<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
------------------------
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)
312/294-0440
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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HEARTLAND PARTNERS, L.P.
June 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets.................... 3
Condensed Consolidated Statements of Operations.......... 4
Consolidated Statements of Cash Flows.................... 5
Notes to Consolidated Financial Statements............... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation..................................... 11
Item 3 Quantitative and Qualitative Disclosure About Market Risk.... 19
PART II. OTHER INFORMATION
Item 1 Legal Proceedings and Contingencies.......................... 19
Item 6 Exhibits and Reports on Form 8-K............................. 23
Signatures............................................... 24
Page 2 of 25
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Assets:
Cash......................................................... $ 251 $ 1,115
Restricted cash.............................................. 3,158 2,564
Marketable securities (at market)............................ -- 149
Accounts receivable (net).................................... 243 353
Due from affiliate........................................... 327 442
Prepaid and other assets..................................... 377 278
Investment in joint venture.................................. 278 278
------- -------
Total................................................... 4,634 5,179
------- -------
Property:
Buildings and other.......................................... 2,543 2,231
Less Accumulated depreciation........................... 1,000 931
------- -------
Net buildings and other...................................... 1,543 1,300
Land held for sale........................................... 841 930
Housing Inventories.......................................... 19,839 13,978
Land held for development.................................... 6,212 6,212
Capitalized predevelopment costs............................. 6,386 5,632
------- -------
Net properties.......................................... 34,821 28,052
------- -------
Total assets.............................................. $39,455 $33,231
======= =======
Liabilities:
Notes payable................................................ $21,929 $13,492
Accounts payable and accrued expenses........................ 2,675 2,636
Management fee due affiliate................................. -- 283
Accrued real estate taxes.................................... 1,015 1,075
Allowance for claims and liabilities......................... 2,778 2,762
Unearned rents and deferred income........................... 1,800 1,862
Other liabilities............................................ 2,148 1,712
------- -------
Total liabilities....................................... 32,345 23,822
------- -------
Partners' Capital:
General Partner.............................................. -- --
Class A Limited Partners - 2,142 units
authorized, issued and outstanding.......................... -- --
Class B Limited Partner...................................... 7,110 9,409
------- -------
Total partners' capital................................. 7,110 9,409
------- -------
Total liabilities and partners' capital...................... $39,455 $33,231
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 25
<PAGE>
HEARTLAND PARTNERS, L. P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
(dollars in thousands except per unit data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
---------
Property sales................................... $ 2,520 $ 987 $ 4,562 $ 2,252
Less: Cost of property sales..................... 2,019 689 3,964 2,123
------- ------- ------- -------
Gross profit on property sale............... 501 298 598 129
Portfolio income................................. 15 9 33 20
Rental income.................................... 145 258 393 475
Other revenue.................................... 112 23 369 58
------- ------- ------- -------
Total net revenues.......................... 773 588 1,393 682
------- ------- ------- -------
Operating expenses:
-------------------
Selling expenses................................. 1,124 889 1,744 1,783
Real Estate Taxes................................ 81 (80) 141 67
General and administrative expenses.............. 878 1,200 1,525 1,969
Depreciation and amortization.................... 35 43 69 72
Management fee................................... 107 107 213 213
------- ------- ------- -------
Total expenses.............................. 2,225 2,159 3,692 4,104
------- ------- ------- -------
Net Loss.................................... $(1,452) $(1,571) $(2,299) $(3,422)
======= ======= ======= =======
Net (Loss) allocated to
General Partner........................... $ -- $ (15) $ -- $ (34)
======= ======= ======== =======
Net (Loss) allocated to Class B
Limited Partner........................... $(1,452) $ (8) $(2,299) $ (17)
======= ======= ======= =======
Net (Loss) allocated to Class A
Limited Partners.......................... $ -- $(1,548) $ -- $(3,371)
======= ======= ======= =======
Net (Loss) per Class A
Limited Partnership Unit.................. $ -- $ (.72) $ -- $ (1.57)
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 25
<PAGE>
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash Flow used in Operating Activities:
- ---------------------------------------
Net (loss).................................................................... $(2,299) $(3,422)
Adjustments reconciling net (loss) to net cash used in operating activities:
Depreciation.................................................................. 69 72
Net change in allowance for claims and liabilities............................ 16 (316)
Net change in assets and liabilities:
(Decrease) increase in accounts receivable................................ 110 (133)
(Increase) in housing inventories, net..................................... (5,861) (579)
