal executive offices) (Zip Code)
312/294-0440
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Page 1 of 19
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS:
Cash......................................................... $ 37 $ 1,890
Restricted cash.............................................. 1,285 724
Marketable securities (at market)............................ 143 141
Accounts receivable (net).................................... 387 251
Accrued interest receivable.................................. 0 3
Prepaid and other assets..................................... 302 355
Investment in joint venture.................................. 303 278
-------- --------
Total..................................................... 2,457 3,642
-------- --------
Property:
Buildings and other.......................................... 2,093 2,003
Less Accumulated depreciation............................. 863 807
-------- --------
Net buildings and other...................................... 1,230 1,196
Land held for sale........................................... 1,132 1,163
Housing Inventories.......................................... 5,394 4,815
Land held for development.................................... 8,748 8,829
Capitalized predevelopment costs............................. 7,833 7,193
-------- --------
Net properties............................................ 24,337 23,196
-------- --------
TOTAL ASSETS............................................ $ 26,794 $ 26,838
======== ========
LIABILITIES:
Notes payable................................................ $ 7,531 $ 3,750
Accounts payable and accrued expenses........................ 1,211 724
Management fee due affiliate................................. 213 425
Accrued real estate taxes.................................... 808 1,092
Allowance for claims and liabilities......................... 1,853 2,169
Unearned rents and deferred income........................... 1,910 1,200
Distribution Payable......................................... 0 1,631
Other liabilities............................................ 1,199 356
-------- --------
TOTAL LIABILITIES......................................... 14,725 11,347
-------- --------
PARTNERS' CAPITAL:
General Partner.............................................. (9) 28
Class A Limited Partners - 2,142 units authorized, issued and
outstanding................................................ 2,533 5,902
Class B Limited Partner...................................... 9,546 9,563
Unrealized holding loss on marketable securities............. (1) (2)
-------- --------
TOTAL PARTNERS' CAPITAL................................... 12,069 15,491
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL...................... $ 26,794 $ 26,838
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 2 of 19
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HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 1998 AND JUNE 30, 1997
(dollars in thousands except per unit data)
(Unaudited)
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<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES:
---------
Property sales................................... $ 987 $ 121 $ 2,252 $ 241
Less: Cost of property sales..................... 689 13 2,123 20
-------- -------- -------- --------
Gross profit on property sales............... 298 108 129 221
Portfolio income................................. 9 8 20 32
Rental income.................................... 258 349 475 682
Other revenue.................................... 23 169 58 181
-------- -------- -------- --------
TOTAL NET REVENUES.......................... 588 634 682 1,116
-------- -------- -------- --------
OPERATING EXPENSES:
-------------------
Selling expenses................................. 720 522 1,454 647
General and administrative expenses.............. 1,289 1,268 2,365 2,743
Depreciation and amortization.................... 43 27 72 49
Management fee................................... 107 106 213 213
-------- -------- -------- --------
TOTAL EXPENSES.............................. 2,159 1,923 4,104 3,652
-------- -------- -------- --------
NET LOSS.................................... $ (1,571) $ (1,289) $ (3,422) $ (2,536)
======== ======== ======== ========
NET LOSS ALLOCATED TO GENERAL PARTNER
AND CLASS B LIMITED PARTNER............... $ (23) $ (20) $ (51) $ (38)
======== ======== ======== ========
NET LOSS ALLOCATED TO CLASS A
LIMITED PARTNERS.......................... $ (1,548) $ (1,269) $ (3,371) $ (2,498)
======== ======== ======== ========
NET LOSS PER CLASS A
LIMITED PARTNERSHIP UNIT.................. $ (.72) $ (.60) $ (1.57) $ (1.17)
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 19
<PAGE>
HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss)................................................................. $ (3,422) $ (2,536)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 72 49
Loss/ (Gain) on sales of properties..................................... (129) (221)
Loss (gain) on sale of securities....................................... 0 3
Proceeds from sales of properties....................................... 2,252 241
Net change in assets and liabilities:
(Decrease) increase in allowance for claims & liabilities............... (316) (400)
(Increase) decrease in accounts and interest receivables................ (133) (63)
Increase (decrease) in accounts payable and accrued liabilities......... 203 430
(Decrease) in management fee due HTI.................................... (212) (212)
Net change in other assets and liabilities.............................. 1,565 233
-------- --------
NET CASH FLOW (USED IN) OPERATING ACTIVITIES............................... (120) (2,476)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures for inventories....................................... (2,671) 0
Capital expenditures including land and development costs.................. (559) (1,966)
Write-off of capitalized costs............................................. 0 335
Addition to buildings, furniture & fixtures................................ (90) 0
Amortization of security premium/discount.................................. 0 (18)
Net sales and maturities of marketable securities.......................... (2) 4,638
Dividend paid.............................................................. (1,631) (2,719)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES........................ (4,953) 270
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Advance on notes payable................................................... 3,781 1,904
Increase in restricted cash................................................ (561) (310)
-------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES............................. 3,220 1,594
-------- --------
(Decrease) increase in cash................................................ (1,853) (612)
Cash at December 31, 1997 and 1996......................................... 1,890 931
-------- --------
CASH AT JUNE 30, 1998 AND 1997............................................. $ 37 $ 319
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
1. CONSOLIDATION
Heartland Partners, L.P. ("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 VII was
formed in 1998 to acquire and engage in sales, marketing and construction of
homes in the Longleaf Country Club, Southern Pines, NC. CMCIV, CMC VI and CMC
VIII were formed at various times to acquire and hold properties under various
stages of negotiations. CMC also owns 100% of the common stock of Lifestyle
Communities, Ltd. ("LCL") which serves as the exclusive sales agent 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, CMCIV, CMCV, CMCVI, CMCVII, CMCVIII and LCL.
