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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10520
HEARTLAND PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 36-3606475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/294-0440
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Limited Partnership Units American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Registrant's Class A Limited Partnership Units
held by non-affiliates of the Registrant, computed by reference to the last
reported sales price of the Registrant's units on the American Stock Exchange as
of March 26, 1998, was approximately $27,420 million. On that date there were
2,142,438 units outstanding. For the purposes of this computation, it is
assumed that non-affiliates of the Registrant are all holders other than
directors and officers of Heartland Technology, Inc., the Registrant's General
Partner.
Exhibit index appears on Page 41.
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Forward Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Condition and Results of Operation section, and elsewhere in this
Form 10-K, are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and other
important factors, including the risks described in the Management's Discussion
and analysis of Condition and Results of Operations section, and elsewhere in
this Form 10-K. The Company's actual future results, performance or achievement
of results and the value of your stock, may differ materially from any such
results, performance or achievement or value implied by these statements. We
caution you not to put undue reliance on any forward-looking statements. In
addition, we do not have any intention or obligation to update the forward-
looking statements in these documents. The Company claims the protections of
the safe harbor for forward-looking statements contained in Section 21E of the
Securities Exchange Act of 1934.
PART I
ITEM 1. Business
Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in such
capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Rosemount,
Minnesota ("Bloomfield" or "Rosemount"). CMC has a 100% membership interest in
CMC Heartland Partners II ("CMCII"), CMC Heartland Partners III ("CMCIII"), CMC
Heartland Partners IV ("CMCIV"), CMC Heartland Partners V ("CMCV") CMC Heartland
Partners VI ("CMCVI"), CMC Heartland Partners VII ("CMCVII") and CMC Heartland
Partners VIII ("CMCVIII"). CMCII was formed to participate in the Goose Island
Industrial park joint venture in Chicago, Illinois. CMCIII was formed in 1997 to
develop a portion of the Kinzie Station property in Chicago, IL. CMCV was formed
in 1996 to acquire finished lots and to construct and sell houses in Osprey
Cove ("Osprey Cove" or "St. Marys"), a master-planned residential community in
St. Marys, GA. CMCVII was formed in 1998 to acquire and engage in sales,
marketing and construction of homes in the Longleaf Country Club, Southern
Pines, NC ("Southern Pines" or "Longleaf"). CMCIV, CMCVI and CMCVIII were formed
at various times to acquire and hold properties under various stages of
negotiations. CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sales agent in the St. Marys,
Southern Pines and Kinzie Station developments. LCL is also the general
contractor in the St. Marys development. CMC owns 100% of the stock of Lifestyle
Construction Company, Inc. ("LCC") which serves as the general contractor in
North Carolina. Except as otherwise noted herein, references herein to
"Heartland" or the "Company" include CMC, HDC, CMCI, CMCII, CMCIII, CMCIV, CMCV,
CMCVI, CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account such net loss shall be allocated only among partners having positive
balances in their capital account.
The General Partner has the discretion to cause Heartland to make distributions
of Heartland's available cash in an amount equal to 98.5% to the Unitholders,
0.5% to the holder of the Class B Interest and 1% to the General Partner. There
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, which distribution was paid on January 7, 1998. On
December 4, 1997, Heartland's partnership agreement was amended to allow the
General Partner in its discretion to establish a record date for distributions
of the
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last day of any calendar month.
Real Estate Development Activities
At year end 1998, property designated for development, including housing
inventories consisted of 15 sites comprising approximately 915 acres. The book
value of this land is $10.8 million or an average of $11,800 per acre. Heartland
reviews these properties to determine whether to hold, develop, joint venture or
sell them. Heartland's objective for these properties is to maximize unitholder
value over a period of years.
Heartland has a 3.88 acre site in the City of Chicago known as Kinzie Station.
Zoning approval for the construction of 381 dwelling units was received in 1997.
The construction on the first phase of the project started on October 1, 1998.
Phase I consists of 163 units in a Tower Building, 24 units in a Plaza Building
and 6 Townhomes. As of December 31, 1998, the Company has executed sales
contracts on 67 Tower units, 5 Plaza units and 2 Townhomes. The first closings
are expected to occur in the first quarter of the year 2000.
In addition to the 3.88 acre site, the Company owns approximately 11 acres of
land and 4 acres of air rights adjacent to Kinzie Station. This acreage is
currently zoned for industrial and manufacturing uses.
On January 6, 1999, the Kinzie Station loan agreement in the amount of
$29,812,000 was signed with Corus Bank N.A. The loan bears interest at the prime
rate plus one percent. This loan is collateralized by the real estate contained
in the project. In conjunction with the loan, a Construction Contract with the
guaranteed maximum price of $24,710,000 was entered into with a general
contractor. The first draw was completed in January 1999.
Included in the aforementioned 915 acres are approximately 17 acres consisting
of 52 lots purchased for $1.9 million, or an average of $36,500 per lot at
Osprey Cove in St. Marys, GA. The 52 lots consist of 3 completed models, 1
unsold home under construction, 13 sold homes under construction, 2 units sold
not under construction and 33 lots owned. Osprey Cove is a master-planned
residential community with a wide range of natural and recreation amenities
which includes a recreational complex, lakes, a boat dock and a boat launch.
At December 31, 1998, there were 15 homes under contract, 13 of which are under
construction at Osprey Cove. As of December 31, 1998, 15 contracts have closed;
13 in 1998 and two in 1997.
In addition to selling its own units, CMC also sells homes and lots for the
developer of Osprey Cove, and Osprey Cove homeowners. For the year ended
December 31, 1998, CMC has sold 7 homes and 14 lots for these owners.
On December 30, 1998, Heartland entered into a modification agreement to its
December 30, 1996, revolving line of credit agreement in the amount of
$3,000,000 for Osprey Cove to extend the maturity date to June 30, 1999. The
line of credit with NationsBank N.A. ("NB") bears interest at the prime rate of
NB plus 1% (8.75% at December 31, 1998). At maturity, all outstanding advances
and any accrued interest must be paid. In the event the loan is not renewed, it
will be extended for a period of six months to allow for completion of homes
then under construction, but no new construction will be commenced. At December
31, 1998, $2,288,000 has been advanced by NB against the revolving line of
credit.
The Company has signed a contract to be the exclusive homebuilder and sales
agent for the Longleaf Country Club in Southern Pines, North Carolina. CMC will
sell and build 244 homes on lots currently owned by Longleaf Associates Limited
Partnership, an affiliate of General Investment & Development. Heartland assumed
the day to day operations on April 1, 1998. As of December 31, 1998, there were
8 homes under contract at Longleaf. In the first quarter of 1999, the Company
expects to close 3 homes. There are 7 homes under construction at December 31,
1998, of which two are models and five are under contract.
When the Company assumed day to day operations of Longleaf in April 1998, there
were a number of units under construction which were owned by the developer, as
well as resale units, on the market. As of December 31, 1998, the Company has
sold 13 units and 2 lots for these owners.
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In December 1998 the Company signed a commitment letter for $3,000,000 with NB
to construct homes in the Longleaf community. NB makes individual loans on each
home as it is started. The developer subordinates its lot to NB's construction
loan. The term of each loan is one year and bears interest at the NB prime rate
plus 1% (8.75% at December 31, 1998). At December 31, 1998, $383,000 had been
advanced by NB to the Company.
Heartland is seeking additional opportunities for homebuilding, particularly in
vacation/retirement communities.
Heartland has received approval on the 226 acre site it owns in Rosemount,
Minnesota. The development known as Bloomfield was approved for 226 attached
units and 241 detached single family homes, on 192 acres with the remaining 34
acres reserved for future residential development. This project will be
developed in Phases.
In Rosemount, unlike most areas in the country, the City is responsible for
constructing the infrastructure improvements. It receives reimbursement for its
costs by real estate tax assessments. The City of Rosemount is approximately
eighty percent (80%) complete with the Phase I infrastructure and anticipates
completion by June 1, 1999. Phase I consists of 120 townhomes, 27 single family
homes and 10 twinhomes. At December 31, 1998, two model and four speculatively
built townhomes are currently under construction. The Grand Opening of the
models are planned for the spring of 1999. Phase II of Bloomfield has site plan
approval from the City of Rosemount for the construction of 20 twinhomes and 97
single family homes.
On November 30, 1998, Heartland executed an agreement for a $2,500,000 land loan
with Bank One relating to the Bloomfield project. The loan bears interest at
the prime rate (7.75% at December 31, 1998), $500,000 of the loan was placed in
an interest reserve. Also, Bank One is providing a $1,750,000 land development
loan, a letter of credit for $179,000 to the City of Rosemount and a $4,000,000
revolving credit line for the construction of homes pursuant to final documents
which were signed in February 1999. The Company believes that no additional
financing will be needed for Phase I of the Rosemount community.
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago based real
estate company, and Wooton Construction, have formed a joint venture to develop
approximately 265,000 square feet of industrial space in the Goose Island
Industrial Park in Chicago, Illinois. As of March 1999, the buildings had been
built and leases had been signed for approximately 260,000 of the 265,000 square
feet.
On December 1, 1998 the Fife property was annexed to the City of Fife. A Local
Improvement District (LID) has been approved in order to support the improvement
and extension of sewers and sewer capacity for the site. Fife has zoned the
property for residential usage. Heartland is in the process of preparing the
preliminary site plan for the site. The Company expects to submit the site plan
in the second quarter of 1999 and expects to receive approval by the end of
1999.
The Company owns Kilbourn Station, a three story, 60,000 square foot office
building and railroad depot in Milwaukee, Wisconsin. Amtrak provides interstate
passenger rail service using the station. The Company has worked with the State
of Wisconsin, the Wisconsin Congressional Delegation and the Milwaukee County
Transit Company (which provides local bus service) on plans to improve Kilbourn
Station. The plans enhance the linkage of the building to Milwaukee's new
"Midwest Express" convention center and to planned local bus routes as well as
updating the design of its interior space. The State has authorized the
expenditure of about $2 million in state funds and the federal government has
authorized about $2 million of federal funds for the improvement of the
facility. The Company expects to begin work on this project in 1999.
The real estate development business is highly competitive. Heartland is subject
to competition from a great number of real estate developers, including
developers with national operations, many of which have greater sales and
financial resources than Heartland.
Property Sales and Leasing Activities
Heartland's current inventory of land held for sale consists of 15,730 acres
located throughout 12 states. The book value of this inventory is approximately
$930,000. The majority of the land is former railroad rights-of-way, long,
narrow
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strips of land that varies between 50-200 feet wide. Some of Heartland's sites
located in small rural communities or outlying mid-cities are leased to third
parties for agricultural, industrial, retail and residential use. These
properties may be improved with the lessee's structures and include grain
elevators, storage sheds, parking lots and small retail service facilities.
The sale, management and leasing of the Company's non-development real estate
inventory is conducted by Heartland's Sales and Property Management Department.
The volume of Company's sales has slowed over the last five years due to the
less desirable characteristics of the remaining properties. The Company
anticipates that the sale of its remaining parcels may take beyond the year
2001.
The Company has a current active lease portfolio of 188 leases. Less than 1% of
its total acreage is leased. The number of leases declines each year as sales of
properties are made to existing lessee's. Historically, the majority of the
leases provide nominal rental income to Heartland. The leases generally require
the lessee to construct, maintain and remove any improvements, pay property
taxes, maintain insurance and maintain the condition of the property. The
majority of the leases are cancellable by either party upon thirty to sixty days
notice. Heartland's ability to terminate or modify certain of its leases is
restricted by applicable law and regulations.
Other Activities
At December 31, 1998, the allowance for claims and liabilities established by
Heartland for environmental and other contingent liabilities totaled
approximately $2.8 million. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Given the uncertainty inherent
in litigation, resolution of these matters could require funds greater or less
than the $2.8 million allowance for claims and liabilities.
Heartland engages outside counsel to defend it in connection with most of these
claims. Significant claims are summarized in Note 8 to the Consolidated
Financial Statements (See Item 8).
Regulation and Environmental Matters
For a discussion of regulation and environmental matters, see Notes 5 and 8 to
the Consolidated Financial Statements (See Item 8).
Employees
At December 31, 1998, Heartland employed 55 people.
Item 2. Properties
At December 31, 1998, real estate holdings consisted of approximately 16,645
acres of scattered land parcels. States in which large land holdings are located
are Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota, Washington,
and Wisconsin. The remaining acreage is located in Georgia, Idaho, Indiana,
Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprising of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. The Company owns certain air
and fiber optics development rights in the Chicago, Illinois area.
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees's.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Improved properties of value to Heartland include a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin, a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records, and several small, old warehouse buildings in Milwaukee
which are leased to third parties for warehouse use.
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Heartland's headquarters occupy approximately 9,000 square feet of leased office
space located at 547 West Jackson Boulevard, Chicago, Illinois. The lease
provides for a base rent of $107,688 through the lease expiration date of
December 31, 1999 and is subject to operating expense and tax escalations.
Item 3. Legal Proceedings
On October 1, 1998, the Company entered into a Settlement Agreement with the
Port of Tacoma which calls for the Company to either pay the Port of Tacoma $1.1
million or transfer to the Port of Tacoma real estate to be agreed upon at a
later date.
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest. The Company will not make a claim on its
insurance carriers in this matter because the settlement amount does not exceed
the self insured retention under the applicable insurance policies.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Unitholders of Heartland in the fourth
quarter ended December 31, 1998.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Units are listed and traded on the American Stock Exchange under the symbol
"HTL". The Units began trading on a "when issued" basis on June 20, 1990. The
following table sets forth the high and low sales prices per Unit by quarter for
the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
First quarter 16 1/4 15
Second quarter 17 3/4 15
Third quarter 18 3/4 15
Fourth quarter 17 12 1/8
1997
First quarter 9 1/4 8 1/8
Second quarter 11 3/4 8
Third quarter 15 3/4 11 3/8
Fourth quarter 16 14 3/4
</TABLE>
Based on records maintained by Heartland's Unit transfer agent and registrar,
there were approximately 598 record holders of Heartland's Units as of March 19,
1999.
The amount of Heartland's cash available to be distributed to Unitholders, the
holder of the Class B Interest and the General Partner ("Available Cash Flow")
will be determined by the General Partner, in its sole discretion, after taking
into account all factors deemed relevant by the General Partner, including,
without limitation, general economic conditions and Heartland's financial
condition, results of operations and cash requirements, including (i) the
servicing and repayment of indebtedness, (ii) general and administrative
charges, including fees and expenses payable to HTI under management and other
arrangements, (iii) property and operating taxes, (iv) other costs and expenses,
including legal and accounting fees, and (v) reserves for future growth,
commitments and contingencies.
Heartland's Available Cash Flow will be derived from CMC, CMCI, CMCII, CMCIII,
CMCV, CMCVII and LCL. When available and appropriate, the General Partner
expects to cause Heartland to make distributions of Heartland's Available Cash
Flow in an amount equal to 98.5% to the Unitholders, 0.5% to the holder of the
Class B Interest, and 1% to the General Partner, although there can be no
assurance as to the amount or timing of Heartland's cash distributions or
whether the General Partner will cause Heartland to make a cash distribution if
cash is available. Future lenders to Heartland may impose restrictions on
Heartland's ability to make distributions. In addition, distributions may not be
made to Unitholders until Heartland has paid to HTI (or its assignee) all
accrued and unpaid management fees pursuant to the Management Agreement between
Heartland and HTI. On December 4, 1997, Heartland's partnership agreement was
amended to allow the General Partner in its discretion to establish a record
date for distributions of the last day of any calendar month.
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Item 6. Selected Financial Data
Following is a summary of Heartland's selected financial data for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 (amounts in thousands except
per Unit data):
<TABLE>
<CAPTION>
Operating Statement Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 3,289 $ 5,172 $6,925 $ 3,525 $ 3,498
Expenses 9,373 7,335 6,537 7,572 6,106
------- ------- ------ ------- -------
Net income (loss) $(6,084) $(2,163) $ 388 $(4,047) $(2,608)
======= ======= ====== ======= =======
Net income (loss) allocated to General
Partner and Class B Interest $ (182) $ (33) $ 6 $ (61) $ (39)
======= ======= ====== ======= =======
Net income (loss) allocated
to Class A units $(5,902) $(2,130) $ 382 $(3,986) $(2,569)
======= ======= ====== ======= =======
Net income (loss) per Class A Unit $ (2.76) $ (0.99) $ 0.18 $ (1.86) $ (1.20)
======= ======= ====== ======= =======
Distribution declared per Class A limited
partnership unit $ -- $ 0.75 $ 1.25 $ -- $ --
======= ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
Balance Sheet Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Notes receivable
including Deferred
Capital Contribution $ -- $ -- $ -- $ -- $ 80
Net Properties 28,052 23,196 21,051 20,747 20,552
Total assets 33,231 26,838 28,040 27,841 30,243
Allowance for claims
and liabilities 2,762 2,169 2,660 2,492 1,895
Total liabilities 23,822 11,347 8,755 6,181 4,930
Partners' capital 9,409 15,491 19,285 21,660 25,313
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Condition and Results of Operation section are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and other important factors, including the
risks described in the Management's Discussion and Analysis of Condition and
Results of Operations section. The Company's actual future results, performance
or achievement of results and the value of your stock, may differ materially
from any such results, performance or achievement or value implied by these
statements. We caution you not to put undue reliance on any forward-looking
statements. In addition, we do not have any intention or obligation to update
the forward-looking statements in these documents. The Company claims the
protections of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934.
Liquidity and Capital Resources
Cash flow for operating activities has been derived primarily from proceeds of
property sales, rental income, interest income, commissions and proceeds from
sales of securities. Cash and marketable securities at amortized cost were
$3,828,000 (including $2,564,000 of restricted cash) at December 31, 1998,
$2,757,000 (including $724,000 of restricted cash) at December 31, 1997, and
$5,992,000 (including $300,000 of restricted cash) at December 31, 1996. The
increase of $1,071,000 was due primarily to the four parcels of land sold in
December 1998 for total revenues of $2,165,000. The decrease of $3,235,000 from
December 31, 1996 to December 31, 1997 is mainly attributable to the liquidation
of marketable securities to make the cash distribution of $2.7 million paid
January 3, 1997 to unitholders of record at
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December 31, 1996 and capital expenditures for land development and construction
costs at Osprey Cove, St. Marys, GA and Kinzie Station, Chicago, IL. On January
7, 1998, Heartland distributed approximately $1,600,000 in cash to unitholders
of record on December 29, 1997. (see the Consolidated Statement of Cash Flows).