Decrease in land held for sale............................................. 89 31
Decrease (increase) in land held for development........................... -- (19)
(Increase) in capitalized development costs................................ (754) (540)
Increase (decrease) in accounts payable and accrued liabilities............ 39 203
(Decrease) in management fee due affiliate................................. (283) (212)
Net change in other assets and liabilities................................. 330 1,565
------- -------
Net cash used in Operating Activities......................................... (8,544) (3,350)
------- -------
Cash Flow used in Investing Activities:
- ---------------------------------------
Additions to buildings and other.............................................. (312) (90)
Net sales and maturities of marketable securities............................. 149 (2)
------- -------
Net cash used in investing activities......................................... (163) (92)
------- -------
Cash Flow from Financing Activities:
- ------------------------------------
Advances on notes payable, net................................................ 8,437 3,781
Increase in restricted cash................................................... (594) (561)
Distribution paid to unitholders.............................................. -- (1,631)
------- -------
Net cash provided by financing activities..................................... 7,843 1,589
------- -------
Decrease in cash.............................................................. (864) (1,853)
Cash at beginning of the period............................................... 1,115 1,890
------- -------
Cash at end of the period..................................................... $ 251 $ 37
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
Page 5 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1999
These unaudited Consolidated Financial Statements of Heartland Partners, L.P., a
Delaware Limited Partnership, and its subsidiaries (collectively, "Heartland" or
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K (the "1998 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
1998 Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect in the opinion of
management all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature. Certain reclassifications have been made to the prior periods'
financial statements in order to conform with current period presentation.
1. 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.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Revenues from housing and land sales are recognized in the period which title
passes and cash is received.
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
Page 6 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1999
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 6 to the Consolidated Financial
Statements).
Property
- --------
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.
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.
Housing inventories consisted of the following at June 30, 1999 (amounts in
thousands):
Land under development.................. $ 5,830
Direct construction costs............... 8,280
Capitalized project costs............... 5,729
-------
$19,839
=======
2. Contingencies
At June 30, 1999, Heartland's allowance for claims and liabilities was
approximately $ 2.8 million of which $0.4 million was for the resolution of non-
environmental claims and $2.4 million was for environmental matters. Significant
legal proceedings and contingencies are discussed in the 1998 Form 10-K. During
the second quarter of 1999, the Company modified its October 1, 1998 settlement
agreement with the Port of Tacoma in which the Port of Tacoma released all
claims against the Company and the Company agreed either to (a) pay $1.1 million
on or before December 31, 2000, plus interest from January 1, 1999, or (b)
convey real property to be agreed upon at a later date. In July 1999, suit was
filed against the Company in Minnesota District Court by a buyer under an
expired real estate sale contract originally entered into in 1995, and extended
to June 30, 1999. The plaintiff in the suit is demanding specific performance by
conveyance to it of the vacant 5.95 acre parcel in Minneapolis, Minnesota that
was originally sold to the buyer for $562,000 pursuant to the real estate
contract.
3. Restricted Cash
Page 7 of 25
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HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1999
The total restricted cash at June 30, 1999 and 1998 was $3,158,000 and
$1,285,000, respectively. Restricted cash increased $594,000 from December 31,
1998 to June 30, 1999. This increase was $294,000 for additional earnest money
deposited on sold units and an increase of $300,000 in the interest reserve for
the LaSalle National Bank line of credit.
4. Notes Payable
Heartland has a line of credit agreement in the amount of $11.5 million with
LaSalle National Bank ("LNB"), pursuant to which CMC granted LNB a first lien on
certain parcels of land in Chicago, Illinois and Milwaukee, Wisconsin which had
a carrying value of $8,653,000 and $6,995,000 as of June 30, 1999, and 1998
respectively. Also, pursuant to the line of credit agreement, CMC has pledged
cash in the amount of $1,150,000 as an interest reserve. The maturity date of
the line of credit is April 29, 2000. Advances against the line of credit bear
interest at the prime rate of LNB plus 1.0% (8.75% at June 30, 1999). At June
30, 1999, and 1998, $8,700,000 and $6,000,000 respectively, had been advanced to
the Company by LNB against the line of credit. In June 1999, the Company
extended the maturity of the loan to April 29, 2000, increased the amount of the
credit facility from $8,500,000 to $11,500,000, increased the interest reserve
from $850,000 to $1,150,000, reduced the net worth requirement from $8,500,000
to $5,500,000 and granted LNB a first lien on a property in Milwaukee,
Wisconsin.