.
All adjustments which are in the opinion of management necessary to fairly
present the financial statements have been made and are of a normal recurring
nature. The results of operations for the quarter and six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
Certain reclassifications have been made to the previously reported 1997
statements in order to provide comparability with the 1998 interim statements.
These reclassifications have not changed the 1997 results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the unaudited condensed
consolidated financial statements should be read in connection with Heartland's
audited consolidated financial statements for the fiscal year ended December 31,
1997, including the notes thereto.
2. CONTINGENCIES
It is Heartland's practice to evaluate environmental liabilities associated with
certain of its properties on a regular basis. An allowance is provided with
regard to potential environmental liabilities, including remediation, legal
fees, consulting fees, and government oversight costs, when it is probable that
a liability
Page 5 of 19
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
has been incurred and the amount of the liability can be reasonably estimated.
The amount of any liability is evaluated independently from any claim for
recovery from third parties with respect to the liability. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. Environmental costs which are
incurred in connection with Heartland's development activities are expensed or
capitalized as appropriate.
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates
based on professional experience but necessarily rely on certain significant
assumptions, including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives.
There is not sufficient information to reasonably estimate all the environmental
liabilities of which management is aware. Accordingly, management is unable to
determine whether environmental liabilities which management is unable to
reasonably estimate will or will not have a material effect on Heartland's
results of operations or financial condition.
At June 30, 1998, Heartland's allowance for claims and liabilities was
approximately $ 1.9 million of which $0.4 million was for the resolution of non-
environmental claims and $1.5 million was for environmental matters.
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 at June 30, 1998, also
includes purchasers' earnest money escrow deposits of $674,498 and a $10,525
construction improvement bond held by the Osprey Cove Homeowners Association
4. SHORT TERM LOANS
Advances against the LNB line of credit as described in Note 3 bear interest at
the prime rate of LNB plus 1.0% (9.50% at June 30, 1998). This loan is
collateralized by certain parcels of land in Chicago, IL which have a carrying
value of $6,995,000 as of June 30, 1998 . The agreement terminated on May 1,
1998, but was extended through June 30, 1998 for renewal negotiations, during
which the line was temporarily
Page 6 of 19
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
increased to $6 million. The company completed negotiations with LNB, under
which the maturity date of the loan has been extended to April 30, 1999; the
line was increased to $8.5 million from $5.0 million; and the net worth
requirement was reduced to $12 million from $15 million. The company has
subsequently pledged additional cash in the amount of $350,000 bringing the
total interest reserve to $850,000. At June 30, 1998, $6,000,000 had been
advanced to the company by LNB against the line of credit.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with NationsBank ("NB") to acquire lots and construct
houses in Osprey Cove subdivision, St. Marys, Georgia, pursuant to which CMC
granted a first mortgage to NB on specific lots in said subdivision with a
carrying value of $3,643,000 at June 30, 1998. Advances against the revolving
line of credit bear interest at the prime rate of NB plus 1.0% (9.50% at June
30, 1998). 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 June 30, 1998,
$1,531,000 had been advanced to CMCV by NB against the revolving line of
credit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for operating activities has been derived primarily from proceeds of
property sales and rental income. Cash and marketable securities at amortized
cost were $1,465,000 (including $1,285,000 of restricted cash) at June 30, 1998
and $2,757,000 (including $724,000 of restricted cash) at December 31, 1997.