Cash used in operating activities was ($6,812,000) in 1998, compared to
($3,035,000) in 1997, and ($99,000) in 1996. The cash used in operating
activities for 1998 compared to 1997 increased ($3,777,000). This is primarily
due to the higher construction and selling costs paid in conjunction with
increased home building activities of $3.3 million. The increase in cash used in
operating activities for 1997 as compared to 1996 is primarily due to the higher
construction and selling costs in conjunction with increased home building
activities of ($4.0 million) (see the Consolidated Statement of Cash Flows).
Proceeds from property sales provided cash flow of $6,231,000 in 1998,
$7,127,000 in 1997, and $6,918,000 in 1996. Sales in 1998 consists of 13 units
in Osprey Cove for $3,141,000 and four parcels of land; Dubuque, IA, $450,000,
Minneapolis, MN, $900,000, Moses Lake, WA $440,000 and St. Paul, MN, $375,000.
These four sales totaled $2,165,000. Significant property sales in 1997 consists
of the $3,000,000 sale of the Humboldt Yard property, the sale of a part
interest in 10.3 acres of the Goose Island property in Chicago for about
$1,458,000 and a sale of a parcel at the Menomonee Valley property of about
$454,000. Also included in 1997 are the sales of the first 2 units in Osprey
Cove which amounted to $507,000. 1996 property sales consist of the $4,500,000
sale of 15.26 acres of the Goose Island property in Chicago, and the $400,000
sale of .7 acres located at North Avenue. The Cherry St. property in Milwaukee,
WI sold for $800,000 in 1996.
As of December 31, 1998, Heartland had approximately $149,000 (fair value)
invested in marketable securities. All securities are invested in direct
obligations of the U.S. Government.
Portfolio income is derived principally from the investment of cash not required
for operating activities ("excess cash") in various U. S. Government and
corporate obligations. Portfolio income for 1998 was $63,000 compared to $62,000
for 1997 and $419,000 for 1996. The decrease in 1997 compared to 1996 reflects
cash used to fund the distribution and capital expenditures associated with
land, development costs, marketing and sales expenses for the development sites.
Heartland has approximately 188 active leases on its real estate properties,
which generated $886,000 of revenue in 1998, $1,104,000 in 1997, and $1,039,000
in 1996. The decrease in rental income between 1997 and 1998 is primarily due to
two tenants who vacated their spaces in the Company's office building in
Milwaukee, WI. New leasing activity is pending finalization of the receipt of
Federal and State agent proceeds, which will be used for the modernization and
restoration of the facility. Rental income for 1997 did not vary significantly
from 1996.
At December 31, 1998, Heartland had designated 15 sites, or approximately 915
acres with a book value of $10,780,000, for development. Capitalized
expenditures at these sites were $9,157,000 in 1998, $5,112,000 in 1997, and
$2,051,000 in 1996. At December 31, 1998, capitalized costs on development
properties including housing inventories totaled $12,933,000. Expenditures which
significantly increase the value and are directly identified with a specific
project are capitalized.
At December 31, 1998, land held for sale consists of 15,730 acres with a book
value of $930,000. It will be disposed of in an orderly fashion. It is
anticipated that it will take beyond the year 2001 to dispose of most of these
properties.
The cost of property sales for 1998 was $4,405,000 or 71% of sales proceeds,
$3,407,000 or 48% for 1997 and $1,674,000 or 24% for 1996. The increase in the
cost of sale ratio for 1998 is due to the 13 home sales in Osprey Cove. The
Osprey Cove revenues represented 50% of total revenues. In 1997 Heartland sold
a development parcel, Humboldt Yard, which carries a higher cost basis than the
typical non-development properties. This resulted in an increase in the cost to
sale ratio in 1997 compared to 1996. It is not expected that future cost of
sales ratios for real estate other than development projects and home sales will
change materially from ratios experienced in 1996, as the balance of Heartland's
real estate other than development projects consists primarily of railroad
properties acquired over the past 140 years at values far lower than current
fair values.
It is the Company's practice to evaluate environmental liabilities associated
with the Company's properties. Heartland monitors the potential exposure to
environmental costs on a regular basis and has recorded a liability in the
amount of
9
<PAGE>
$2.4 million at December 31, 1998, and $1.8 million at December 31, 1997, for
possible environmental liabilities, including remediation, legal and consulting
fees. A reserve is established with regard to potential environmental
liabilities when it is probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. The amount of any liability
is determined independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated, but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then a reserve in
the minimum amount of the range is accrued.
In addition, Heartland has established an allowance for resolution of non-
environmental claims of $.4 million at December 31, 1998 and 1997.
Heartland does not at this time anticipate that these claims or assessments will
have a material effect on the Company's liquidity, financial position and
results of operations beyond the reserve which the Company has established for
such claims and assessments. In making this evaluation, the Company has assumed
that the Company will continue to be able to assert the bankruptcy bar arising
from the reorganization of its predecessor and that resolution of current
pending and threatened claims and assessments will be consistent with the
Company's experience with similar previously asserted claims and assessments.
While the timing of the payment in respect of environmental claims has not
significantly adversely effected the Company's cash flow or liquidity in the
past, management is not able to reasonably anticipate whether future payments
may or may not have a significant adverse effect in the future.
Heartland's management believes it will have sufficient funds available for
operating expenses and to fund development projects either from internal
operations or third party financing. On May 14, 1997, CMC signed a line of
credit agreement in the amount of $5 million with La Salle National Bank
("LNB"), pursuant to which CMC granted LNB a first lien on certain parcels of
land in Chicago, IL and pursuant to which CMC pledged cash in the amount of
$500,000 as an interest reserve. The agreement terminated on May 1, 1998, but
was extended through June 30, 1998. On June 30, 1998, the loan was amended
extending the maturity date to April 30, 1999, and increasing the line to $8.5
million. The Company has subsequently pledged additional cash in the amount of
$350,000 bringing the total interest reserve to $850,000. On October 23, 1998,
CMC amended the loan temporarily increasing the line to $9,500,000 and reducing
net worth requirements to $8,500,000. The $1,000,000 temporary increase was paid
back in December 1998. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.0% (8.75% at December 31, 1998). At December 31, 1998,
$8,321,000 had been advanced to the Company by LNB against the line of credit.
(See Note 4 to the Consolidated Financial Statements). The Company is currently
in negotiations with LNB to extend the maturity of the loan, modify certain
existing financial covenants, and increase the amount of the credit facility.
While the Company has no reason to believe that the extension, modification of
terms and increased capacity of the credit facility will not be granted, there
can be no assurance that the contemplated transaction will be approved by LNB.
Results of Operations
For the year ended December 31, 1998, operations resulted in a net loss of
$6,084,000 or $2.76 per Class A Unit. Operations for the years ended December
31, 1997 and 1996 resulted in a net loss of $2,163,000 or $0.99 per Class A Unit
and a net income of $388,000 or $0.18 per Class A Unit, respectively.
The net loss in 1998 compared to the net loss in 1997 is due to selling expenses
increasing $973,000 related to Osprey Cove, Kinzie Station, Longleaf and
Rosemount, an increase in the environmental reserve expense of $1,383,000 and a
decrease in net revenues of $1,883,000 offset by a decrease in real estate
tax expense of $304,000.
The net loss in 1997 compared to net income in 1996 is due to decrease in net
revenues of $1,753,000, and selling expense increases of $1,402,000 related to
the Osprey Cove and Kinzie Station projects.
Portfolio income is derived principally from the investment of cash not required
for operating activities ("excess cash") in various U.S. Government and
corporate obligations. Portfolio income for 1998 was $63,000 compared to $62,000
for 1997 and $419,000 for 1996. The decrease in 1997 compared to 1996 reflects
cash used to fund the
10
<PAGE>
distribution and capital expenditures associated with land, development costs,
marketing and sales expenses for the development sites.
Heartland has approximately 188 active leases on its real estate properties,
which generated $886,000 of revenue in 1998, $1,104,000 in 1997, and $1,039,000
in 1996. The 1997 rental income is not significantly greater than 1996 rental
income. The decrease in rental income between 1997 and 1998 is primarily due to
two tenants who vacated their spaces in the Company's office building in
Milwaukee, Wisconsin. New leasing activity in that building is pending
modernization and restoration of the facility.
Total expenses for 1998 were $9,373,000 compared to $7,335,000 for 1997 and
$6,537,000 for 1996. The increase of $2,038,000 in 1998 compared to 1997 is
primarily due to increased selling expense of $973,000 in Osprey Cove, Kinzie
Station, Longleaf and Rosemount and increases in the environmental reserve
expense of $1,383,000 offset by a decrease in property taxes of $304,000. The
increase of $798,000 in 1997 compared to 1996 is due to an increase of
$1,402,000 in selling expenses and an increase of $777,000 in general and
administrative expenses offset by a decrease in real estate taxes of $281,000
and a decrease in environmental expenses of $1,063,000.
Economic and Other Conditions Generally
The real estate industry is highly cyclical and is affected by changes in
national, global and local economic conditions and events, such as employment
levels, availability of financing, interest rates, consumer confidence and the
demand for housing and other types of construction. Real estate developers are
subject to various risks, many of which are outside the control of the
developer, including real estate market conditions, changing demographic
conditions, adverse weather conditions and natural disasters, such as
hurricanes, tornados, delays in construction schedules, cost overruns, changes
in government regulations or requirements, increases in real estate taxes and
other local government fees and availability and cost of land, materials and
labor. The occurrence of any of the foregoing could have a material adverse
effect on the financial conditions of Heartland.
Access to Financing
The real estate business is capital intensive and requires expenditures for land
and infrastructure development, housing construction and working capital.
Accordingly, Heartland anticipates incurring additional indebtedness to fund
their real estate development activities. As of December 31, 1998, Heartland's
total consolidated indebtedness was $13,492,000. There can be no assurance that
the amounts available from internally generated funds, cash on hand, Heartland's
existing credit facilities and sale of non-strategic assets will be sufficient
to fund Heartland's anticipated operations. Heartland may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financing and sales of debt or
equity securities. No assurance can be given that such financing will be
available or, if available, will be on terms favorable to Heartland. If
Heartland is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures, development
projects may be delayed or abandoned. Any such delay or abandonment could result
in a reduction in sales and would adversely affect Heartland's future results of
operations.
11
<PAGE>
Period-to-Period Fluctuations
Heartland's real estate projects are long-term in nature. Sales activity varies
from period to period, and the ultimate success of any development cannot always
be determined from results in any particular period or periods. Thus, the timing
and amount of revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage effectively their
cash flows from operations would have an adverse effect on their ability to
service debt, and to meet working capital requirements.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at December 31, 1998, is
$13,492,000. The Company pays interest on all its outstanding borrowings under
revolving credit facilities and fixed loan amounts at the prime rate plus 0.00%
to 1.00%. An adverse change of 1.00% in the prime rate would increase the yearly
interest incurred by approximately $135,000.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than 2000. This
could result in a system failure or miscalculations causing disruptions of
operation, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required to
modify or replace significant portions of our software and certain hardware so
that those systems will property recognize dates beyond December 31, 1999. We
believe that with modifications or replacements of existing software and certain
hardware, the Year 2000 issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 issue
could materially affect our operations.
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, remediation, testing and implementation. To date, we have fully
completed our assessment of all systems that could be significantly affected by
the Year 2000. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particularly the
general ledger, billing and inventory systems. Based on a review of our product
line, we have determined that most of the products we have sold and will
continue to sell do not require remediation to be Year 2000 compliant.
Accordingly, we do not believe that the Year 2000 presents a material exposure
as it relates to our products. In addition, we have gathered information about
the Year 2000 compliance status of our significant suppliers and subcontractors
and continue to monitor their compliance.
For its information technology exposures, to date the Company is substantially
complete on the remediation phase and we expect to complete software
reprogramming and replacement no later than June 30, 1999. Once software is
reprogrammed or replaced for a system, we will begin testing and implementation.
These phases run concurrently for different systems. We have begun the testing
and implementation of our remediated systems. Completion of the testing phase
for all significant systems was completed by January 31, 1999, with all
remediated systems fully tested and implemented by June 30, 1999, with 100%
completion targeted for September 30, 1999.
The remediation of operating equipment is significantly more difficult than the
remediation of the information technology systems because some of the
manufacturers of the equipment have not yet provided the necessary remediation
programming. Therefore, we are only 10% complete in the remediation phase of
our operating equipment. Testing of this equipment is more difficult than the
testing of the information technology systems; as a result, the Company has
recently started with the testing of its remediated operating equipment. Once
testing is satisfactorily completed, the operating equipment will be ready for
immediate use. The Company expects to complete its remediation efforts by June
30, 1999. Testing and implementation of affected equipment is expected to be
completed by September 30, 1999.
12
<PAGE>
We have begun to query our significant suppliers and subcontractors that do not
share information systems with the Company (external agents). To date, we are
not aware of any external agent with a Year 2000 issue that would materially
impact our results of operations, liquidity, or capital resources. However, we
have no means of ensuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially affect our business or financial results. The
effect of non-compliance by external agents is not determinable.
We will utilize both internal and external resources to reprogram, or replace,
test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $200,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $175,000 ($25,000 expensed and $150,000 capitalized for
new systems and equipment), related to all phases of the Year 2000 project. Of
the total remaining project costs, none of the remaining $25,000 relates to
repair of hardware and software and will be expensed as incurred.
We believe that we have an effective program in place to resolve the Year 2000
issue in a timely manner. As noted above, we have not yet completed all
necessary phases of the Year 2000 program. If we do not complete any additional
phases, the Company would be unable to take customer orders, manufacture
products, finance construction or collect payments. In addition, disruptions in
the economy generally resulting from the Year 2000 issue could also materially
affect the Company. The Company could be subject to litigation for computer
system product failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost reserve
cannot be reasonably estimated at this time.
We currently have no contingency plans in place if we do not complete all phases
of the Year 2000 program. We plan to evaluate the status of completion in June
1999 and determine whether such a plan is necessary. If we are unable to
successfully implement any of the four phases of our Year 2000 plan and we do
not develop a contingency plan to address such problems, or if Year 2000 issues
negatively affect our suppliers, our customers or the economy generally, our
business or financial results may be materially affected.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
See Management's Discussion and Analysis of Financial Condition and Results of
Operations: Economic and Other Conditions and Interest Rate Sensitivity.