As of June 30, 1999, CMCV has a revolving line of credit agreement in the
amount of $3 million with NationsBank ("NB") to acquire lots and construct
houses in the Osprey Cove subdivision, St. Marys, Georgia, pursuant to which CMC
granted a first mortgage to NB on specific lots in said subdivision with a
carrying value of $3,237,000 and $3,643,000 at June 30, 1999, and 1998,
respectively. The revolving line of credit agreement matured June 30, 1999.
On July 27, 1999, the Company extended the maturity of the revolving line of
credit agreement to December 30, 1999. The line of credit bears interest at the
prime rate of NB plus 1% (8.75% at June 30, 1999). 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 $2,071,000 and $1,531,000 at June 30, 1999, and 1998, respectively,
against the revolving line of credit facility.
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 June 30, 1999, the Company had
outstanding balances on 11 term loans totaling $767,000. The carrying value of
the related inventory at June 30, 1999, totaled $854,000. The term of each loan
is one year and bears interest at the NB prime rate plus 1% (8.75% at June 30,
1999).
On November 30, 1998, Heartland executed an agreement for a $2,500,000 loan
from Bank One relating to the Bloomfield project. The loan has a two year term
and bears interest at the prime rate (7.75% at June 30, 1999).
Page 8 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1999
$500,000 of the loan was placed in an interest reserve. In addition, Bank One is
providing a $1,750,000 development loan, letters of credit for $204,500 to the
City of Rosemount and a $4,000,000 revolving credit line for the construction of
homes; these credit facilities were executed on February 1, 1999. The loans bear
interest at the prime rate (7.75% at June 30, 1999). The loans mature on January
31, 2001 and January 31, 2000, respectively. At June 30, 1999, $294,000 had been
advanced against the development loan and $800,000 against the revolving line of
credit. The three loans are collateralized by land and inventory with a carrying
value of $4,369,000 at June 30, 1999.
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(8.75% at June 30, 1999). 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. At June 30, 1999,
$6,797,000 had been advanced against the loan.
5. Related Party Transactions
Heartland has a management agreement with Heartland Technology, Inc. ("HTI")
pursuant to which the Company is required to pay HTI an annual management fee in
the amount of $425,000. As of June 30, 1999, the management fee had been paid in
full to HTI.
Under a management services agreement, HTI reimburses the Company for reasonable
and necessary costs and expenses for services. At June 30, 1999, HTI owed
Heartland approximately $327,000. This was a decrease of $ 115,000 from
December 31, 1998.
Page 9 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1999
6. Reportable Segments
The following tables set forth the reconciliation of net income and total assets
for Heartland's reportable segments for the quarters ended June 30, 1999 and
1998 (See Note 1 to the Consolidated Financial Statements).
<TABLE>
<CAPTION>
Property
(amounts in thousands) Land Sales(1) Development (2) Corporate (3) Consolidated
- ----------------------------------- --------------- ------------------- ---------------- -------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
- ---------
Property sales $ 694 $ 389 $ 1,826 $ 598 $ 0 $ 0 $ 2,520 $ 987
Less: cost of property sales....... 151 31 1,868 658 0 0 2,019 689
------ ------ ------- ------- ------ ------ ------- -------
Gross profit on property sales.. 543 358 (42) (60) 0 0 501 298
Rental income...................... 145 258 0 0 0 0 145 258
Portfolio income................... 0 0 0 0 15 9 15 9
Miscellaneous income............... 0 0 112 23 0 0 112 23
------ ------ ------- ------- ------ ------ ------- -------
Total Net Revenues.............. 688 616 70 (37) 15 9 773 588
------ ------ ------- ------- ------ ------ ------- -------
Expenses:
- ---------
Selling............................ 160 213 914 676 0 0 1,074 889
Real estate taxes.................. 20 (80) 61 0 0 0 81 (80)
General and Administrative......... 0 0 246 556 442 535 688 1,091
Environmental Expense.............. 50 0 190 0 0 109 240 109
Management fee..................... 0 0 0 0 107 107 107 107
Depreciation and amortization...... 0 0 22 35 13 8 35 43
------ ------ ------- ------- ------ ------ ------- -------
Total Expenses.................. 230 133 1,433 1,267 562 759 2,225 2,159
------ ------ ------- ------- ------ ------ ------- -------
Net Income (Loss)............... $ 458 $ 483 $(1,363) $(1,304) $ (547) $ (750) $(1,452) $(1,571)
====== ====== ======= ======= ====== ====== ======= =======
Properties, net of accumulated $ 842 $1,139 $33,162 $22,496 $ 817 $ 702 $34,821 $24,337
depreciation.................... ====== ====== ======= ======= ====== ====== ======= =======
Total assets.................... $1,085 $1,466 $35,798 $23,634 $2,572 $1,694 $39,455 $26,794
====== ====== ======= ======= ====== ====== ======= =======
</TABLE>
1. The Land Sales reportable business segment consists of the approximately
15,237 acres of land located throughout 12 states for sale as of June 30,
1999. The related sales and marketing expenses are also reported in this
segment.