The increase of $180,000 from December 31, 1997 to June 30, 1998 is mainly
attributable to sales escrow receipts as offset by the cash distribution of $1.6
million paid January 7, 1998 to unitholders of record on December 31, 1997; and
also to capital expenditures for land development and construction costs at
Osprey Cove, St. Marys, GA and Kinzie Station, Chicago, IL.(see the Consolidated
Statement of Cash Flows).
Cash flow used for operations was $120,000 in the first six months of 1998,
compared to $2,476,000 used in operations in the first six months of 1997. The
decrease in cash used in operations between years is primarily due to the sale
of 7 units at Osprey Cove, St. Marys, GA in the first six months of 1998, vs.
none in the first six months of 1997.
Page 7 of 19
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
At June 30, 1998, there were 20 homes under contract at Osprey Cove in St.
Marys, GA. Of those, 15 contracts are expected to close during the balance of
1998. To date, 9 contracts have closed; 7 in the first half of 1998 and 2 in
the 4th quarter 1997.
The Company opened its sales office at Kinzie Station for the pre-sale of the
first phase of construction. Phase I consists of 163 units in a tower building,
24 units in a plaza building and 6 townhomes. As of June 30, 1998, this phase
is over 30% sold. Construction is expected to start in the third quarter of
1998. The first closings are expected to occur in the fourth quarter of 1999.
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago based real
estate company, and Wooten Construction, have formed a joint venture to develop
approximately 265,000 square feet of industrial space in The Goose Industrial
Park over the next year. Leases for a 150,000 square foot distribution facility
and for 30,000 square feet of a 66,000 square foot building have been signed by
the joint venture.
Preliminary concept approval has been received by the Company on a 226 acre site
in Rosemount, Minnesota. The development known as Bloomfield was approved for
226 attached units and 241 detached single family units on 192 acres, with the
remaining 34 acres reserved for future residential development.
The Company has entered into a Letter of Intent for the Longleaf Country Club in
Southern Pines, North Carolina. Under the terms of the Letter of Intent, CMC
would sell and build 244 homes on lots currently owned by Longleaf Associates
Limited Partnership, an affiliate of General Investment & Development. Heartland
took over the day to day operations on April 1, 1998. The final contract is
expected to be executed by August 31, 1998.
In addition, the Company has entered into a Letter of Agreement with The
Carolina Company, Inc. to become the exclusive sales, marketing and construction
company for The Carolina golf course community in Southern Pines, North
Carolina.
Heartland has filed for annexation of its property by Fife, Washington for the
purpose of obtaining residential zoning for the parcel.
Proceeds from property sales provided cash flow of $987,000 for the second
quarter of 1998 compared to $121,000 for the second quarter of 1997. The
increase is due to 2 sales which closed in the second quarter of 1998 at Osprey
Cove, St. Marys, GA and $249,000 in condemnation proceeds on 1.75 acres of the
Lite Yard Property located in Minneapolis, MN.
As of June 30, 1998, Heartland had approximately $144,000 (fair value) invested
in marketable securities. All securities are invested in direct obligations of
the U.S. Government.
Page 8 of 19
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Portfolio income is derived principally from the investment of cash not required
for operating activities ("excess cash") in various U. S. Government
obligations. Portfolio income for the second quarter 1998 was $9,000 compared to
$8,000 for the second quarter of 1997. The year to date decrease in 1998
compared to 1997 reflects cash used to fund the distribution and capital
expenditures associated with land, development costs, marketing and sales
expenses for the development sites.
Heartland has approximately 200 active leases on its real estate properties,
which generated $258,000 of revenue in the second quarter of 1998, compared to
$349,000 in the second quarter of 1997. The decrease is due to two tenants who
vacated two spaces in Milwaukee. This has resulted in decreased monthly
revenues of about $35,000. Rental income for 1998 is expected to decrease as a
result of these vacancies. New leasing activity is pending finalization of the
receipt of Federal and State grants, which proceeds will be used for the
modernization and restoration on the facility.
At June 30, 1998, Heartland had designated 17 sites, or approximately 940 acres
with a book value of $10,615,000, for development. Capitalized expenditures at
these sites were $3,230,000 for the six months ended June 30, 1998 compared to
$2,537,000 for the same period of 1997. At June 30, 1998, capitalized costs on
development properties totaled $7,833,000. 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. No loss is included in the statement of operations for
the six months ended June 30, 1998, and 1997.