13
<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, 1998 and 1997, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Partners, L.P. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 26, 1999
14
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
ASSETS:
- -------
<S> <C> <C>
Cash......................................................................... $ 1,115 $ 1,890
Restricted cash.............................................................. 2,564 724
Marketable securities (amortized cost of $149 in 1998 and $143 in 1997)...... 149 141
Accounts receivable (net of allowance of $416 in 1998 and $205 in 1997)...... 353 251
Due from affiliate........................................................... 442 --
Prepaid and other assets..................................................... 278 358
Investment in joint venture.................................................. 278 278
------- -------
Total..................................................................... 5,179 3,642
------- -------
Property:
Buildings and other.......................................................... 2,231 2,003
Less accumulated depreciation............................................. 931 807
------- -------
Net buildings and other...................................................... 1,300 1,196
Land held for sale........................................................... 930 1,163
Housing inventories.......................................................... 13,978 4,092
Land held for development.................................................... 6,212 8,829
Capitalized predevelopment costs............................................. 5,632 7,916
------- -------
Net Properties............................................................ 28,052 23,196
------- -------
Total Assets................................................................. $33,231 $26,838
======= =======
LIABILITIES:
- ------------
Notes payable................................................................ $13,492 $ 3,750
Accounts payable and accrued expenses........................................ 2,636 724
Management fee due affiliate................................................. 283 425
Accrued real estate taxes.................................................... 1,075 1,092
Allowance for claims and liabilities......................................... 2,762 2,169
Unearned rents and deferred income........................................... 1,862 1,200
Distribution payable......................................................... -- 1,631
Other liabilities............................................................ 1,712 356
------- -------
Total Liabilities......................................................... 23,822 11,347
------- -------
PARTNERS' CAPITAL:
- ------------------
General Partner.............................................................. -- 28
Class A Limited Partners - 2,142 units authorized, issued and outstanding.... -- 5,902
Class B Limited Partner...................................................... 9,409 9,563
Unrealized holding loss on marketable securities............................. -- (2)
------- -------
Total Partners' Capital...................................................... 9,409 15,491
------- -------
Total Liabilities and Partners' Capital...................................... $33,231 $26,838
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
15
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996
(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, 1996 .................. $ 89 $11,935 $9,594 $ 42 $21,660
Net Income ................................... 4 382 2 -- 388
Distribution ................................. (27) (2,678) (14) -- (2,719)
Marketable securities fair value adjustment .. -- -- -- (44) (44)
----- ------- ------ ----- -------
Balances at December 31, 1996 ................ 66 9,639 9,582 (2) 19,285
Net loss ..................................... (22) (2,130) (11) -- (2,163)
Distribution ................................. (16) (1,607) (8) -- (1,631)
----- ------- ------ ----- -------
Balances at December 31, 1997 ................ 28 5,902 9,563 (2) 15,491
Net Loss ..................................... (28) (5,902) (154) -- (6,084)
Marketable securities fair value adjustment .. -- -- -- 2 2
----- ------- ------ ----- -------
Balances at December 31, 1998 ................ $ -- $ -- $9,409 $ -- $ 9,409
===== ======= ====== ===== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
16
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
(amounts in thousands, except for per unit data)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
- ---------
Property sales ...................................................... $ 6,231 $ 7,127 $ 6,918
Less: cost of property sales ........................................ 4,405 3,407 1,674
------- ------- -------
Gross profit on property sales .................................. 1,826 3,720 5,244
Rental income ....................................................... 886 1,104 1,039
Portfolio income .................................................... 63 62 419
Miscellaneous income ................................................ 514 286 223
------- ------- -------
Total Net Revenues........................................... 3,289 5,172 6,925
------- ------- -------
Expenses:
- ---------
Selling ............................................................. 2,876 1,903 501
Real estate taxes ................................................... 399 703 984
General and administrative .......................................... 4,088 4,132 3,355
Environmental Expense ............................................... 1,461 78 1,141
Management fee ...................................................... 425 425 425
Depreciation and amortization ....................................... 124 94 131
------- ------- -------
Total Expenses .................................................. 9,373 7,335 6,537
------- ------- -------
Net Income (Loss) ............................................... $(6,084) $(2,163) $ 388
======= ======= =======
Net income (loss) allocated to General Partner .................. $ (28) $ (22) $ 4
======= ======= =======
Net income (loss) allocated to Class B limited partner .......... $ (154) $ (11) $ 2
======= ======= =======
Net income (loss) allocated to Class A limited partners ......... $(5,902) $(2,130) $ 382
======= ======= =======
Net income (loss) per Class A limited partnership unit .......... $ (2.76) $ (0.99) $ 0.18
======= ======= =======
Average number of Class A limited partnership units outstanding . 2,142 2,142 2,142
======= ======= =======
Distributions declared per Class A limited partnership unit ..... $ -- $ 0.75 $ 1.25
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
17
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
- ------------------------------------
Net income (loss) ............................................................. $(6,084) $(2,163) $ 388
Adjustments reconciling net income (loss) to net cash used in operating
activities:
Bad debt expense .............................................................. 211 98 27
Depreciation .................................................................. 124 94 131
Accretion of discount on securities ........................................... -- (21) (78)
Loss (Gain) on sale of securities ............................................. -- 3 (79)
Net change in allowance for claims and liabilities ............................ 593 (491) 168
Net change in assets and liabilities:
Decrease (increase) in accounts receivable ................................ (313) 181 205
Increase in housing inventories..... ...................................... (4,852) (3,486) (848)
Decrease in land held for sale ............................................ 233 123 81
Decrease in land held for development ..................................... 790 158 350
(Increase) decrease in capitalized development costs ...................... (923) 1,234 44
Increase (decrease) in accounts payable and accrued liabilities ........... 1,895 476 (208)
(Decrease) increase in management fee due affiliate ....................... (142) -- --
Net change in other assets and liabilities ................................ 1,656 759 (280)
------- ------- -------
Net cash used in Operating Activities ..................................... (6,812) (3,035) (99)
------- ------- -------
Cash Flow from Investing Activities:
- ------------------------------------
Additions to buildings and other .............................................. (228) (510) (62)
Net (purchases) sales and maturities of marketable securities ................. (6) 4,636 1,259
------- ------- -------
Net cash (used in) provided by investing activities ........................... (234) 4,126 1,197
------- ------- -------
Cash Flow from Financing Activities:
- ------------------------------------
(Repayment of) proceeds from note payable to Heartland Technology, Inc. ....... -- -- (648)
Advances on notes payable, net ................................................ 9,742 3,011 737
Increase in restricted cash ................................................... (1,840) (424) (300)
Distribution paid to unitholders .............................................. (1,631) (2,719) --
------- ------- -------
Net cash provided by (used in) financing activities ........................... 6,271 (132) (211)
------- ------- -------
Net (decrease) increase in cash ............................................... (775) 959 887
Cash at beginning of year ..................................................... 1,890 931 44
------- ------- -------
Cash at end of year ........................................................... $ 1,115 $ 1,890 $ 931
======= ======= =======
Supplemental Disclosure of Non Cash Operating Activities:
- ---------------------------------------------------------
Net land held for development and capitalized development costs transferred $ 5,034 $ -- $ --
to housing inventories ...................................................... ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
18
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
1. Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in such
capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Rosemount,
Minnesota ("Bloomfield" or "Rosemount"). CMC has a 100% membership interest in
CMC Heartland Partners II ("CMCII"), CMC Heartland Partners III ("CMCIII"), CMC
Heartland Partners IV ("CMCIV"), CMC Heartland Partners V ("CMCV") CMC Heartland
Partners VI ("CMCVI"), CMC Heartland Partners VII ("CMCVII") and CMC Heartland
Partners VIII ("CMCVIII"). CMCII was formed to participate in the Goose Island
Industrial park joint venture in Chicago, Illinois. CMCIII was formed in 1997 to
develop a portion of the Kinzie Station property in Chicago, IL. CMCV was formed
in 1996 to acquire finished lots and to construct and sell houses in Osprey Cove
("Osprey Cove" or "St. Marys"), a master-planned residential community in St.
Marys, GA. CMCVII was formed in 1998 to acquire and engage in sales, marketing
and construction of homes in the Longleaf Country Club, Southern Pines, NC
("Southern Pines" or "Longleaf"). CMCIV, CMCVI and CMCVIII were formed at
various times to acquire and hold properties under various stages of
negotiations. CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sales agent in the St. Marys,
Southern Pines and Kinzie Station developments. LCL is also the general
contractor in the St. Marys development. CMC owns 100% of the stock of Lifestyle
Construction Company, Inc. ("LCC") which serves as the general contractor in
North Carolina. Except as otherwise noted herein, references herein to
"Heartland" or the "Company" include CMC, HDC, CMCI, CMCII, CMCIII, CMCIV, CMCV,
CMCVI, CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account, such net loss shall be allocated only amoung partners having positive
balances in their capital accounts.
The General Partner has the discretion to cause Heartland to make distributions
of Heartland's available cash in an amount equal to 98.5% to the Unitholders,
0.5% to the holder of the Class B Interest and 1% to the General Partner. There
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, which dividend was paid on January 7, 1998. On December 4,
1997, Heartland's partnership agreement was amended to allow the General Partner
in its discretion to establish a record date for distributions of the last day
of any calendar month.
At December 31, 1998, land held for sale consisted of scattered land parcels.
States in which large land holdings are located are Illinois, Iowa, Minnesota,
Montana, North Dakota, South Dakota, Washington, and Wisconsin. The remaining
acreage is located in Idaho, Indiana, Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprised of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. Certain air rights and fiber
optics development rights are also owned.
19
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Improved properties of value to Heartland include a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin, a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records, and several small, old warehouse buildings in Milwaukee
which are leased to third parties for warehouse use.
At December 31, 1998, property available for development, including housing
inventories, consisted of 15 sites with a book value of land is $10.8 million.
Heartland reviews these properties to determine whether to hold, develop, either
solely or with a third party joint venturer, or sell them. Heartland's objective
for these properties is to maximize unitholder value over a period of years.
Heartland has a 3.88 acre site in Chicago, Illinois known as Kinzie Station
under development. Phase I consists of 163 units in a Tower Building, 24 units
in a Plaza Building and 6 Townhomes. CMC is also selling and building single
family homes in Osprey Cove located in St. Marys, Georgia, Longleaf Country Club
in Southern Pines, North Carolina and the Bloomfield community in Rosemount,
Minnesota. These sites are classified as housing inventories.
2. Summary of Significant Accounting Policies
Consolidation
- -------------
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCI, 1%
general partnership interest owned by HDC and 99% owned by CMC; CMC II, CMC III,
CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC, each 100% owned by CMC. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues from housing and land sales are recognized in the period in which title
passes and cash is received.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Marketable Securities
- ---------------------
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such classification as of each balance sheet
date. Debt securities that the Company does not have the positive intent or
ability to hold to maturity, and all marketable equity securities are classified
as available-for-sale and are carried at fair value. All of Heartland's
marketable securities held at December 31, 1998 and 1997 are classified as
available-for-sale. Unrealized holding gains and losses on securities classified
as available-for-sale are reported as a separate component of partners' capital.
Partners' capital included an unrealized holding loss on marketable securities
classified as available for sale of $2,000 at December 31, 1997. Realized gains
and losses, and declines in value judged to be other than temporary, are
included in net securities gains (losses). Premiums and discounts on marketable
securities are amortized
20
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
on a straight-line basis using the maturity date of the security to determine
the amortization period and such amortization is included in interest income.
The cost of securities sold is based on the specific identification method.
Properties
- ----------
Properties are carried at their historical cost. Expenditures which
significantly improve the values or extend useful lives of the properties are
capitalized. Predevelopment costs including interest, financing fees, and real
estate taxes that are directly identified with a specific development project
are capitalized. Repairs and maintenance are charged to expense as incurred.
Depreciation is provided for financial statement purposes over the estimated
useful life of the respective assets ranging from 7 years for office equipment
and fixtures to 40 years for building and improvements primarily using the
straight-line method.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the particular development property may not be
recoverable. If these events or changes in circumstances are present, the
Company estimates the sum of the expected future cash flows (undiscounted) to
result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss the Company would
measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property.
Housing inventories, (including completed model homes), consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost which is not in excess of fair value. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units sold in
relation to the total anticipated units in the related development project; such
allocation approximates the relative sales value method. Direct construction
costs are allocated to the specific units sold for purposes of determining costs
of sales. Selling and marketing costs, not including those costs incurred
related to furnishing and developing the models and sales office, are expensed
in the period incurred. Costs incurred in the construction of the model units
and related furnishings are capitalized at cost. The Company intends to offer
these units for sale at the completion of a project and, accordingly, no
amortization of direct construction costs is provided. Housing inventories are
reviewed for impairment whenever events or circumstances indicate the fair value
is less than the cost. If these events or changes in circumstances are present,
the Company then would write down the inventory to its fair value.
As of December 31, 1998 and 1997, management is not aware of any impairment
losses in the Company's real estate assets. Accordingly, no impairment losses
were recognized during any of the years presented.
21
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Housing inventories consisted of the following at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
(amounts in thousands)
1998 1997
-------- -------
<S> <C> <C>
Land under development............................ $ 4,568 $1,421
Direct construction costs......................... 2,109 1,843
Capitalized project costs......................... 7,301 828
------- ------
$13,978 $4,092
======= ======
</TABLE>
Interest, financing fees, and real estate taxes relating to land and
construction in progress are capitalized and, accordingly, are included in the
aggregate cost of housing inventories. These costs are amortized to cost of
sales on a per unit basis in relationship to the total units of the related
development based upon the total estimated budget to be incurred for the
development. This accounting treatment approximates the relative sales value
method. Additionally, the Company provides each home purchaser with a one-year
warranty covering the major components of the unit. The costs associated with
these warranties are immaterial and therefore, expensed as incurred.
Fair Value of Financial Instruments
- -----------------------------------
Management has considered fair value information relating to its financial
instruments at December 31, 1998. For cash and marketable securities, the
carrying amounts approximate fair value. For variable rate debt that reprices
frequently, fair values approximate carrying values. For all remaining financial
instruments, carrying value approximates fair value due to the relatively short
maturity of these instruments.
Income Taxes
- ------------
A publicly-traded partnership generally is not liable for Federal income taxes,
provided that for each taxable year at least 90% of its gross income consists of
certain passive types of income. In such case, each partner includes its
proportionate share of partnership income or loss in its own tax return.
Accordingly, no provision for income taxes is reflected in Heartland's financial
statements.
Heartland's assets are carried at historical cost. At December 31, 1998, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
Segment Reporting
- -----------------
During the fourth quarter of 1998, Heartland adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement No. 131"). Statement No. 131 superseded FASB
Statement of Financial Accounting Standards No. 14, Financial Reporting for
Segments of a Business Enterprise ("Statement No. 14"). Statement No. 131
establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of Statement
No. 131 did not affect Heartland's results of operations or financial position.
The Company has two primary reportable business segments, which consist of land
sales and property development (See Note 11 to the Consolidated Financial
Statements).
22
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Reclassification
- ----------------
Certain reclassifications have been made to the previously reported 1997 and
1996 statements in order to provide comparability with the 1998 statements.
These reclassifications have not changed the 1997 and 1996 results.
3. Restricted Cash
On May 14, 1997, CMC established a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB") pursuant to which CMC pledged cash
in the amount of $500,000 as an interest reserve. During 1998, LNB increased the
line of credit to $8.5 million and extended the maturity date of the loan to
April 30, 1999, pursuant to which CMC pledged additional cash in the amount of
$350,000 as an interest reserve. On December 30, 1997, CMCV renewed a line of
credit agreement in the amount of $3 million with NationsBank ("NB") pursuant to
which CMCV pledged cash in the amount of $100,000 as an interest reserve. This
cash was released in 1998. On November 30, 1998, CMCI executed an agreement for
a $2,500,000 loan with Bank One relating to the Bloomfield project pursuant to
which CMCI has pledged $502,000 in cash as an interest reserve (see Note 4 to
the Consolidated Financial Statements). Restricted cash also includes
purchasers' earnest money escrow deposits of $1,202,000 and $114,000 at December
31, 1998, and 1997, respectively and a $10,000 construction improvement bond
held by the Osprey Cove Homeowners Association. The total restricted cash at
December 31, 1998 and 1997 was $2,564,000 and $724,000, respectively.
4. Notes Payable
On May 14, 1997, CMC signed a line of credit agreement in the amount of $5
million with LNB, pursuant to which CMC granted LNB a first lien on certain
parcels of land in Chicago, IL which had a carrying value of $5,560,000 and
$6,407,000 as of December 31, 1998, and 1997, respectively. Also, pursuant to
the line of credit agreement, CMC pledged cash in the amount of $500,000 as an
interest reserve. The agreement terminated on May 1, 1998, but was extended
through June 30, 1998. On June 30, 1998, the loan was amended extending the
maturity date to April 30, 1999, and increasing the line to $8.5 million. The
Company has subsequently pledged additional cash in the amount of $350,000
bringing the total interest reserve to $850,000. On October 23, 1998, CMC
amended the loan temporarily increasing the line to $9,500,000 and reducing net
worth requirements to $8,500,000. The $1,000,000 temporary increase was paid
back in December 1998. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.0% (8.75% at December 31, 1998). At December 31, 1998,
and 1997, $8,321,000 and $2,000,000 respectively, had been advanced to the
Company by LNB against the line of credit. The Company is currently in
negotiations with LNB to extend the maturity of the loan, modify certain
existing financial covenants, and increase the amount of the credit facility.
While the Company has no reason to believe that the extension, modification of
terms and increased capacity of the credit facility will not be granted, there
can be no assurance that the contemplated transaction will be approved by LNB.
No adjustments related to this uncertainty have been made in the accompanying
financial statements.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with NB to acquire lots and construct houses in the Osprey
Cove subdivision, St. Marys, Georgia, pursuant to which CMC granted a first
mortgage to NB on specific lots in said subdivision with a carrying value of
$5,138,000 and $4,092,000 at December 31, 1998, and 1997, respectively. On
December 30, 1998, Heartland entered into a modification agreement to its
December 30, 1996, revolving line of credit agreement in the amount of $3
million for Osprey Cove to extend the maturity date to June 30, 1999. The line
of credit with NB bears interest at the prime rate of NB plus 1% (8.75% at
December 31, 1998). At maturity, all outstanding advances and any accrued
interest must be paid. In the event the loan is not renewed, it will be extended
for a period of six months to allow for completion of homes then under
construction, but no new construction will be commenced. NB had advanced
$2,288,000 and $1,750,000 at December 31, 1998, and 1997, respectively against
the revolving line of credit facility.
23
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Under the terms of the agreement, CMCV is required to maintain a minimum net
worth of $500,000 and a minimum leverage ratio not to exceed of 4:1.
In December 1998 the Company signed a commitment letter for $3,000,000 with NB
to construct homes in the Longleaf community. NB makes individual loans on each
home at the time construction begins. The third party developer subordinates its
lot to NB's construction loan. As of December 31, 1998, the Company had
outstanding balances on 7 term loans totaling $383,000. The carrying value of
the related inventory at December 31, 1998, totaled $546,000. The term of each
loan is one year and bears interest at the NB prime rate plus 1% (8.75% at
December 31, 1998).
On November 30, 1998, Heartland executed an agreement for a $2,500,000 loan with
Bank One relating to the Bloomfield project. The two year loan bears interest at
the prime rate (7.75% at December 31,1998). $500,000 of the loan was placed in
an interest reserve. The loan is collateralized by the Phase II land with a
carry value of $918,000 at December 31, 1998. In addition, Bank One is providing
a $1,750,000 development loan, a letter of credit for $179,000 to the City of
Rosemount and a $4,000,000 revolving credit line for the construction of homes;
these credit facilities were executed in February 1999. The Company believes
that no additional financing will be needed for Phase I of the Rosemount
community.
On January 6, 1999, the Kinzie Station 2.5 year loan agreement in the amount of
$29,812,000 was signed with Corus Bank N.A. The loan bears interest at the prime
rate plus one percent. This loan is collateralized by the real estate contained
in the project. In conjunction with the loan, a Construction Contract with the
guaranteed maximum price of $24,710,000 was entered into with a general
contractor. The first draw was completed in January 1999.
During the years ended December 31, 1998, 1997, and 1996, the Company incurred
and paid interest on loans in the amount of $802,000, $189,000 and $108,000,
respectively, of which $802,000, $126,000 and $0 was capitalized. Interest
expense in 1997 and 1996 is recorded in general and administrative expense.
5. Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. Environmental costs which are
incurred in connection with Heartland's development activities are expensed or
capitalized as appropriate.
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives. (See Note 8).
There is not sufficient information to reasonably estimate all the environmental
liabilities of which management is aware. Accordingly, management is unable to
determine whether environmental liabilities which management is unable to
reasonably estimate will or will not have a material effect on Heartland's
results of operations or financial condition.
24
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
6. Related Party Transactions
CMC has a management agreement with HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On December 29,
1995, HTI advanced CMC approximately $648,000 and on February 14, 1996 HTI
advanced an additional $425,000 for past due management fees. Each advance was
in the form of a note payable on demand and bore interest at the prime rate plus
2.5%. Interest expense on the note was approximately $107,000 for 1996. On
December 31, 1996, CMC paid HTI $1,180,400 related to previously accrued
management fees including $107,400 for interest related to the past due amounts.