2. The Property Development reportable business segment consists of the
approximately 911 acres representing 15 sites that Heartland is in the
process of developing and communities in which Heartland is currently
acquiring finished lots, selling and building homes. The related selling and
operating expenses are also reported for this business segment.
Page 10 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
3. The Corporate level revenues and expenses consist of portfolio income from
investments, salaries and general and administrative expenses for the
employees and occupied office space in Chicago, Illinois.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Forward Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operation section, and elsewhere
in this Form 10-Q 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 Financial Condition and Results of Operation section,
and elsewhere in this Form 10-Q. 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 statement 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 from operating activities has been derived primarily from the proceeds
of property sales and rental income. Cash and marketable securities at amortized
cost were $3,409,000 (including $3,158,000 of restricted cash) at June 30, 1999,
and $3,828,000 (including $2,564,000 of restricted cash) at December 31, 1998.
The decrease of $419,000 from December 31, 1998 to June 30, 1999, is mainly
attributable to capital expenditures for land development and construction costs
(see Consolidated Statement of Cash Flows).
Cash flow used for operations was $8,544,000 in the first six months of 1999,
compared to $3,350,000 used in operations in the first six months of 1998. The
increase in cash used in operations between the years of $5,194,000 is mainly
attributable to capital expenditures of $5,861,000 for housing inventories in
the first six months of 1999.
At June 30, 1999, property designated for development consisted of 15 sites
comprising approximately 911 acres. The book value of this land is $10.3 million
or an average of $11,300 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 June 30, 1999, the Company had executed sale contracts
on 84
Page 11 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
Tower units, 5 Plaza units and 3 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 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(8.75% at June 30,1999). 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. As of June 30, 1999, $6,797,000 has
been advanced against the loan.
Included in the aforementioned 911 acres are approximately 13 acres consisting
of 41 lots purchased for $1.4 million, or an average of $34,100 per lot at
Osprey Cove in St. Marys, GA. The 41 lots consist of 2 completed models, 3
unsold homes under construction, 6 sold homes under construction, 2 units sold
not under construction, 1 lot sold and 27 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 June 30, 1999, there were 10 homes under contract, 7 of which are under
construction at Osprey Cove. As of June 30, 1999, 26 contracts have closed; 11
in the first six months of 1999, 13 in 1998 and 2 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 six months ended
June 30, 1999, CMC sold 2 homes and 16 lots for these owners.
As of June 30, 1999, CMCV has a revolving line of credit agreement in the amount
of $3,000,000 from NB for Osprey Cove that matured on June 30, 1999. The
Company, on July 27, 1999, extended the maturity of the line of credit to
December 30, 1999. The line of credit with NB bears interest at the prime rate
of NB plus 1% (8.75% at June 30, 1999). 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 June 30,
1999, $2,071,000 has been advanced by NB under the revolving line of credit.
The Company is the exclusive homebuilder and sales agent for the Longleaf
Country Club in Southern Pines, North Carolina. CMC currently intends to sell
and build 244 homes on lots currently owned by Longleaf Associates Limited
Partnership, an affiliate of General Investment & Development.
As of June 30, 1999, there were 14 homes under contract at Longleaf. There are
12 homes under construction at June 30, 1999, of which 2 are models, 9 are under
contract and 1 is unsold. The Company closed 5 contracts in the first six
months of 1999.