At June 30, 1998, land held for sale consists of 16,213 acres with a book value
of $1,132,000. It will be disposed of in an orderly fashion. These properties
will not be disposed of until at least the end of the year 2001.
The cost of property sales for the second quarter ended June 30, 1998 was
$689,000 or 70% of sales proceeds compared to 13,000 or 11% for the same period
of 1997. This increase is due to the indirect construction costs incurred with
the startup of Osprey Cove, St. Marys, GA. These costs are capitalized and
written off as units close. A significant portion of those costs were incurred
and capitalized during 1997, before any sales were consummated.
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 $1.5 million at June 30, 1998 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
Page 9 of 19
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
reasonably estimated. The amount of any liability is determined independently
from any claim for recovery. If the amount of the liability cannot be reasonably
estimated, but management is able to determine that the amount of the liability
is likely to fall within a range, and no amount within that range can be
determined to be the better estimate, then a reserve in the minimum amount of
the range is accrued.
In addition, Heartland has established an allowance for resolution of non-
environmental claims of $.4 million.
Heartland does not at this time anticipate that these claims or assessments will
have a material effect on the Company's liquidity, financial position and
results of operations beyond the reserve which the Company has established for
such claims and assessments. In making this evaluation, the Company has assumed
that the Company will continue to be able to assert the bankruptcy bar arising
from the reorganization of its predecessor and that resolution of current
pending and threatened claims and assessments will be consistent with the
Company's experience with similar previously asserted claims and assessments.
While the timing of the payment in respect of environmental claims has not
significantly adversely effected the Company's cash flow or liquidity in the
past, management is not able to reasonably anticipate whether future payments
may or may not have a significant adverse effect in the future.
Heartland's management believes it will have sufficient funds available for
operating expenses, but anticipates the necessity of utilizing outside financing
to fund development projects. In 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 June 30, 1998). The agreement terminated on May 1, 1998,
but was extended through June 30, 1998 for renewal negotiations, during which
the line was temporarily increased to $6 million. The company completed
negotiations with LNB, under which the maturity date of the loan has been
extended to April 30, 1999; the line was increased to $8.5 million from $5.0
million; and the net worth requirement was reduced to $12 million from $15
million. The company has subsequently pledged additional cash in the amount of
$350,000 bringing the total interest reserve to $850,000. At June 30, 1998,
$6,000,000 had been advanced to the company by LNB against the line of credit.
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.
Page 10 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
RESULTS OF OPERATIONS
Operations for the second quarter and six months ended June 30, 1998 resulted in
a net loss of $1,571,000 and $3,422,000, respectively, of which $1,548,000 and
$3,371,000 was allocated to the Class A limited Partners, or $ .72 and $1.57 per
Class A Unit. Operations for the same quarter and six months ended 1997 resulted
in net loss of $1,289,000 and $2,536,000 respectively, of which $1,269,000 and
$2,498,000 was allocated to Class A limited partners or $.60 and $1.17 per Class
A Unit.
Property sales for the second quarter and first six months of 1998 were $987,000
and $2,252,000 compared to $121,000 and $241,000 for the similar period of 1997.
Second quarter 1998 sales included 2 units closed at Osprey Cove, St. Marys, GA
and $249,000 in condemnation proceeds on 1.75 acres of the Lite Yard property
located in Minneapolis, MN. There were no major property sales during the first
sixth months of 1997.
Portfolio income for the second quarter of 1998 was $9,000 compared to $8,000
for the second quarter of 1997. Portfolio income for the first sixth months of
1998 was $ 20,000 compared to $32,000 for the similar period of 1997. Portfolio
income for the first six months of 1998 decreased $12,000 as compared to the
first six months of 1997 primarily due to a decrease in excess cash available to
invest in marketable securities.
Rental income for the second quarter and first six months of 1998 was $258,000
and $475,000 respectively compared to $349,000 and $682,000 for the similar
periods of 1997. The decrease in rental income between 1997 and 1998 is due to
two tenants who vacated their spaces in Milwaukee, WI. New leasing activity is
pending finalization of the receipt of Federal and State grant proceeds, which
will be used for the modernization and restoration of the facility.
Total expenses for the second quarter of 1998 were $2,159,000 compared to
$1,923,000 for the same period of 1997. The increase of $236,000 is primarily
due to an increase in sales and marketing costs in connection with the Osprey
Cove and Kinzie Station projects.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Form 10-Q contain certain statements which
may 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-Q and the Company's other
filings with the Securities and Exchange Commission, including its 10K and
annual report and include, among others:
Page 11 of 19
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HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Economic, and Other Conditions Generally.