At December 31, 1997, the management fee accrued and unpaid was approximately
$425,000 representing deferred management fees for the year ended December 31,
1997. In February 1998, CMC paid HTI the $425,000 management fee. $142,000 of
the 1998 management fee was paid in 1998.
Under a management services agreement, HTI reimburses Heartland for reasonable
and necessary costs and expenses for services totaling $322,000 for the year
ended December 31, 1998, $228,000 for 1997 and $180,000 for 1996. HTI owes CMC
$442,000 as of December 31, 1998, related to these expenses.
7. Leases
Heartland is a lessor under numerous property lease arrangements with varying
lease terms. The majority of the leases are cancelable by either party upon
thirty to sixty days notice and provide nominal rental income to Heartland. The
leases generally require the lessee to construct, maintain and remove any
improvements, pay property taxes, maintain insurance and maintain the condition
of the property. Heartland has several major leases on buildings and land in
Chicago, Illinois, Milwaukee, Wisconsin and Minneapolis, Minnesota which account
for over half of Heartland's annual rental income.
Heartland is lessor with one non-cancellable operating lease for $114,400 per
year that will continue as long as the lessee operates its railroad line.
Heartland leases its office premises as well as offices at certain development
sites and certain equipment under various operating leases. Future minimum lease
commitments under non-cancellable operating leases are as follows:
<TABLE>
<S> <C>
1999............................................ $310,000
2000............................................ 192,000
2001............................................ 115,000
2002............................................ 48,000
--------
Total........................................ $665,000
========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was $294,000,
$133,000, and $132,000, respectively.
8. Legal Proceedings and Contingencies
At December 31, 1998, and 1997, Heartland's allowance for claims and liabilities
was approximately $2.8 million and $2.2 million, respectively. During the year
ended December 31, 1998, 1997, and 1996 provisions for, a $1,461,000, $78,000
and $1,141,000, respectively, were recorded with respect to environmental
matters. Significant legal matters are discussed below.
Soo Line Matters
- ----------------
25
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The Soo Line Railroad Company (the "Soo") has asserted that the Company is
liable for certain occupational injury claims filed after the consummation of an
Asset Purchase Agreement and related agreements ("APA") by former employees now
employed by the Soo. The Company has denied liability for each of these claims
based on a prior settlement with the Soo. The Soo has also asserted that the
Company is liable for the remediation of releases of petroleum or other
regulated materials at six different sites acquired from the Company located in
Iowa, Minnesota and Wisconsin. The Company has denied liability based on the
APA.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements on many of these
claims. As a result of Soo's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
- ------------------
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest.
On October 1, 1998, the Company entered into a Settlement Agreement with the
Port in which the Port released all claims and the Company agreed to either pay
$1.1 million or to convey real property to be agreed upon between the parties at
a later date. At December 31, 1998, and 1997, Heartland's allowance for claims
and liabilities for this site was $1,100,000 and $290,000, respectively.
The Company will not make a claim on its insurance carriers in this matter
because the settlement amount does not exceed the self insured retention under
the applicable insurance policies.
Wheeler Pit, Janesville, Wisconsin
- ----------------------------------
In November 1995 the Company settled a claim with respect to the Wheeler Pit
site near Janesville, Wisconsin. The settlement calls for the Company to pay
General Motors $800,000 at $200,000 annually for four years, 32% of the
monitoring costs for twenty-five years beginning in 1997 and 32% of governmental
oversight costs; the oversight costs not to exceed $50,000. Payments of $200,000
were made in 1995, 1996, 1997 and 1998. A payment of $50,000 for past government
oversight costs was made in October 1998. At December 31, 1998, and 1997,
Heartland's allowance for claims and liabilities for this site was $184,000 and
$408,000, respectively, of which $171,000 and $358,000 represents the annual
payments discounted at 4.54% and 6.07% respectively.
Miscellaneous Environmental Matters
- -----------------------------------
Under environmental laws, liability for hazardous substance contamination is
imposed on the current owners and operators of the contaminated site, as well as
the owner or the operator of the site at the time the hazardous substance was
disposed or otherwise released. In most cases, this liability is imposed without
regard to fault. Currently, the Company has known environmental liabilities
associated with certain of its properties arising out of the activities of its
predecessor or certain of its predecessor's lessees and may have further
material environmental liabilities as yet unknown. The majority of the Company's
known environmental liabilities stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad or in operations
conducted by its predecessor's lessees. The following is a summary of material
known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is liable for some or all of the investigation and remediation of
certain properties in Montana sold by its predecessor's reorganization trustee
26
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
prior to the consummation of its predecessor's reorganization. The Company has
denied liability at certain of these sites based on the reorganization bar of
the Company's predecessors. The Company's potential liability for the
investigation and remediation of these sites was discussed in detail at a
meeting with DEQ in April 1997. While DEQ has not formally changed its position,
DEQ has not elected to file suit. Management is not able to express an opinion
at this time whether the cost of the defense of this liability or the
environmental exposure in the event of the Company's liability will or will not
be material.
At twelve separate sites, the Company has been notified that releases arising
out of the operations of a lessee, former lessee or other third party have been
reported to government agencies. At each of these sites, the third party is
voluntarily cooperating with the appropriate agency by investigating the extent
of any such contamination and performing the appropriate remediation, if any.
The Company has petroleum groundwater remediation projects or long term
monitoring programs at Austin, Minnesota, Farmington, Minnesota, and Miles City,
Montana. At December 31, 1998, and 1997, Heartland's aggregate allowance for
claims and liabilities for these sites were approximately $41,000 and $187,000,
respectively.
In December 1989, the Minnesota Pollution Control Agency ("MPCA") added a site
which includes the Company's Pig's Eye Yard site in St. Paul, Minnesota to its
Permanent List of Priorities based on historical records and an initial
investigation of soil and groundwater conditions adjacent to Pig's Eye Yard.
Portions of this site had been leased to the City of St. Paul for a landfill and
to the Metropolitan Waste Control Commission for disposal of incinerator ash.
The site, which includes portions of the adjacent municipal waste water
treatment plant, was placed on the Superfund Accelerated Clean Up Model list in
1993. No potentially responsible parties ("PRPs") have been formally named at
this site. The Company has reached an agreement to sell its interest in this
property to the city of St. Paul for $630,000, subject to final documentation.
The Company has an interest in property at Moses Lake, Washington previously
owned and used by the United States government as an Air Force base. Sampling by
the Army Corps of Engineers has indicated the presence of various regulated
materials, primarily in the groundwater, which were most likely released as a
result of military or other third party operations. A portion of the Company's
property is located over a well field which was placed on the national priority
list in October 1992. The Company has not been named as a PRP.
The Company is voluntarily investigating the environmental condition of a
property in Minneapolis, Minnesota in connection with a contract to sell the
property. The investigation has indicated certain metal impacts in the soil and
groundwater. The Company's estimate at this time is that the remediation
construction may cost between $425,000 and $881,000. The contract sale price is
$562,000. At December 31, 1998, and 1997, Heartland's aggregate allowance for
claims and liabilities for these sites was approximately $518,000 and $472,000,
respectively.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company, or
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
27
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
9. Compensation and Benefits
An employment agreement with the President and Chief Executive Officer of CMC
provides for a base salary of $275,000 through May 30, 2002, all or a portion of
which may be deferred at the officer's election. The contract provides incentive
compensation equal to 10% of the value of all amounts distributed to Unitholders
and the holder of the Class B Interest in excess of the "Capital Amount" as
defined. The Capital Amount approximates the average market value of the Units
for the first 30 trading days after the Distribution Date, subject to adjustment
as set forth in the contract. During or after the term of employment, incentive
payments will be made with respect to distributions by Heartland during
Heartland's term of existence, and if distributions are made subsequent to such
officer's death, payments will be made to his designee or estate. The contract
also provides that in the event of a "change of control of Heartland" during or
after the term of employment, the officer shall receive a lump sum payment of
$1,250,000.
Heartland sponsors a Group Savings Plan, which is a salary reduction plan
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986.
All full-time permanent employees of Heartland are eligible to participate in
the plan. A participating employee can authorize contributions to the plan in
the form of salary reductions of up to the maximum allowed by the Internal
Revenue Code in any plan year. In 1998 Heartland made matching contributions of
50% of each participant's contribution to the plan. Beginning January 1, 1999,
Heartland will make matching contributions of 25%. Participating 1998 employees
are fully vested with respect to salary reduction and Heartland's contributions.
For all future participants, they are fully vested with respect to salary
reduction immediately but the matching contribution vests at 20% per year.
Benefits are normally distributed upon retirement (on or after age 65), death or
termination of employment, but may be distributed prior to termination of
employment upon showing of financial hardship. Heartland contributed to the plan
approximately $80,000 in 1998, $60,000 in 1997, and $65,000 in 1996 on behalf of
all employees.
10. Marketable Securities
The following is a summary of marketable securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury securities and obligations of U.S.
government agencies............................... $ 149 $ -- $ -- $ 149
======= ========== ======= ========
</TABLE>
At December 31, 1998 and 1997 all marketable securities were classified as
available-for-sale. Proceeds from sale and maturities of debt securities during
1998, 1997, and 1996, were $297,000, $9,015,000, and $27,238,000, respectively.
The gain on sale of securities in 1997 was approximately $3,000. Proceeds from
sales in 1998 and 1996 approximated cost for all securities at the date of sale.
The net adjustment to unrealized holding gains (losses) on marketable securities
included as a separate component of partners' capital was $2,000, $0 and
$(44,000) for the years ended December 31, 1998, 1997 and 1996, respectively.
28
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The cost and estimated fair value of debt securities at December 31, 1998, by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because the issuers of the securities may have the right
to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
Due in one year or less................. $149 $149
Due after one year through three years.. --- ---
Due after three years................... --- ---
---- ----
Total................................ $149 $149
==== ====
</TABLE>
11. Reportable Segments
The following tables set forth the reconciliation of net income and total assets
for Heartland's reportable segments for the years ended December 31, 1998, 1997
and 1996 (See Note 2 to the Consolidated Financial Statements).
<TABLE>
<CAPTION>
Property
1998 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- ---------------------------------- -------------- --------------- ------------- ------------
Revenues:
- ---------
<S> <C> <C> <C> <C>
Property sales.................... $1,814 $ 4,417 $ 0 $ 6,231
Less: cost of property sales...... 215 4,190 0 4,405
------ ------- ------- -------
Gross profit on property sales. 1,599 227 0 1,826
Rental income..................... 886 0 0 886
Portfolio income.................. 0 0 63 63
Miscellaneous income.............. 0 514 0 514
------ ------- ------- -------
Total Net Revenues............. 2,485 741 63 3,289
------ ------- ------- -------
Expenses:
- ---------
Selling........................... 0 2,876 0 2,876
Real estate taxes................. 209 190 0 399
General and administrative........ 986 327 2,775 4,088
Environmental Expense............. 248 25 1,188 1,461
Management fee.................... 0 0 425 425
Depreciation and amortization..... 0 84 40 124
------ ------- ------- -------
Total Expenses................. 1,443 3,502 4,428 9,373
------ ------- ------- -------
Net Income (Loss).............. $1,042 $(2,761) $(4,365) $(6,084)
====== ======= ======= =======
Properties, net of accumulated
depreciation............... $ 937 $26,296 $ 819 $28,052
====== ======= ======= =======
Total assets................... $1,290 $29,403 $ 2,538 $33,231
====== ======= ======= =======
</TABLE>
29
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Property
1997 (amounts in thousands) Land Sales(1) Development(2) Corporate (3) Consolidated
- ----------------------------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
- ---------
Property sales..................... $1,708 $ 5,419 $ 0 $ 7,127
Less: cost of property sales....... 125 3,282 0 3,407
------ ------- ------- -------
Gross profit on property sales.. 1,583 2,137 0 3,720
Rental income...................... 1,104 0 0 1,104
Portfolio income................... 0 0 62 62
Miscellaneous income............... 0 286 0 286
------ ------- ------- -------
Total Net Revenues............ 2,687 2,423 62 5,172
------ ------- ------- -------
Expenses:
- ---------
Selling............................ 0 1,903 0 1,903
Real estate taxes.................. 182 521 0 703
General and administrative......... 565 50 3,517 4,132
Environmental Expense.............. 0 78 0 78
Management fee..................... 0 0 425 425
Depreciation and amortization...... 0 67 27 94
------ ------- ------- -------
Total Expenses................ 747 2,619 3,969 7,335
------ ------- ------- -------
Net Income (Loss)............. $1,940 $ (196) $(3,907) $(2,163)
====== ======= ======= =======
Properties, net of accumulated
depreciation................ $1,171 $21,371 $ 654 $23,196
====== ======= ======= =======
Total assets.................. $1,422 $21,854 $ 3,562 $26,838
====== ======= ======= =======
</TABLE>
30
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Property
1996 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- ----------------------------------- -------------- --------------- ------------- ------------
Revenues:
- ---------
<S> <C> <C> <C> <C>
Property sales...................... $1,218 $5,700 $ 0 $6,918
Less: cost of property sales........ 81 1,593 0 1,674
------ ------ ------- ------
Gross profit on property sales... 1,137 4,107 0 5,244
Rental income....................... 1,039 0 0 1,039
Portfolio income.................... 0 0 419 419
Miscellaneous income................ 0 223 0 223
------ ------ ------- ------
Total Net Revenues............... 2,176 4,330 419 6,925
------ ------ ------- ------
Expenses:
- ---------
Selling............................. 0 501 0 501
Real estate taxes................... 130 854 0 984
General and administrative.......... 582 0 2,773 3,355
Environmental Expense............... 0 1,141 0 1,141
Management fee...................... 0 0 425 425
Depreciation and amortization....... 0 59 72 131
------ ------ ------- ------
Total Expenses................... 712 2,555 3,270 6,537
------ ------ ------- ------
Net Income (Loss)................ $1,464 $1,775 $(2,851) $ 388
====== ====== ======= ======
</TABLE>
(1) The Land Sales reportable business segment consists of the approximately
15,730 acres of land located throughout 12 states for sale or rental as of
December 31, 1998, and after the related sales and marketing general and
administrative expenses.
(2) The Property Development reportable business segment consists of the
approximately 915 acres representing 15 sites that Heartland is in the
process of developing or homebuilding communities in which the Company is
currently acquiring finished lots, and building and then selling homes. The
related selling and operating expenses are also reported for this business
segment.
(3) The Corporate level consists of portfolio income from investments and
salaries and general and administrative expenses for the employees and
occupied office space in Chicago, Illinois.
31
<PAGE>
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1998, 1997 AND 1996
(amounts in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end
Description of year expenses Deductions of year
- ----------- ---------- ---------- -------------- -------
Year Ended December 31, 1998:
<S> <C> <C> <C> <C>
Allowance for claims and liabilities... $2,169 $1,461 $ (868)(a) $2,762
====== ====== ========== ======
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
====== ====== ========== ======
</TABLE>
Note: (a) Payments
32
<PAGE>
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Cost Capitalized Gross Amount at Which
Initial Cost to Subsequent Carried
Heartland to Acquisition (1) at Close of Period (1)
---------------------- -------------------------- ------------------------------------
Building,
Buildings & Carrying Improvement and
Description Land Improvements Improvements(3) Costs(4) Land Carrying Costs Total
- ----------- ---- ------------ --------------- -------- ------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Developable Sites
Chicago, IL................... (7) $ 4,434 $ 1 $3,233 $2,964 $ 4,434 $ 6,198 $10,632
Milwaukee, WI................. 856 939 1,356(6) 1,198 856 3,493 4,349
Fife, WA...................... 2,573 - 262 358 2,573 620 3,193
Rosemount, MN................. (10) 956 - 1,607 526 956 2,133 3,089
Osprey........................ (8) 1,898 - 2,586 208 1,898 2,794 4,692
Longleaf...................... (9) - - 590 - - 590 590
Other developable properties
less than 5% of total........ 63 - 146(6) 40 63 186 249
------- ---- ------ ------ ------- ------- -------
Total developable properties.. 10,780 940(5) 9,780 5,294 10,780 16,014 26,794
------- ---- ------ ------ ------- ------- -------
Sale Properties............... 930 - 10(5) - 930 10 940
------- ---- ------ ------ ------- ------- -------
TOTAL......................... $11,710 $940 $9,790 $5,294 $11,710 $16,024 $27,734
======= ==== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Life on
Which
Depreciation
In Latest
Date of Income
Accumulated Completion of Date Statement
Description Depreciation Construction Acquired Is Computed
- ----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Developable Sites
Chicago, IL................... (7) $ 18 Various Various (2)
Milwaukee, WI................. 480 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.. 498
----
Sale Properties............... 3 Various Various
----
TOTAL......................... $501
====
</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, real estate taxes and
interest.
(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 $1,249,
with related accumulated depreciation of $430.
(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 $8,321,000 short-term loan
(See Note 4 to the Consolidated Financial Statements).
(8) Includes parcels of land encumbered by a $2,288,000 short-term loan (See
Note 4 to the Consolidated Financial Statements).
(9) Includes homes encumbered by a $383,000 short-term loan (See Note 4 to the
Consolidated Financial Statements).
(10) Includes parcel of land encumbered by a $2,500,000 two year loan (See Note
4 to the Consolidated Financial Statements).
33
<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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at January 1.......... $22,982 $21,280 $20,903
------- ------- -------
Additions during year:
Other acquisitions............ 939 1,125 663
Improvements.................. 8,218 3,987 1,388
------- ------- -------
Total Additions............ 9,157 5,112 2,051
------- ------- -------
Deductions during year:
Cost of real estate sold... 4,405 3,410 1,674
------- ------- -------
Total deductions........... 4,405 3,410 1,674
------- ------- -------
Balance at December 31........ $27,734 $22,982 $21,280
======= ======= =======
</TABLE>
Reconciliation Of Real Estate Accumulated Depreciation
At Beginning of Year with Total At End of Year
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at January 1.......... $ 440 $ 382 $ 323
----- ----- -----
Additions during year:
Charged to Expense.......... 61 61 59
----- ----- -----
Total Additions........... 61 61 59
----- ----- -----
Deductions during year:
Cost of real estate sold.... --- 3 ---
----- ----- -----
Total deductions.......... --- 3 ---
----- ----- -----
Balance at December 31........ $ 501 $ 440 $ 382
===== ===== =====
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
34
<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.
<TABLE>
<CAPTION>
Name and Age Principal Occupation, Business
Experience and Directorships
<S> <C>
Lawrence S. Adelson, 49...... Vice President and General Counsel of the Company since June 1990;
Vice President and General Counsel of HTI since October 1988.
Richard P. Brandstatter, 43.. Vice President - Finance, Treasurer and Secretary of the Company
since August 1995; Vice President - Finance, Treasurer and Secretary
of HTI since February 1999.
Robert S. Davis, 84.......... Director of HTI (Class I) (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.
Edwin Jacobson, 69........... President and Chief Executive Officer of the Company (since
September 1990); Director of HTI (Class III) (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).
Gordon H. Newman, 66......... Director of HTI (Class I)(since February 1999). Senior Vice
President, General Counsel and Secretary of Sara Lee Corporation; member of
the Management Committee; Chief Ethics Officer; responsible for
recruitment of members of board of directors and corporate governance
policy (1975-1995).
John Torell III, 59.......... Director of Company (Class III)(since September 1997); Member of
the executive committee of the Board of the Company; Chairman
(since 1990), Torell Management, Inc. (private investment company),
New York, New York; President (1982-1988), Manufacturers Hanover
Corporation (banking), New York, New York; Chairman, President
and Chief Executive Officer (1988-1989), CalFed, Inc. (banking), Los
Angeles, California; Chairman and Chief Executive Officer (1990-
1994), Fortune Bancorp (banking), Tampa, Florida; Chairman,
Telesphere, Inc. (financial information), New York, New York. Mr.
Torell also serves as a director of American Home Products
Corporation, Paine Webber Group, Inc. and Volt Information Sciences,
Inc.
</TABLE>
35
<PAGE>
Ezra K. Zilkha, 73.... Director of HTI (Class II) (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 (until April 1996) and former Chairman of the
Investment Committee of Cigna Corporation; Director,
Fortune Bancorp (1990-1994); Chairmen and Director of
Union Holdings, Inc.(industrial holding
company)(December 1984-May 1990 and March 1991-September
1993); President of 3555 Intermediate Corp. (investment
holding company)(since March 1991).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires certain officers
and directors of the Company's General Partner, Heartland Technology, Inc., and
any persons who own more than ten-percent of the Units to file forms reporting
their initial beneficial ownership of Units and subsequent changes in that
ownership with the Securities and Exchange Commission and the American Stock
Exchange. Officers and directors of Heartland Technology, Inc. and greater than
ten-percent beneficial owners are also required to furnish the Company with
copies of all such Section 16(a) forms they file. Based solely on a review of
the copies of the forms furnished to the Company, or written representations
from certain reporting persons that no Forms 5 were required, the Company
believes that during the 1998 fiscal year all section 16(a) filing requirements
were complied with, except that a Form 3 report of initial beneficial ownership
was filed late on behalf of John H. Torell, III and Richard P. Brandstatter.
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 1998 compensation greater than $100,000.
<TABLE>
<CAPTION>
Name And Annual Compensation All Other
Principal Position Year Salary Bonus Compensation
- ------------------------ ---- --------- ------------ ------------
<S> <C> <C> <C> <C>
Edwin Jacobson 1998 $275,000 $ --- $5,000
President and Chief 1997 275,000 --- 4,750
Executive Officer 1996 275,000 --- 4,750
Lawrence S. Adelson 1998 $ 99,000 --- $5,000
Vice President and 1997 112,500 $25,000 4,750
General Counsel 1996 112,500 --- 4,750
</TABLE>
"All other compensation" is comprised of CMC's contribution on behalf of the
officers to a salary reduction plan qualified under Sections 401(a) and (k) of
the Internal Revenue Code of 1986. Columns for "Other Annual Compensation",
"Restricted Stock Awards", "Options/SARS" and "Payout-LTIP Payout" are omitted
since there was no compensation awarded to, earned by or paid to any of the
above named executives required to be reported in such columns in any fiscal
year covered by the table.
Under a deferred salary arrangement available to all employees, Mr. Adelson
deferred $35,341 of his 1996 salary into 1997, $37,817 of his 1997 salary into
1998 and $39,165 of his 1998 salary into 1999.
An employment agreement with the President and Chief Executive Officer of CMC
provides for a base salary of
36
<PAGE>
$275,000 from August 16, 1995 through May 30, 2002, all or a portion of which
may be deferred at the officer's election. The contract provides incentive
compensation equal to 10% of the value of all amounts distributed to Unitholders
and the holder of the Class B Interest in excess of the "Capital Amount" as
defined. The Capital Amount approximates the average market value of the Units
for the first 30 trading days after the Distribution Date, subject to adjustment
as set forth in the contract. During or after the term of employment, incentive
payments will be made with respect to distributions by Heartland during
Heartland's term of existence, and if distributions are made subsequent to such
officer's death, payments will be made to his designee or estate. The contract
also provides that in the event of a "change of control of Heartland" during or
after the term of employment, the officer shall receive a lump sum payment of
$1,250,000.
Heartland 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. In 1998, a participating employee could
authorize contributions to the plan in the form of salary reduction of up to
$10,000. In 1998, CMC made 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 9, 1999:
<TABLE>
<CAPTION>
Number of
Name and Address of Beneficial Owner (i) Units Owned Percent
- ---------------------------------------- ----------- --------
<S> <C> <C>
Lehman Brothers Holdings, Inc. (ii)
American Express Tower
3 World Financial Center
New York, New York 10285.................. 187,400 8.7%
Waveland Partners, L.P. (v)
333 West Wacker Drive, Suite 1600
Chicago, IL 60606......................... 262,789 12.3%
Cowen & Company (iii)
Financial Square
New York, New York 10285.................. 183,100 8.5%
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
Edwin Jacobson (iv)
547 W. Jackson
Chicago, Illinois 60661................... 138,000 6.4%
GEM Value Fund, L.P. (vi)
900 North Michigan Avenue, Suite 1900
Chicago, IL 60611......................... 154,896 7.2%
</TABLE>
(i) Nature of ownership is direct, except as otherwise indicated herein.
(ii) Based on a Schedule 13G/A on February 3, 1995, 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 Schedule 13G/A filed on February 12, 1998, 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 Form 13D Amended, as dated through March 25,
1999, Waveland Partners, L.P., Waveland Capital Management, L.P., Clincher
Capital Corporation, Waveland Capital Management, L.L.C., Waveland
Partners, Ltd. and Waveland International, Ltd. share voting and
dispositive power with respect to such Units.
(vi) Based on a Schedule 13D filed on July 9, 1998, GEM Value
Fund, L.P., a private investment partnership, and GEM Value Partners LLC,
its General Partner, have shared voting and dispositive power with respect
to such units.
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 9, 1999:
<TABLE>
<CAPTION>
Name of Beneficial
Owner and Number of Number of
Persons in Group Units Owned Percent
---------------- ----------- -------
<S> <C> <C>
Lawrence S. Adelson --- ---%
Robert S. Davis --- ---%
Edwin Jacobson (ii) 138,000 6.4%
Gordon H. Newman --- ---%
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%
</TABLE>
38
<PAGE>
(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. In February
1998, CMC paid HTI the $425,000 1997 deferred management fee. $142,000 of the
1998 management fee has been paid.
Under a management services agreement, HTI reimbursed Heartland for reasonable
and necessary costs and expenses for services totaling $322,000 for the year
ended December 31, 1998, $228,000 for 1997, and $180,000 for 1996. HTI owes CMC
$442,000 as of December 31, 1998, related to these expenses.
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 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.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed or incorporated by reference as part of
this report:
1. Financial statements
--------------------
The financial statements of Heartland Partners, L.P. are included in Part II,
Item 8:
REPORT OF INDEPENDENT AUDITORS.......................... 14
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997............................. 15
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996.. 16
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996... 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996.. 18
Notes to Consolidated Financial Statements.............. 19
2. Financial statement schedules
-----------------------------
VALUATION AND QUALIFYING ACCOUNTS....................... 32
REAL ESTATE AND ACCUMULATED DEPRECIATION................ 33
Attachment A to Schedule III............................ 34
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.
40
<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 Partaners, 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, incorporated by
reference to Exhibit 10.8 to Heartland's Annual Report on Form 10-K for
the year ended December 31, 1997.*
10.9 Loan and Security Agreement dated March 15, 1996, between CMC Heartland
Partners and LaSalle National Bank, incorporated by reference to
Exhibit 10.1 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
10.10 Amendment to Loan and Security Agreement dated May 14, 1997, by and
between CMC Heartland Partners and LaSalle National Bank, incorporated
by reference to Exhibit 10.2 to Heartland's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
10.11 Amended and Restated Loan Security Agreement dated June 30, 1998 among
CMC Heartland Partners, L.P. and LaSalle National Bank, incorporated by
reference to Exhibit 10.3 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
41
<PAGE>
10.12 Option, Management and Marketing Agreement dated September 9, 1998
between CMC Heartland Partners VII, LLC and Longleaf Associates Limited
Partnership, incorporated by reference to Exhibit 10.4 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
10.13 Settlement Agreement by and between the Port of Tacoma, CMC Real Estate
Corporation, Chicago Milwaukee Corporation, CMC Heartland Partners, and
Heartland Partners L.P. effective October 1, 1998, incorporated by
reference to Exhibit 10.5 to Heartland's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
10.14 Amendment to Amended and Restated Loan and Security Agreement dated
October 23, 1998 among CMC Heartland Partners and LaSalle National
Bank, incorporated by reference to Exhibit 10.6 to Heartland's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
10.15 Loan Agreement, between CMC Heartland Partners I, Limited Partnership,
a Delaware limited partnership, as Borrower and Bank One, Illinois, NA,
a national banking association, as Lender dated November 30, 1998
(filed herewith).
21 Subsidiaries of Heartland Partners, L.P (filed herewith).
27 Financial Data Schedule (filed herewith).
* 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 1998.
42
<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/Richard P. Brandstatter
-----------------------------
Richard P. Brandstatter
Vice President-Finance,
Treasurer and
Secretary of Heartland Technology,
Inc., General Partner (Principal
Financial and Accounting Officer)
Date: March 31, 1999
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, 1999 March 31, 1999
/s/ Gordon H. Newman /s/ Ezra K. Zilkha
--------------------- ------------------
Gordon H. Newman Ezra K. Zilkha
(Director of Heartland Technology, Inc.) (Director of Heartland Technology, Inc.)
March 31, 1999 March 31, 1999
/s/ John R. Torell III
----------------------
John R. Torell III
(Director of Heartland Technology, Inc.)
March 31, 1999
</TABLE>
43
<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.
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.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
- ------ ----------- -----------
<S> <C> <C>
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, incorporated by reference to
Exhibit 10.8 to Heartland's Annual Report on Form 10-K for the year ended December
31, 1997.
10.9 Loan and Security Agreement dated March 15, 1996, between CMC Heartland
Partners and LaSalle National Bank, incorporated by reference to Exhibit 10.1 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
10.10 Amendment to Loan and Security Agreement dated May 14, 1997, by and between
CMC Heartland Partners and LaSalle National Bank, incorporated by reference to
Exhibit 10.2 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10.11 Amended and Restated Loan Security Agreement dated June 30, 1998 among CMC
Heartland Partners, L.P. and LaSalle National Bank, incorporated by reference to
Exhibit 10.3 to Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10.12 Option, Management and Marketing Agreement dated September 9, 1998
between CMC Heartland Partners VII, LLC and Longleaf Associates
Limited Partnership, incorporated by reference to Exhibit 10.4 to
Heartland's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10.13 Settlement Agreement by and between the Port of Tacoma, CMC Real Estate
Corporation, Chicago Milwaukee Corporation, CMC Heartland Partners, and
Heartland Partners L.P. effective October 1, 1998, incorporated by reference to Exhibit
10.5 to Heartland's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
10.14 Amendment to Amended and Restated Loan and Security Agreement dated October
23, 1998 among CMC Heartland Partners and LaSalle National Bank, incorporated
by reference to Exhibit 10.6 to Heartland's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
10.15 Loan Agreement, between CMC Heartland Partners I, Limited Partnership, a Delaware
limited partnership, as Borrower and Bank One, Illinois, NA, a national banking
association, as Lender dated November 30, 1998 (filed herewith).
21 Subsidiaries of Heartland Partners, L.P. (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
45
<PAGE>
Exhibit 10.15
LOAN AGREEMENT
BETWEEN
CMC HEARTLAND PARTNERS I, LIMITED PARTNERSHIP,
a Delaware limited partnership, as Borrower
AND
BANK ONE, ILLINOIS, NA, a national
banking association, as Lender
<PAGE>
TABLE OF CONTENTS
Section Page No.
1. RECITALS.................................................... 1
2. DEFINITIONS................................................. 1
3. COMMITMENT TO LEND; COMMITMENT FEE.......................... 5
3.1 Loan Amount........................................... 5
3.2 The Loan Evidenced by Note............................ 5
3.3 Interest Rate......................................... 5
3.4 Payment of Interest and Principal..................... 5
3.5 Default Rate.......................................... 5
3.6 Late Charge........................................... 5
3.7 Fees.................................................. 5
4. LOAN DOCUMENTS.............................................. 5
5. INTENTIONALLY OMITTED....................................... 8
6. REPRESENTATIONS AND WARRANTIES.............................. 8
6.1 Borrower.............................................. 8
6.2 General Partner....................................... 9
6.3 Title................................................. 9
6.4 Validity and Enforceability of Documents.............. 9
6.5 Litigation............................................ 9
6.6 Utilities; Authorities................................ 9
6.7 Solvency..............................................10
6.8 Financial Statements..................................10
6.9 Compliance with Laws..................................10
6.10 Financing Statements..................................10
6.11 Event of Default......................................10
6.12 Responsible Property Transfer Act.....................10
6.13 Additional Agreements.................................11
7. BORROWER'S COVENANTS........................................11
7.1 Compliance with Laws..................................11
7.2 Inspection............................................11
7.3 Mechanics' Liens......................................11
7.4 Release by Lender.....................................12
7.5 Financial Statements; Reports.........................12
7.6 Affirmation of Representations and Warranties.........13
<PAGE>
7.7 Title................................................ 13
7.8 Proceedings Affecting Property....................... 13
7.9 Disposal and Encumbrance of Property................. 13
7.10 Insurance............................................ 14
7.11 Performance of Obligations; Notice of Default........ 14
7.12 Restrictions Affecting Borrower...................... 14
7.13 Use of Receipts...................................... 15
7.14 Management and Leasing Agreements; Subordination..... 15
7.15 Additional Documents................................. 15
8. LOAN EXPENSES.............................................. 15
9. LENDER'S REPRESENTATIVES................................... 15
10. EVENTS OF DEFAULT.......................................... 15
11. REMEDIES................................................... 17
12. MISCELLANEOUS.............................................. 18
12.1 Additional Indebtedness.............................. 18
12.2 Additional Acts...................................... 18
12.3 Loan Agreement Governs............................... 18
12.4 Additional Advances.................................. 18
12.5 Amendment; Waiver; Approval.......................... 18
12.6 Notice............................................... 19
12.7 Benefit; Assignment.................................. 19
12.8 Governing Law........................................ 20
12.9 Indemnity............................................ 20
12.10 Headings............................................. 20
12.11 No Partnership or Joint Venture...................... 20
12.12 Time is of the Essence............................... 20
12.13 Invalid Provisions................................... 20
12.14 Offset............................................... 21
12.15 Acts by Lender....................................... 21
12.16 Binding Provisions................................... 21
12.17 Counterparts......................................... 21
12.18 No Third Party Beneficiary........................... 21
12.19 Publicity............................................ 21
12.20 Arbitration.......................................... 21
12.21 JURISDICTION AND VENUE............................... 22
12.22 JURY WAIVER.......................................... 23
ii
<PAGE>
LOAN AGREEMENT
This Loan Agreement ("Agreement") is dated as of November 30, 1998, by and
between CMC HEARTLAND PARTNERS I, LIMITED PARTNERSHIP, a Delaware limited
partnership ("Borrower"), and BANK ONE, ILLINOIS, NA, a national banking
association ("Lender").
1. RECITALS.
1.1 Borrower has requested that Lender make a loan to Borrower in the
maximum principal amount of $2,500,000 to provide funds necessary to
reimburse Limited Partner (as defined below) for its expenses in connection
with the Property (as defined below). Lender has agreed to make said loan
subject to the terms and conditions set forth herein.
1.2 In consideration of the mutual agreements set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Borrower and Lender agree as follows:
2. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
2.1 "Applicable Laws" shall mean all laws, statutes, ordinances,
rules, regulations, judgments, decrees or orders of any state, federal or
local government or agency which are applicable to Borrower and/or the
Property.
2.2 "Assignment of Deposit Account" shall mean the Assignment of
Deposit Account of even date herewith made by Borrower in favor of Lender,
as the same may be hereafter amended or otherwise modified from time to
time.
2.3 "Assignment of Rents" shall mean the Assignment of Rents and
Leases of even date herewith to be made by Borrower to Lender to secure the
Loan, as the same may be hereafter amended or otherwise modified from time
to time.
2.4 "Building" shall mean any building located on the Land.
2.5 "Business Day" shall mean each day excluding Saturdays, Sundays
and any other day on which Lender is closed for business to the public.
2.6 "City" shall mean the city of Rosemount, Minnesota.
2.7 "Default Rate" shall mean the Prime Rate plus three percent per
annum.
2.8 "Event of Default" shall have the meaning ascribed to it in
Section 10 of this Agreement.