- ----------------------------------------
The real estate industry is highly cyclical and is affected by changes in
national, global and local economic conditions and events, such as employment
levels, availability of financing, interest rates, consumer confidence and the
demand for housing and other types of construction. Real estate developers are
subject to various risks, many of which are outside the control of the
developer, including real estate market conditions, changing demographic
conditions, adverse weather conditions and natural disasters, such as
hurricanes, tornados, delays in construction schedules, cost overruns, changes
in government regulations or requirements, increases in real estate taxes and
other local government fees and availability and cost of land, materials and
labor. The occurrence of any of the foregoing could have a material adverse
effect on the financial conditions of Heartland, and in turn the Company.
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 June 30, 1998 Heartland's total
consolidated indebtedness was $7,531,000. 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.
Page 12 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS AND CONTINGENCIES
At June 30, 1998, Heartland's allowance for claims and liabilities was
approximately $ 1.9 million. During the quarter ended June 30, 1998, a net
$50,000 reduction to the provision was recorded in respect to environmental
matters. Material 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 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.
Page 13 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
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 and expert witness fees. Management believes it has
meritorious defenses in this matter and intends to pursue them vigorously.
The company's predecessors purchased insurance policies from the late 1960's to
the mid-1980's in the event of liability in excess of the self-insured retention
amounts in these policies. Notice of this litigation has been given to the
insurance carriers although no formal demand has been made pending liquidation
of the claim.
Wheeler Pit, Janesville, Wisconsin
- ----------------------------------
In November 1995 the Company settled a claim with respect to the Wheeler Pit
site near Janesville, Wisconsin. The settlement calls for the Company to pay
General Motors $800,000 at $200,000 annually for four years, 32% of the
monitoring costs for twenty-five years beginning in 1997 and 32% of governmental
oversight costs; the oversight costs not to exceed $50,000. Payments of $200,000
were made in 1995, 1996, 1997 and 1998.
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 DEQ in April 1997. While DEQ has not formally changed its position,
DEQ has not elected to file suit. Management is not able to express an opinion
at this time whether the cost of the defense of this liability or the
environmental exposure in the event of the Company's liability will or will not
be material.
At twelve separate sites, the Company has been notified that releases arising
out of the operations of a lessee, former lessee or other third party have been
reported to government agencies. At each of these sites, the third
Page 14 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
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.
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 estimate at this time is that the remediation
construction may cost between $425,000 and $881,000. The contract sale price is
$562,000.
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.
Page 15 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
Page 16 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K; No report on Form 8-K was filed during the quarter
ended June 30, 1998.
Page 17 of 19
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
(Registrant)
Date: August 14, 1998 BY: /s/ Edwin Jacobson
---------------------------
Edwin Jacobson
President and Chief Executive Officer
Heartland Technology, Inc.
the General Partner
Date: August 14, 1998 BY: /s/ Leon F. Fiorentino
---------------------------
Leon F. Fiorentino
Vice-President, Secretary
and Treasurer of
Heartland Technology, Inc.
the General Partner
Page 18 of 19
<PAGE>
HEARTLAND PARTNERS
JUNE 30, 1998
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description Sequential Page Number
- -------------- ----------- ----------------------
<S> <C> <C>
27 Financial Data Schedule 20
</TABLE>
Page 19 of 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 37 1,890
<SECURITIES> 143 141
<RECEIVABLES> 592 459
<ALLOWANCES> 205 205
<INVENTORY> 5,394 4,815
<CURRENT-ASSETS> 2,457 3,642
<PP&E> 25,200 24,003
<DEPRECIATION> 863 807
<TOTAL-ASSETS> 26,794 26,838
<CURRENT-LIABILITIES> 10,962 7,978
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 12,069 15,491
<TOTAL-LIABILITY-AND-EQUITY> 26,794 26,838
<SALES> 2,252 241
<TOTAL-REVENUES> 2,805 1,136
<CGS> 2,123 20
<TOTAL-COSTS> 2,123 20
<OTHER-EXPENSES> 4,104 3,652
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,422) (2,536)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,422) (2,536)
<EPS-PRIMARY> (1.57)<F1> (1.17)<F1>
<EPS-DILUTED> 0 0
<FN>
<F1> Primary EPS represents the per-unit Class A Limited Partners' income
allocation, and excludes that of the General Partner and Class B Limited
Partner.
</FN>
</TABLE>