<PAGE>
2.9 "General Partner" shall mean Heartland Development Corporation, a
Delaware corporation, the sole general partner of Borrower.
2.10 "Hazardous Materials" shall mean and include any and all
hazardous, toxic or dangerous substances, wastes and materials and other
pollutants and contaminants as defined or described in any or all
applicable federal, state or local statutes, laws, ordinances, codes,
rules, regulations, orders or decrees now or hereafter regulating, relating
to or imposing liability or standards of conduct with respect to
environmental matters, including, without limitation the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
by the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C.
(S)9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
(S)1801 et seq.), the Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976, as amended by the Solid and
Hazardous Waste Amendments of 1984 (42 U.S.C. (S)6901 et seq.), the Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1977 and
the Water Quality Act of 1987 (33 U.S.C. (S)1251 et seq.), the Toxic
Substances Control Act of 1976 (15 U.S.C. (S)2601 et seq.), the Emergency
Planning and Community Right-to-Know Act of 1986 (42 U.S.C. (S)11001 et
seq.), the Clear Air Act of 1966, as amended (42 U.S.C. (S)7401 et seq.),
the National Environmental Policy Act of 1970 (42 U.S.C. (S)4321 et seq.),
the Rivers and Harbours Act of 1899 (33 U.S.C. (S)401 et seq.), the
Endangered Species Act of 1973, as amended (16 U.S.C. (S)1531 et seq.), the
Safe Drinking Water Act of 1974, as amended (42 U.S.C. (S)300(f) et seq.),
and the Occupational Safety and Health Act of 1970, as amended (29 U.S.C.
(S)651 et seq.) and all rules, regulations and guidance documents
promulgated or published thereunder, all as amended or hereinafter amended.
Without intending to limit the scope or breadth of the foregoing
definition, the term Hazardous Materials shall include asbestos, urea
formaldehyde, polychlorinated biphenyls, crude oil, radioactive materials
and underground storage tanks.
2.11 "Improvements" shall mean the Building and other structures and
all paving, lighting, landscaping, utility lines and equipment and all
other site improvements and all other improvements on the Land or hereafter
constructed thereon.
2.12 "Indemnity Agreement" shall mean the Environmental Indemnity
Agreement of even date herewith made by Borrower in favor of Lender, as the
same may be hereafter amended or otherwise modified from time to time.
2.13 "Land" shall mean Parcel 1 and Parcel 2, collectively.
2.14 "Limited Partner" shall mean CMC Heartland Partners, a Delaware
general partnership, the sole limited partner of Borrower.
2.15 "Loan" shall mean the loan from Lender to Borrower in an amount
not to exceed $2,500,000 in the aggregate which is to be disbursed pursuant
to this Agreement and which loan shall otherwise be governed by the
provisions hereof.
2
<PAGE>
2.16 "Loan Documents" shall mean this Agreement, the Assignment of
Rents, the Mortgage, the Note, the Security Agreement, the Indemnity
Agreement, the Assignment of Deposit Account, and every other document now
or hereafter evidencing, securing or otherwise executed in conjunction with
the Loan, together with all amendments and modifications thereof.
2.17 "Loan Expenses" shall mean the expenses, charges, costs and fees
relating to the making, administration, negotiation, documentation or any
other aspect of the Loan, including, without limitation, Lender's
reasonable attorneys' fees and costs in connection with the negotiation,
documentation and enforcement of the Loan, all recording fees and charges,
title insurance charges and premiums, escrow fees, fees of insurance
consultants, costs of surveys and of other bonds required by the Title
Company in connection with clearing title to the Real Property or the
issuance of title reports, binders, policies and the like, and all other
costs, expenses, charges and fees referred to in or necessitated by the
terms of this Agreement or any of the other Loan Documents.
2.18 "Maturity Date" shall mean December 1, 2000.
2.19 "Mortgage" shall mean the Mortgage of even date herewith
encumbering the Real Property to be made by Borrower to Lender to secure
the Loan, as the same may be hereafter amended or otherwise modified from
time to time.
2.20 "New LLC" shall mean the Delaware limited liability company that
is the successor entity of Borrower.
2.21 "Note" shall mean the note evidencing the Loan to be made by
Borrower payable to the order of Lender in the original principal amount of
$2,500,000, as the same may be hereafter amended or otherwise modified from
time to time.
2.22 "Parcel 1" shall mean the real property legally described on
Exhibit A-1 attached hereto.
2.23 "Parcel 2" shall mean the real property legally described on
Exhibit A-2 attached hereto.
2.24 "Permitted Exceptions" shall mean the exceptions to the title of
the Real Property listed on Exhibit C attached hereto.
2.25 "Person" shall mean any individual, firm, corporation, business
enterprise, trust, association, joint venture, partnership, governmental
body or other entity, whether acting in an individual, fiduciary or other
capacity.
2.26 "Personal Property" shall mean and include any and all
furniture, furnishings, appliances, equipment and all fixtures (to the
extent such fixtures are
3
<PAGE>
attached in a manner so as not to be deemed to be part of the Real
Property) to be located at the Land which will be used or usable in
connection with the ownership, development or operation of the Real
Property and which will be owned, leased or otherwise possessed by Borrower
or any of its affiliates.
2.27 "Prime Rate" shall mean an annual rate of interest equal to the
prime rate as publicly announced by Lender to be in effect from time to
time, adjusted and changing when and as said prime rate changes.
2.28 "Principal Balance" shall mean the unpaid principal balance of
the Loan outstanding from time to time.
2.29 "Property" shall mean the Real Property and the Personal
Property and all other tangible and intangible assets benefitting or
otherwise appertaining to the Real Property, including, without limitation,
all of the collateral for the Loan described in the Loan Documents.
2.30 "PUD" shall mean that certain Planned Unit Development Agreement
- Bloomfield (fka the Villages of Eastview), dated as of July 15, 1998, by
and between Borrower and the City.
2.31 "Real Property" shall mean the Land, the Improvements and all
easements and appurtenants thereto.
2.32 "Security Agreement" shall mean the security agreement
encumbering the Personal Property to be made by Borrower to Lender to
secure the Loan, as the same may be hereafter amended or otherwise modified
from time to time.
2.33 "Subdivision Agreement" shall mean that certain Subdivision
Agreement (Bloomfield Addition), dated as of July 21, 1998, by and between
Borrower and the City.
2.34 "Survey" shall have the meaning set forth in Section 4.4 below.
2.35 "Title Company" shall mean Commonwealth Land Title Insurance
Company.
2.36 "Title Policy" shall mean the title insurance policy described
in Section 4.5 below.
2.37 "Unmatured Default" shall mean an event or circumstance that
with the giving of notice, the passage of time, or both, would constitute
an Event of Default.
4
<PAGE>
3. COMMITMENT TO LEND; COMMITMENT FEE.
3.1 Loan Amount. Lender agrees to lend to Borrower, and Borrower
agrees to borrow from Lender $2,500,000 for the purposes, upon the terms
and subject to the conditions contained in this Agreement. Borrower may
prepay all or any part of the Loan at any time and from time to time upon
seven days prior written notice to Lender without cost or penalty.
3.2 The Loan Evidenced by Note. The Loan shall be evidenced by the
Note, which shall be executed and delivered by Borrower simultaneously with
the execution of this Agreement.
3.3 Interest Rate. Interest shall accrue on the unpaid principal
balance of the Loan during each calendar month (whether full or partial) at
the Prime Rate. Interest shall be computed on the basis of a year
consisting of 360 days and shall be based on the actual number of days
during the period for which interest is being charged.
3.4 Payment of Interest and Principal. The payment of interest and
principal shall be governed by the provisions of the Note.
3.5 Default Rate. At any time after the Maturity Date or otherwise
when an Event of Default exists under this Agreement or any of the other
Loan Documents, the Principal Balance and any other amounts then owing by
Borrower to Lender shall bear interest at the Default Rate.
3.6 Late Charge. If any payment of interest or principal due under
the Note is not made within five days after such payment is due, then, in
addition to the payment of the amount so due, Borrower shall pay to Lender
a "late charge" of five cents for each whole dollar so overdue to defray
part of the cost of collecting and handling such late payment.
3.7 Fees. Lender has fully earned a non-refundable loan and
administration fee in the amount of $25,000, and, concurrently with the
execution of this Agreement, the unpaid balance of such fee shall be due
and payable by Borrower.
4. LOAN DOCUMENTS. Prior to the disbursement of the Loan, Borrower shall
execute and/or deliver to Lender those of the following documents and other
items required to be executed and/or delivered by Borrower, and shall cause to
be executed and/or delivered to Lender those of the following documents and
other items required to be executed and/or delivered by others, all of which
documents and other items shall contain such provisions as shall be required to
conform to this Agreement and otherwise shall be satisfactory in form and
substance to Lender:
4.1 The Loan Documents.
5
<PAGE>
4.2 UCC financing statements perfecting the security interests
created by the Security Agreement.
4.3 Three copies of a plat of subdivision for Parcel 2.
4.4 Three copies of the plat of survey for Parcel 1 (the "Survey")
prepared and certified by a registered or certified surveyor in compliance
with ALTA land survey standards, showing: the boundaries and legal
description of Parcel 1; the location of all existing improvements on
Parcel 1; the area of Parcel 1 in square feet and acres (to the nearest
1/100th of an acre); the location of all parking areas (and containing a
certification as to the number thereof), utilities and any additional
easements or other matters of record affecting Parcel 1; the location of
all applicable lot, side and rear set-back lines, rights-of-way, easements
and public utilities; the location of all abutting roadways, streets and
alleys; the location of utility services and storm drain and sewer
facilities; and all encroachments by improvements on Parcel 1 over
easements or adjoining property and all encroachments from adjoining
property onto Parcel 1, so long as each such encroachment, if any, is
accepted by Lender or the Title Company has committed to provide
affirmative insurance coverage acceptable to Lender with respect to such
encroachment. The Survey shall be as of a current date and shall bear a
certificate of the surveyor stating that the Survey and the ALTA
certification run to the benefit of Lender and the Title Company. All
matters shown on the Survey must be acceptable to Lender.
4.5 Such insurance policies and certificates (with premiums prepaid)
evidencing builder's risk insurance, all-risk, fire and extended coverage,
hazard and comprehensive liability insurance, including contractual
liability, workmen's compensation insurance, rental loss insurance for not
less than one year, and such other insurance as Lender reasonably requires
covering the Property, in such form, with such endorsements, in such
amounts, with deductibles and with such carriers as shall be acceptable to
Lender, and naming Lender as an additional insured party on all liability
policies and as mortgagee/additional loss payee on the builder's risk and
other property damage policies and containing a prohibition against
cancellation for nonpayment of premiums or any other reason or modification
without thirty days prior written notice to Lender. Any provision of this
Section to the contrary notwithstanding, all insurance policies required to
be carried under this Agreement shall provide expressly that they shall not
be rendered invalid by a waiver of the right of subrogation by any insured
and that the insurer shall have no right to be subrogated to Lender.
Borrower shall deliver (or cause to be delivered) to Lender either (i) an
original of each such insurance policy, or (ii) a copy of each such policy
certified by the issuing agent as being a true, correct and complete copy
of the original.
4.6 An ALTA Loan Policy of Title Insurance (the "Title Policy")
issued by the Title Company in the full amount of the Note insuring that
the Mortgage will be a first priority lien upon the fee simple title to the
Real Property, subject to no liens, claims,
6
<PAGE>
exceptions or encumbrances except the Permitted Exceptions and containing
the following endorsements:
(a) ALTA Short Form 3.0 Zoning Endorsement with respect to
Parcel 2;
(b) ALTA Broad Form 3.1 Zoning Endorsement with respect to
Parcel 1;
(c) Comprehensive Endorsement No. 1 (ALTA Form 9)
(d) Location and Access Endorsements;
(e) Contiguity Endorsement;
(f) Endorsement deleting the creditors' rights exception;
(g) Doing Business Endorsement;
(h) Usury Endorsement; and
(i) Such additional endorsements as may be reasonably required by
Lender based upon its review of the Title Policy.
4.7 Copies of such documents, if any, as Borrower has provided the
Title Company in connection with the issuance and underwriting of the Title
Policy.
4.8 Copies of all recorded documents described in the Title Policy.
4.9 Current Uniform Commercial Code, federal and state tax lien and
judgment searches, pending suit and litigation searches and bankruptcy
court filings searches covering Borrower and disclosing no matters
objectionable to Lender.
4.10 Opinion letter from legal counsel for Borrower (which counsel
must be approved by Lender with respect to the issuance of such opinion)
opining to the authority of said parties to execute, deliver and perform
their respective obligations under the Loan Documents, to the validity and
binding effect of the Loan Documents and to such other matters as Lender
and its counsel shall require.
4.11 Evidence that (i) no portion of the Real Property is located in
an area designated by the Secretary of Housing and Urban Development as
having special flood hazards, or if any portion of the Real Property is so
located, evidence that flood insurance is in effect; and (ii) no portion of
the Real Property is located in a federally, state or locally designated
wetland or other type of government protected area.
7
<PAGE>
4.12 Certified copies of the Partnership Agreement of Borrower,
together with all amendments thereto, and such resolutions and other
documents as Lender deems appropriate evidencing the authority of Borrower
to execute and deliver the Loan Documents to which such Persons are a party
and to perform the obligations contemplated hereby and thereby.
4.13 Certified copies of all service contracts, development
agreements and other agreements affecting the use, development or operation
of the Property, if any.
4.14 Evidence that the environmental condition of the Property is
satisfactory to Lender. Such evidence shall include, but shall not be
limited to, a Phase I Environmental Audit certified to Borrower and Lender
and setting forth environmental investigations of the Property and the
areas surrounding the Property. Such testing and investigation shall be
performed by an environmental professional acceptable to Lender in a manner
satisfactory to Lender.
4.15 Evidence that, as of the date of disbursement of the Loan, there
has been no material adverse change in the financial or other projections
for the Property, the physical condition of the Property or the financial
condition of the Borrower since the date of the most recent financial
statements or projections delivered to Lender or the most recent
inspections of the condition of the Property made by Lender, as the case
may be.
4.16 An MAI appraisal satisfactory to Lender indicating the aggregate
fair market value of the Property is that acceptable to Lender.
4.17 Such other assignments, certificates, opinions and other
documents, instruments and information affecting or relating to Lender's
interest in the Property or the use, operation or development of the
Property as Lender may reasonably require.
5. INTENTIONALLY OMITTED.
6. REPRESENTATIONS AND WARRANTIES. In order to induce Lender to execute
this Agreement and to make the Loan, Borrower represents and warrants to Lender
as follows:
6.1 Borrower. Borrower is a duly formed limited partnership under the
laws of the State of Delaware, validly existing, in good standing and fully
qualified to do business in the State of Minnesota. The Partnership
Agreement of Borrower (the "Partnership Agreement") dated as of July 20,
1993 creating Borrower, a certified copy of which has been furnished to
Lender, is in effect, unamended and is the true, correct and complete
document relating to Borrower's creation and governance. Borrower and its
partners have fully complied with all applicable securities and other laws,
ordinances and regulations in connection with the formation of Borrower and
the sale and offer for sale of interests therein.
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6.2 General Partner. General Partner is a duly formed corporation
under the laws of the State of Delaware, validly existing, in good standing
and fully qualified to do business in the State of Minnesota. The
Certificate of Incorporation and By-Laws of General Partner, certified
copies of which have been furnished to Lender, are in effect, unamended and
are the true, correct and complete documents relating to General Partner's
creation and governance. General Partner and its shareholder have fully
complied with all applicable securities and other laws, ordinances and
regulations in connection with the formation of General Partner and the
sale and offer for sale of interests therein.
6.3 Title. Borrower owns good and marketable fee simple title to the
Real Property free and clear of all liens, claims and encumbrances, except
the Permitted Exceptions.
6.4 Validity and Enforceability of Documents. Upon the execution and
delivery of the Loan Documents, the Loan Documents shall be valid and
binding upon the parties that have executed the same in accordance with the
respective provisions thereof, and enforceable in accordance with the
respective provisions thereof, subject only to applicable bankruptcy,
reorganization, insolvency, moratorium and other similar laws affecting the
enforcement of creditor's rights. Execution, delivery and performance of
the Loan Documents do not and will not contravene, conflict with, violate
or constitute a default under the Partnership Agreement, or any Applicable
Law or any agreement, indenture or instrument to which the Borrower or
General Partner is a party or is bound or which is binding upon or
applicable to the Property or any portion thereof.
6.5 Litigation. There is not any condition, event or circumstance
existing, or any litigation, arbitration, governmental or administrative
proceeding, action, examination, claims or demand pending or, to the best
of Borrower's knowledge after due inquiry, threatened affecting Borrower,
General Partner or the Property, or involving the validity or
enforceability of the Loan Documents or involving any risk of a judgment or
liability which, if satisfied, would have an adverse effect on the
financial condition, business or properties of Borrower, General Partner or
the priority of the lien of the Mortgage, or which would prevent Borrower
or General Partner from complying with or performing its obligations under
this Agreement, the Note or any of the other Loan Documents within the time
limits set forth therein for such compliance or performance and no basis
for any such matter exists.
6.6 Utilities; Authorities. All utilities necessary for use,
operation and occupancy of the Property (including, without limitation,
water, storm sewer, sanitary sewer and drainage, electric, gas and
telephone facilities) are available at the boundaries of the Land (or in
the streets adjoining the Land), and all requirements for the use of such
utilities have been fulfilled. All building, zoning, safety, disabled
persons, health, fire, water district, sewerage and environmental
protection agency permits and other licenses
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and permits which are required by any governmental authority for the use,
occupancy and operation of the Property have been obtained by or furnished
to Borrower and are in full force and effect or will be obtained by and
maintained in full force and effect by Borrower when and as required by any
governmental authority.
6.7 Solvency. Borrower is solvent and able to pay its debts as such
debts become due, and has capital sufficient to carry on its present
business transactions. The value of Borrower's property, at a fair
valuation, is greater than the sum of its debts. Borrower is not bankrupt
or insolvent. Borrower has not made an assignment for the benefit of its
creditors. There has been no trustee or receiver appointed for the benefit
of Borrower's creditors and there has been no bankruptcy, reorganization or
insolvency proceedings instituted by or against Borrower. Borrower will not
be rendered insolvent by its execution, delivery or performance of the Loan
Documents or by the transactions contemplated thereunder.
6.8 Financial Statements. All financial statements submitted to
Lender relating to Borrower, General Partner, and the Property are true,
complete and correct, and have been prepared in accordance with sound
accounting principles consistently applied and fairly present the financial
condition of the Person to which they pertain and the other information
therein described and do not contain any untrue statement of a material
fact or omit to state a fact material to the financial statement submitted
or this Agreement. No material adverse change has occurred in the financial
condition of Borrower, General Partner, or the Property since the dates of
each such financial statements.
6.9 Compliance with Laws. The use, occupancy and operation of the
Property for its intended purposes is not in violation any Applicable Laws,
any contractual arrangements with third parties or any covenants,
conditions, easements, rights of way or restrictions of record. Neither
Borrower nor any agent thereof has received any notice, written or
otherwise, alleging any such violation, which violation has not previously
been cured. The Property is in full compliance and conformity with all
zoning requirements, and will not be a non-conforming or special use. No
right to any off-site facilities will be necessary to insure compliance by
the Property with all Applicable Laws.
6.10 Financing Statements. There are no UCC financing statements in
effect other than those to be filed and/or recorded by Lender which name
Borrower as debtor and pertaining to any rights in any of the Personal
Property.
6.11 Event of Default. No Event of Default has occurred, and no
Unmatured Default exists.
6.12 Responsible Property Transfer Act. To the best of Borrower's
knowledge, there are no facilities on the Real Estate that are subject to
reporting under (S)312 of the Federal Emergency Planning and Community
Right-To-Know Act of 1986, 43 U.S.C.
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(S)11022, and federal regulations promulgated thereunder. The Real Estate
does not contain any underground storage tanks.
6.13 Additional Agreements. Except for the Subdivision Agreement
and the PUD, true and correct copies of which have been furnished to
Lender, there are no leases, management, leasing, development or other
agreements in existence that affect the Property.
All representations and warranties which have been made by Borrower in this
Agreement or the other Loan Documents shall be true in all respects at the
time of each disbursement of the Loan, and in the event of any material
breach, misrepresentation or omission, Lender shall have the absolute right
to terminate its obligations under this Agreement (without any obligation
to refund any loan or other fees previously paid), and upon demand by
Lender, Borrower shall reimburse Lender for the Loan Expenses, and Lender
shall be entitled to recover from Borrower all losses and damages resulting
therefrom.
7. BORROWER'S COVENANTS.
7.1 Compliance with Laws. Borrower shall comply or cause compliance
with all Applicable Laws governing the development, use and operation of
the Property. Evidence of such compliance shall be submitted to Lender on
request.
7.2 Inspection. Upon reasonable prior written or oral notice (which
shall not be required in the event of an emergency), Borrower shall permit
inspection of the Property by Lender and any other agent or designee of
Lender. In addition, upon reasonable prior written or oral notice (which
shall not be required in the event of an emergency), Borrower shall permit
Lender and/or its agents and designees access to and the right to inspect,
audit and copy all books, records, contracts and other documents and
information relating to Borrower or the Property. Lender shall use
reasonable efforts to keep confidential all information and documentation
obtained by Lender in connection with such audits and inspections, except
to the extent that Lender determines, in its reasonable discretion, a need
to disclose same; provided, however, under no circumstances shall Lender
have any liability to Borrower in the event of an unintentional disclosure
or disclosure deemed necessary by Lender. All such books, records and
accounts of operations relating to the Property shall be kept in accordance
with sound accounting practices consistently applied. Borrower shall
promptly respond to any inquiry from Lender for information with respect to
the Property, which information may be verified by Lender at Borrower's
expense; provided, however, that Lender shall at all times be entitled to
rely upon any statements or representations made by Borrower or any agent
thereof.
7.3 Mechanics' Liens. Borrower shall not permit any mechanics' lien
claims to be filed or otherwise asserted against the Property or against
any funds due any contractor or subcontractor, and Borrower shall promptly
(and in any event within fifteen
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days after Borrower has received notice of such filing) discharge or cause
to be discharged the same in case of the filing of any claims for lien or
proceedings for the enforcement thereof; provided that in connection with
any such lien or claim which Borrower may in good faith desire to contest,
Borrower may contest the same by appropriate legal proceedings diligently
prosecuted, but only if Borrower shall furnish to the Title Company such
security or indemnity as the Title Company requires to induce the Title
Company to issue an endorsement to the Title Policy insuring over the
exception created by such lien, and provided further, that Lender shall not
be required to make any further disbursements of the Loan until any
mechanics' lien claims have been so insured against by the Title Company.
7.4 Release by Lender. With respect to the matters set forth in
Section 7.3 above, if Borrower shall (a) fail promptly to discharge any
asserted liens or claims, or (b) fail promptly to contest asserted liens or
claims or to give security or indemnity in the manner provided in Section
7.3 above, or (c) having commenced to contest the same, and having given
such security or indemnity, fail to prosecute such contest with diligence,
or to maintain such indemnity or security so required by the Title Company
for its full amount, or (d) upon adverse conclusion of any such contest,
fail promptly to cause any judgment or decree to be satisfied and lien to
be released, then Lender may, but shall not be required to, procure the
release and discharge of any such claim and any judgment or decree thereon
and, further, may, in its sole discretion, effect any settlement or
compromise of the same, or may furnish such security or indemnity to the
Title Company, and any amounts so expended by Lender, including premiums
paid or security furnished in connection with the issuance of any surety
company bonds, shall be deemed to constitute disbursements of the proceeds
of the Loan hereunder and shall bear interest from the date so disbursed
until paid at the Default Rate. In settling, compromising or discharging
any claims for lien, Lender shall not be required to inquire into the
validity or amount of any such claim.
7.5 Financial Statements; Reports. Borrower will from time to time
furnish to Lender such information and reports, financial and otherwise,
concerning Borrower and the operation of the Property as Lender reasonably
requires, including, without limitation, the following:
(a) Within ninety days after the end of each calendar year,
compiled financial statements of the Property on a form acceptable to
Lender, setting forth the information therein required as of December
31 of the immediately preceding year, containing income and expense
statements and a balance sheet. The financial statements shall be
prepared by an independent accounting firm in accordance with
generally accepted accounting principles consistently applied and
shall be certified by the chief financial officer of Borrower as
fairly and accurately presenting the information contained therein.
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(b) Within ninety days after the end of each calendar year,
financial statements and the federal and state income tax returns for
Borrower, such financial statements to be on Lender's standard form or
another form acceptable to Lender, setting forth the information
therein required as of December 31 of the immediately preceding year,
and certified by Borrower as fairly and accurately presenting the
information contained therein.
(c) Within ninety days after the end of each calendar year,
detailed cash flow statements for the preceding calendar year, on a
form acceptable to Lender, for all income producing properties listed
on the financial statements of Borrower, certified by the chief
financial officer of Borrower, as applicable, as fairly and accurately
presenting the information contained therein.
7.6 Affirmation of Representations and Warranties. Borrower agrees
that all representations and warranties of Borrower contained in Article 6
hereof shall remain true in all material respects at all times until the
Loan is repaid in full.
7.7 Title. Except for (i) the Mortgage and other security for the
Loan, (ii) the lien of general real estate taxes payment of which is not
yet due, (iii) mechanics' liens which are contested in the manner permitted
in Paragraphs 7.3 above, and (iv) any other Permitted Exceptions, Borrower
shall keep its fee simple title in the Property free and clear of all
liens, claims and encumbrances, whether senior or junior to or at parity
with the Mortgage.
7.8 Proceedings Affecting Property. If any proceedings are filed
seeking to enjoin or otherwise prevent or declare invalid or unlawful the
occupancy, use, maintenance or operation of the Property, or any portion
thereof, Borrower shall cause such proceedings to be vigorously contested
in good faith, and in the event of an adverse ruling or decision, prosecute
all allowable appeals therefrom, and shall, without limiting the generality
of the foregoing, resist the entry or seek the stay of any temporary or
permanent injunction that may be entered, and use its best efforts to bring
about a favorable and speedy disposition of all such proceedings. All such
proceedings, including without limitation, all of Lender's costs, and fees
and disbursements of Lender's counsel in connection with any such
proceedings, whether or not Lender is a party thereto, shall be at
Borrower's expense. To the extent that Lender incurs any such expenses,
including attorneys' fees and fees and charges for court costs, bonds and
the like, Borrower shall reimburse Lender for such expenses and the amount
due Lender shall bear interest from the date so incurred by Lender until
repaid to Lender at the Default Rate and shall be payable to Lender on
demand. The foregoing provisions of this Section shall not limit or affect
the provisions of Section 10(j) below.
7.9 Disposal and Encumbrance of Property. Except for the conveyance
of 8.7 acres of land, referred to as "outlot D", to the City for a public
park pursuant to the PUD and the Subdivision Agreement, Borrower shall not,
without Lender's prior written
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consent, suffer, permit or enter into any agreement for any sale, lease,
transfer, or in any way encumber or dispose of or grant or suffer any
security or other assignment (collateral or otherwise) of or in all or any
portion of the Property. Any consent given by Lender or any waiver of
default under this Section, shall not constitute a consent to, or waiver of
any right, remedy or power of Lender under any subsequent default
hereunder. Provided that there is not an Event of Default or an Unmatured
Default, upon the conveyance to the City of "outlot D" as permitted above,
Lender shall release its mortgage on such portion of land.
7.10 Insurance. Borrower shall pay all premiums on all insurance
policies required from time to time under this Agreement, and thirty days
prior to expiration of any such policies, Borrower shall furnish to Lender,
with premiums prepaid, additional and renewal policies in form, and with
companies, coverage, deductibles and amounts satisfactory to Lender. In the
event of failure by Borrower to provide such insurance, Lender may, but
shall not be required to, place insurance and treat the amounts expended
therefor as disbursements of Loan proceeds and such amounts from the date
so expended by Lender until repaid to Lender shall bear interest at the
Default Rate.
7.11 Performance of Obligations; Notice of Default. Borrower shall
promptly and fully perform and comply in all respects with the obligations,
terms, agreements, provisions and requirements of this Agreement and the
other Loan Documents and all other documents and instruments relating
thereto and will not permit to occur any default or breach hereunder or
thereunder. Borrower shall promptly give to Lender notice of the occurrence
of any Unmatured Default or of any event that could have a material adverse
effect on any security for the Loan or on Borrower's ability to perform its
obligations under this Agreement or any of the other Loan Documents.
7.12 Restrictions Affecting Borrower. Except as otherwise permitted
pursuant to Section 12.7 below, Borrower covenants and agrees that, without
the prior written consent of Lender, there shall not occur: (i) any
amendment or modification of the Partnership Agreement, (ii) the release or
discharge of the General Partner as Borrower's general partner, or (iii)
the admission of any new partners to Borrower. Except as otherwise
permitted pursuant to Section 12.7 below, at all times prior to the
repayment of the Loan, (A) General Partner shall be a general partner of
Borrower and General Partner shall not sell, assign, transfer, pledge,
encumber or dispose of all or any of its partnership interests in Borrower;
(B) except for the initial distribution to Limited Partner stated in
Recital 1.1, Borrower shall not make or permit any distributions of cash
flow or cash proceeds to any partner of Borrower or any partner,
subpartner, member, shareholder, officer, director or affiliate of any
partner of Borrower and all excess cash flow from the Property shall be
paid to Lender and applied to the repayment of the Principal Balance; (C)
Borrower shall not enter into any contract or agreement for the provision
of services or otherwise with respect to the Property with any partner of
Borrower or any partner, subpartner, member, shareholder, officer, director
or affiliate of any partner of Borrower unless such contract or agreement
is an arms-length, market rate agreement and is
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cancelable upon thirty days written notice from any owner of the Property;
and (D) neither Borrower nor General Partner shall be dissolved or its
existence terminated.
7.13 Use of Receipts. Borrower shall cause all rents and other
income and receipts realized and received by Borrower, if any, from and in
connection with the Property to be used for the purpose of paying the
actual costs and expenses incurred by Borrower in connection with the
ownership, operation, management and repair of the Property, including
without limitation, operating expenses, real estate taxes, insurance
premiums and interest on the Loan.
7.14 Management and Leasing Agreements; Subordination. Borrower
shall not amend, extend, substitute or enter into any new lease, management
or leasing agreement covering all or any portion of the Property without
Lender's prior written consent. In the event that Lender grants such
consent, Borrower shall cause the tenant, General Partner or leasing broker
under said agreement to enter into an agreement with Lender, acceptable in
form and substance to Lender, pursuant to which said tenant, General
Partner or broker subordinates its liens for unpaid fees to the liens of
the Mortgage and the other Loan Documents.
7.15 Additional Documents. Borrower shall not execute or record any
document pertaining to, affecting or running with all or any portion of the
Property without the prior written approval of Lender of the form and
substance of such documents, which approval shall not be unreasonably
withheld.
8. LOAN EXPENSES. Borrower agrees to pay all of the Loan Expenses. Any Loan
Expenses paid by Lender shall bear interest commencing on the date demand for
repayment thereof is made by Lender until repaid to Lender at the Default Rate
and shall be paid by Borrower upon demand, or may be paid by Lender at any time
and shall be deemed a disbursement of proceeds of the Loan. Any Loan Expenses
paid by Lender shall be reimbursed to Lender by Borrower regardless of whether
there shall be any disbursements of the Loan.
9. LENDER'S REPRESENTATIVES. Lender, at Borrower's expense, shall have the
right to engage personnel in connection with negotiation, documentation,
administration and servicing of the Loan.
10. EVENTS OF DEFAULT. The occurrence of any one or more of the following
shall constitute an "Event of Default":
(a) Failure by Borrower or any other obligor to pay on or before the
fifth day following the date when due any installment of principal or
interest or any other amount payable pursuant to the Note, this Agreement
or any of the other Loan Documents.
(b) Failure by Borrower to promptly perform or cause to be performed
any non-monetary obligation or observe any non-monetary condition,
covenant, term,
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agreement or provision required to be performed or observed by Borrower or
any other obligor under this Agreement, the Note, the Mortgage, the
Indemnity Agreement or any of the other Loan Documents; provided, however,
that if such failure by its nature can be cured, then so long as the
continued operation and safety of the Property, and the priority, validity
and enforceability of the lien created by the Mortgage or any of the other
Loan Documents and the value of the Property are not imminently impaired,
threatened or jeopardized, then Borrower shall have a period (the "Cure
Period") of thirty days after written notice from Lender of any such
failure of performance or observance to cure or cause the cure of the same,
and an Event of Default shall not be deemed to exist during the Cure
Period, provided further that if Borrower commences to cure such failure
during the Cure Period and is diligently and in good faith attempting to
effect such cure, the Cure Period shall be extended until such failure is
cured, but in no event shall the Cure Period be longer than 90 days in the
aggregate.
(c) Failure by Borrower to promptly perform or cause to be performed
any obligation, or observe any condition, covenant, term, agreement or
provision required to be performed or observed by Borrower under the
Subdivision Agreement or the PUD beyond any applicable cure period.
(d) The existence of any material inaccuracy or untruth in any
representation, or warranty contained in this Agreement or any other Loan
Documents, or of any statement or certification as to facts delivered to
Lender by or on behalf of Borrower or General Partner.
(e) At any time Borrower files a voluntary petition in bankruptcy, or
is adjudicated a bankrupt or insolvent, or institutes (by petition,
application, answer, consent or otherwise) any bankruptcy, insolvency,
reorganization, arrangement, composition, readjustment, dissolution,
liquidation or similar proceedings under any present or future federal,
state or other statute or law, or admits in writing its inability to pay
its debts as they mature, or makes an assignment for the benefit of its
creditors, or seeks or consents to the appointment of any receiver, trustee
or similar officer for all or any substantial part of its property.
(f) The commencement of any involuntary petition in bankruptcy against
the Borrower or the institution against Borrower of any reorganization,
arrangement, composition, readjustment, dissolution, liquidation or similar
proceedings under any present or future federal, state or other statute or
law, or the appointment of a receiver, trustee or other officer for all or
any substantial part of the property of Borrower which remains undismissed
or undischarged for a period of sixty days.
(g) Any sale, transfer, lease, assignment, conveyance, financing,
lien, encumbrance or other transaction made in violation of Section 7.9
above.
(h) Failure of Borrower for a period of thirty days after Lender's
demand to procure the reversal, dismissal or disposition to Lender's
satisfaction of any order
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enjoining or otherwise preventing or declaring invalid or unlawful the
occupancy, maintenance, operation or use of the Property, or any portion
thereof, in the manner required by the terms of this Agreement, or of any
proceedings which could or might affect the validity or priority of the
lien of the Mortgage or any of the other security for the Loan, or which
could materially affect Borrower's ability to perform its obligations under
this Agreement or the other Loan Documents.
(i) The attachment, seizure, levy upon or taking of possession by any
receiver, custodian or assignee for the benefit of creditors of all or a
substantial part of the property of Borrower which is not stayed or
dismissed within thirty days after the occurrence thereof.
(j) Except as expressly permitted pursuant to Section 12.7 below, the
assignment or attempted assignment of this Agreement by Borrower without
Lender's prior written consent.
(k) The filing of formal charges under any federal, state or local
law, statute or ordinance for which Borrower's forfeiture of all or any
portion of the Property is a potential penalty.
(l) The occurrence of an Event of Default under any of the other Loan
Documents.
11. REMEDIES. Upon the occurrence of any Event of Default, Lender, in
addition to availing itself of any remedies conferred upon it at law or in
equity and by the terms of the Note, the Mortgage and the other Loan Documents,
may pursue any one or more of the following remedies first, concurrently or
successively with each other and with any other available remedies, it being the
intent hereof that none of such remedies shall be to the exclusion of any
others:
(a) Take possession of the Property and do anything necessary or
desirable in Lender's sole judgment to fulfill the obligations of Borrower
hereunder. All sums expended by Lender pursuant to this Article 11 shall
be deemed to have been paid to Borrower and secured by the Mortgage and the
other Loan Documents, and shall bear interest at the Default Rate until
repaid to Lender.
(b) Declare the unpaid indebtedness evidenced by the Note to be
immediately due and payable.
(c) Apply the balance of any deposits made with Lender toward the
repayment of the Loan.
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12. MISCELLANEOUS.
12.1 Additional Indebtedness. If any advances or payments made by
Lender pursuant to this Agreement or any other Loan Document, together with
the disbursement of the Loan, shall exceed the aggregate face amount of the
Note, all such advances and payments shall constitute additional
indebtedness secured by the Mortgage and all other security for the Loan,
and shall bear interest at the Default Rate from the date advanced until
paid.
12.2 Additional Acts. Borrower shall, upon request, execute and
deliver such further instruments and documents and do such further acts and
things as may be reasonably required to provide to Lender the evidence of
and security for the Loan contemplated by this Agreement.
12.3 Loan Agreement Governs. In the event of any inconsistency
between any provision of this Agreement and any provision of any other Loan
Document, the provision of this Agreement shall govern; provided, however,
that the provisions of all of the Loan Documents shall be construed as an
integrated set of provisions governing the Loan and, accordingly, shall be
interpreted and construed liberally to give the maximum validity,
enforceability and effect to all of such provisions.
12.4 Additional Advances. If an Event of Default shall occur,
Lender may, but shall not be obligated to, take any and all actions to cure
such default, and all amounts expended in so doing, all Loan Expenses and
all other amounts paid or advanced by Lender pursuant to the Loan
Documents, and all other amounts advanced by Lender in connection with
preserving any security for the Loan, shall constitute additional advances
of the Loan, shall be secured by the Mortgage and all other security for
the Loan, and shall bear interest at the Default Rate from the date
advanced until paid.
12.5 Amendment; Waiver; Approval. This Agreement shall not be
amended, modified or supplemented without the written agreement of Borrower
and Lender at the time of such amendment, modification or supplement. No
waiver of any provision of this Agreement or any of the other Loan
Documents shall be effective unless set forth in writing signed by the
party making such waiver, and any such waiver shall be effective only to
the extent therein set forth. Failure by Lender to insist upon full and
prompt performance of any provisions of this Agreement or any of the other
Loan Documents, or to take action in the event of any breach of any such
provision or upon the occurrence of any Event of Default, shall not
constitute a waiver of any rights of Lender, and Lender may at any time
thereafter exercise all available rights and remedies with respect to such
breach or Event of Default. Receipt by Lender of any instrument or document
shall not constitute or be deemed to be an approval thereof. Any approvals
required under any of the other Loan Documents must be in writing, signed
by Lender and directed to Borrower.
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12.6 Notice. All notices, communications and waivers under this
Loan Agreement shall be in writing and shall be (i) delivered in person or
(ii) mailed, postage prepaid, either by registered or certified mail,
return receipt requested, or (iii) sent by overnight express carrier,
addressed in each case as follows:
To Lender: Bank One, Illinois, NA
East State Street at Mulford Road
Rockford, Illinois 61110
Attn: Donald J. Pafford
With copy to: Bank One, Illinois, NA
200 South Wacker Drive
Chicago, Illinois 60606
Attn: Terry Rosenberg
and Schwartz, Cooper, Greenberger & Krauss, Chtd.
180 North LaSalle Street, Suite 2700
Chicago, Illinois 60601
Attn: Martin Behn, Esq.
To Borrower: CMC Heartland Partners I, Limited Partnership
547 West Jackson Boulevard
Suite 1510
Chicago, Illinois 60661
Attn: Lawrence Adelson, Esq.
With copy to: CMC Heartland Partners I, Limited Partnership
547 West Jackson Boulevard
Suite 1510
Chicago, Illinois 60661
Attn: Richard P. Brandstatter
or to any other address as to either of the parties hereto, as such party
shall designate in a written notice to the other party hereto. All notices
sent pursuant to the terms of this Section shall be deemed received (i) if
personally delivered, then on the date of delivery, (ii) if sent by
overnight, express carrier, then on the next Business Day immediately
following the day sent, or (iii) if sent by registered or certified mail,
then on the earlier of the third Business Day following the day sent or
when actually received.
12.7 Benefit; Assignment. The rights, powers and remedies of Lender
under this Agreement shall inure to the benefit of Lender and its
successors and assigns. The rights and obligations of Borrower under this
Agreement may not be assigned and any purported assignment by Borrower
shall be null and void. Notwithstanding anything to the contrary contained
herein, Borrower may be converted into New LLC of which
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Limited Partner is the sole member, provided, that Lender receives prior
notice of such conversion, there is no Event of Default or Unmatured
Default, and copies of the following items, all in form and substance
acceptable to Lender in its reasonable discretion, are delivered to Lender
prior any conversion: (a) a certified copy of New LLC's Articles of
Formation, (b) a certified copy of New LLC's operating agreement, (c) a
good standing certificate from the State of Minnesota, (d) new financing
statements, and (e) any other documents reasonably required by Lender. Upon
the conversion of Borrower into New LLC, the terms "Borrower", "Mortgagor",
"Debtor", "Assignor" and "Maker" contained in any of the Loan Documents
shall mean New LLC.
12.8 Governing Law. Except with respect to the creation, perfection
and priority of the liens and security interests created by the Loan
Documents, which shall be construed in accordance with and governed by the
laws of the State of Minnesota, the validity and interpretation of the Loan
Documents shall be construed in accordance with the laws and decisions of
the State of Illinois.
12.9 Indemnity. Borrower agrees to indemnify, defend and hold Lender
harmless from and against any and all liabilities, obligations, losses,
damages, claims, costs and expenses (including reasonable attorneys' fees
and court costs) of whatever kind or nature which may be imposed on,
incurred by or asserted against Lender at any time which relate to or arise
from the offer for sale or sale of any partnership interest in Borrower,
the acquisition or sale or offer for sale of all or any portion of the
Property and/or the ownership, use, operation or maintenance of the
Property, including, without limitation, any brokerage commissions or
finder's fees asserted against Lender with respect to the making of the
Loan or the acquisition of the Property.
12.10 Headings. The titles and headings of the articles, sections
and paragraphs of this Agreement have been inserted as a matter of
convenience of reference only and shall not control or affect the meaning
or construction of any of the terms or provisions of this Agreement.
12.11 No Partnership or Joint Venture. Lender, by executing and
performing this Agreement shall not become a partner or joint venturer with
Borrower or any partner of Borrower or any of their respective associates
or affiliates and all inspections of the Property herein provided for are
for the sole benefit of Lender.
12.12 Time is of the Essence. Time is of the essence of the payment
of all amounts due Lender under the Loan Documents and performance and
observance by Borrower of each covenant, agreement, provision and term of
this Agreement and the other Loan Documents.
12.13 Invalid Provisions. In the event that any provision of this
Agreement is deemed to be invalid by reason of the operation of law, or by
reason of the interpretation placed thereon by any administrative agency or
any court, Borrower and Lender shall
20
<PAGE>
negotiate an equitable adjustment in the provisions of the same in order to
effect, to the maximum extent permitted by law, the purpose of this
Agreement and the validity and enforceability of the remaining provisions,
or portions or applications thereof, shall not be affected thereby and
shall remain in full force and effect.
12.14 Offset. Without limitation of any other right or remedy of
Lender hereunder or provided by law, any indebtedness relating to the
Property or its operation and now or hereafter owing to Borrower by Lender
(including, without limitation, any amounts on deposit in any demand, time,
savings, passbook or like account maintained by Borrower with Lender) may
be offset and applied by Lender hereunder, or under the Note, the Mortgage
or any of the other Loan Documents.
12.15 Acts by Lender. Notwithstanding anything herein contained to
the contrary, Lender will not be required to make any disbursement or
perform any other act under this Agreement if, as a result thereof, Lender
will violate any law, statute, ordinance, rule, regulation or judicial
decision applicable thereto.
12.16 Binding Provisions. The covenants, warranties, agreements,
obligations, liabilities and responsibilities of Borrower under this
Agreement shall be binding upon and enforceable against Borrower and its
legal representatives, administrators, successors and permitted assigns.
12.17 Counterparts. This Agreement may be executed in counterparts,
and all said counterparts when taken together shall constitute one and the
same Agreement.
12.18 No Third Party Beneficiary. This Agreement is only for the
benefit of the parties hereto and their permitted successors and assigns.
No other person or entity shall be entitled to rely on any matter set forth
herein without the prior written consent of such parties.
12.19 Publicity. Subject to compliance with Applicable Laws, Lender
reserves the right to publicize the making of the Loan in any manner it
deems appropriate, including, without limitation, advertisements in trade
journals and newspapers.
12.20 Arbitration. Lender and Borrower agree that upon the written
demand of either Lender or Borrower, whether made before or after the
institution of any legal proceedings, but prior to the rendering of any
judgment in that proceeding, all disputes, claims and controversies between
them, whether individual, joint, or class in nature, arising from this
Agreement, the Mortgage, the Note, any of the other Loan Documents or
otherwise, including without limitation, contract disputes and tort claims,
shall be resolved by binding arbitration pursuant to the Commercial Rules
of the American Arbitration Association ("AAA"). Any arbitration proceeding
held pursuant to this arbitration provision shall be conducted in the city
nearest Lender's address set forth in Section 12.6 above having an AAA
regional office, or at any other place selected by mutual agreement of the
parties. No act to take or dispose of any of the Real Property or any of
the other collateral securing the Loans (the Real Property and all such
other
21
<PAGE>
collateral being hereinafter referred to as the "Collateral") shall
constitute a waiver of this arbitration agreement or be prohibited by this
arbitration agreement. This arbitration provision shall not limit the right
of either Borrower or Lender during any dispute, claim or controversy to
seek, use, and employ ancillary, or preliminary rights and/or remedies,
judicial or otherwise, for the purposes of realizing upon, preserving,
protecting, foreclosing upon or proceeding under forcible entry and
detainer for possession of, any real or personal property, and any such
action shall not be deemed an election of remedies. Such remedies include,
without limitation, obtaining injunctive relief or a temporary restraining
order, invoking a power of sale, if applicable, under any deed of trust or
mortgage, obtaining a writ of attachment or imposition of a receivership,
or exercising any rights relating to personal property, including
exercising the right of set-off, or taking or disposing of such property
with or without judicial process pursuant to the Code. Any disputes, claims
or controversies concerning the lawfulness or reasonableness of an act, or
exercise of any right or remedy concerning any Collateral, including any
claim to rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated; provided, however, that no arbitrator
shall have the right or the power to enjoin or restrain any act of either
Lender or Borrower. Judgment upon any award rendered by any arbitrator may
be entered in any court having jurisdiction. The statute of limitations,
estoppel, waiver, laches and similar doctrines which would otherwise be
applicable in any action brought by Lender or Borrower shall be applicable
in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these
purposes. The Federal Arbitration Act (Title 9 of the United States Code)
shall apply to the construction, interpretation, and enforcement of this
arbitration provision.
12.21 JURISDICTION AND VENUE. SUBJECT TO THE PROVISIONS OF SECTION
12.20 ABOVE, BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS
INITIATED BY BORROWER AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS
AGREEMENT SHALL BE LITIGATED IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS,
OR THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS
OR, IF LENDER INITIATES SUCH ACTION, ANY COURT IN WHICH LENDER SHALL
INITIATE SUCH ACTION AND WHICH HAS JURISDICTION. SUBJECT TO THE PROVISIONS
OF SECTION 12.20 ABOVE, BORROWER HEREBY EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY
LENDER IN ANY OF SUCH COURTS, AND HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN, AND
AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR
PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT
THE ADDRESS TO WHICH NOTICES ARE TO BE SENT PURSUANT TO THIS AGREEMENT.
BORROWER WAIVES ANY CLAIM THAT CHICAGO, ILLINOIS OR THE NORTHERN DISTRICT
OF ILLINOIS IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF
VENUE. SHOULD BORROWER, AFTER BEING SO
22
<PAGE>
SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR
PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE
MAILING THEREOF, BORROWER SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR
JUDGMENT MAY BE ENTERED BY LENDER AGAINST BORROWER AS DEMANDED OR PRAYED
FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. THE EXCLUSIVE CHOICE OF
FORUM FOR BORROWER SET FORTH IN THIS SECTION (BUT SUBJECT TO THE PROVISIONS
OF SECTION 12.20 ABOVE) SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT BY
LENDER OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING BY LENDER
OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION,
AND BORROWER HEREBY WAIVES THE RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY
SUCH JUDGMENT OR ACTION.
12.22 JURY WAIVER. BORROWER AND LENDER HEREBY VOLUNTARILY,
KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR
OTHERWISE) BETWEEN OR AMONG BORROWER AND LENDER ARISING OUT OF OR IN ANY
WAY RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY RELATIONSHIP
BETWEEN BORROWER AND LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT TO
LENDER TO PROVIDE THE LOAN DESCRIBED HEREIN AND IN THE OTHER LOAN
DOCUMENTS.
23
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
CMC HEARTLAND PARTNERS I, BANK ONE, ILLINOIS, NA, a national
LIMITED PARTNERSHIP, a Delaware banking association
limited partnership
By: /s/ Donald J. Pafford
By: Heartland Development Corporation, ------------------------------
a Delaware corporation Title: Vice President
----------------------------
By: /s/ Richard P. Brandstatter
---------------------------
Title: Vice President
---------------------------
24
<PAGE>
Schedule of Exhibits
--------------------
A-1 - Legal Description of Parcel 1
A-2 - Legal Description of Parcel 2
B - Permitted Exceptions
<PAGE>
EXHIBIT A-1
-----------
Legal Description of Parcel 1
-----------------------------
Lot Sixty-five (65) of Auditor's Subdivision No. One (1), Rosemount, according
to the plat thereof now on file and of record in the office of the Register of
Deeds in and for said County and State; the same being all that part of the
Southeast Quarter (SE 1/4) of Section 29, Township 115, Range 19, lying East of
the railroad right of way of the former Chicago, Milwaukee and St. Paul Railway,
excepting therefrom the following:
A. A strip of land heretofore deeded to the Burlington, Cedar Rapids and
Northern Railway Company of Iowa, by deed dated October 4, 1901, recorded
in Book 113 of Deeds, page 190;
B. An easement to Minnesota Northern Natural Gas Company, a Minnesota
corporation, dated September 30, 1933, recorded in Book 195 of Deeds, page
15;
C. An easement containing 3.37 acres, more or less, to the United States of
America described in Judgment on Declaration of Taking dated December 15,
1943, recorded in Book 51 of M.R., page 552;
D. All that part of Lot 65 of Auditor's Subdivision No. 1, Rosemount,
according to the plat thereof now on file and of record in the office of
the Register of Deeds for said County and State; (the same being all that
part of the Southeast Quarter (SE 1/4) of Section 29, Township 115, Range
19, lying East of the railroad right of way;) which lies North of the North
line of that certain easement dated December 15, 1943, and recorded in Book
51 of Miscellaneous Records at page 552, in the office of the Register of
Deeds of Dakota County, and West of a line parallel to and 920 feet West of
the East line of the Southeast Quarter (SE 1/4) of Section 29, Township
115, Range 19, Dakota County, Minnesota. Subject to the rights of the
public and public utilities easements in the roadway along the North side
of the premises herein conveyed, containing 16.6 acres, more or less.
Said parcel being in Dakota County, State of Minnesota
<PAGE>
EXHIBIT A-2
-----------
Legal Description of Parcel 2
-----------------------------
Outlots A, B, C and D; all in Bloomfield.
Said parcel being in Dakota County, State of Minnesota
<PAGE>
EXHIBIT B
---------
Permitted Exceptions
--------------------
1. General real estate taxes for the year 1999 and each year thereafter
not yet due and payable.
2. Exception Nos. 5,6,8,10-19 contained on Schedule B of Commonwealth
Land Title Insurance Company Commitment No. 46813C - Reissue No. 2 dated
September 22, 1998.
<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.
<TABLE>
<CAPTION>
Name of Subsidiary State Ownership
- ------------------ ----- ---------
<S> <C> <C>
CMC Heartland Partners N/A 99.99%
Heartland Development Corporation Delaware 100%
CMC Heartland Partners I, Limited Partnership Delaware (a)
CMC Heartland Partners II, LLC Delaware (b)
CMC Heartland Partners III, LLC Delaware (b)
CMC Heartland Partners IV, LLC Delaware (b)
CMC Heartland Partners V, LLC Delaware (b)
CMC Heartland Partners VI, LLC Delaware (b)
CMC Heartland Partners VII, LLC Delaware (b)
CMC Heartland Partners VIII, LLC Delaware (b)
Lifestyle Communities, Ltd. Delaware (b)
Lifestyle Construction Company, Inc. Delaware (b)
</TABLE>
(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, VI, V, VI, VII, VIII and Lifestyle
Communities, Ltd. and Lifestyle Construction Company, Inc. are all 100% owned by
CMC Heartland Partners.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 1998
Form 10K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,115 1,890
<SECURITIES> 149 141
<RECEIVABLES> 769 459
<ALLOWANCES> 416 205
<INVENTORY> 13,978 4,092
<CURRENT-ASSETS> 2,337 2,640
<PP&E> 28,983 24,003
<DEPRECIATION> 931 807
<TOTAL-ASSETS> 33,231 26,838
<CURRENT-LIABILITIES> 19,198 7,978
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 9,409 15,491
<TOTAL-LIABILITY-AND-EQUITY> 33,231 26,838
<SALES> 6,231 7,127
<TOTAL-REVENUES> 7,694 8,579
<CGS> 4,405 3,407
<TOTAL-COSTS> 9,373 7,335
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (6,084) (2,163)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,084) (2,163)
<EPS-PRIMARY> (2.76) (.99)<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>