Page 12 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
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 June 30, 1999, the Company had sold
a total of 24 homes and 2 lots for these owners.
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 June 30, 1999). At June 30, 1999, $767,000 had been advanced
by NB to the Company under these loans.
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. The City receives reimbursement
for its costs by real estate tax assessments. The City of Rosemount has
completed the Phase I infrastructure. Phase I consists of 120 townhomes, 27
single family homes and 10 twinhomes. At June 30, 1999, the 2 townhomes models
are complete and 10 unsold townhomes are currently under construction. The
single family model home is complete and 2 single family unsold homes are under
construction. There are 3 sold single family homes that have not been started as
of June 30, 1999. The Grand Opening of the models took place in May 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 June 30, 1999), and $500,000 of the loan was placed in
an interest reserve (certificate of deposit). Also, Bank One is providing a
$1,750,000 land development loan, letters of credit for $204,500 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 on February 1, 1999. The loans
bear interest at the prime rate (7.75 % at June 30, 1999). At June 30, 1999,
$294,000 had been advanced against the land development loan and $800,000
against the revolving line of credit. 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 June 30, 1999, the buildings had
been built and leases had been signed for approximately 260,000 of the 265,000
square feet.
Page 13 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
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 has prepared the preliminary site
plan for the site. The Company has submitted the site plan for approval and
expects it to be approved 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 approximately $2 million in state funds and the federal
government has authorized approximately $2 million of federal funds for the
improvement of the facility. The Company expects to begin work on this project
in the third quarter of 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 15,237 acres
located throughout 12 states. The book value of this inventory is approximately
$841,000. The majority of the land is former railroad rights-of-way, long,
narrow strips of land that vary 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 the Company's sales has slowed over the last five years due mainly
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 approximately 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 lessees. The majority of the
leases provide nominal rental income to Heartland. The leases generally require
the lessee to construct, maintain and remove any improvements, pay property
taxes, maintain insurance and maintain the condition of the property. The
majority of the leases are cancelable by either party upon thirty to sixty days
notice. Heartland's ability to terminate or modify certain of its leases is
restricted by applicable law and regulations.
The Company performs annual reviews on major properties to determine that the
capitalized cost of development properties does not exceed the current fair
value without regard to the property's expected
Page 14 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
net realizable value from development. If the capitalized cost of any property
exceeds the current fair value, then a loss is recognized and the capitalized
cost is reduced in accordance with FAS 121. No loss is included in the statement
of operations for the quarters and six months ended June 30, 1999, and 1998.
It is the Company's practice to evaluate environmental liabilities associated
with the Company's properties. Heartland monitors the potential exposure to
environmental costs on a regular basis and has recorded a liability in the
amount of $2.4 million at June 30, 1999 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 $0.4 million.
At this time Heartland does not anticipate that these claims or assessments will
have a material effect on the Company's liquidity, financial position or 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 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 affected the Company's cash flow or liquidity in the
past, management is not able to reasonably anticipate whether future payments
may or may not have a significant adverse effect in the future.
Heartland's management believes it will have sufficient funds available for
operating expenses, but anticipates the necessity of utilizing outside financing
to fund development projects and homebuilding operations. The Company has a line
of credit with LNB in the amount of $11.5 million. Cash in the amount of
$1,150,000 is pledged as an interest reserve. The line of credit matures April
29, 2000. Advances against the line of credit bear interest at the prime rate of
LNB plus 1.0% (8.75% at June 30, 1999). At June 30, 1999, $8,700,000 had been
advanced to the Company by LNB against the line of credit. On June 30, 1999, the
Company extended, pledged additional collateral under, modified the financial
terms and increased the amount of the credit facility.
Results of Operations
For the second quarter and six months ended June 30, 1999, operations resulted
in a net loss of $1,452,000 and $2,299,000, respectively or $0 per Class A Unit.
Operations for the second quarter and
Page 15 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
six months ended June 30, 1998, resulted in a net loss of $1,571,000 and
$3,422,000 respectively, or $0.72 and $1.57 per Class A Unit.
The decrease in the net loss for the second quarter of 1999 compared to 1998 of
$119,000 is due to a decrease in general and administrative expenses of
$322,000, and an increase in net revenues of $185,000 due to improved gross
profit on property sales. The decrease in the net loss for the six months ended
June 30, 1999 compared to 1998 of $1,123,000 is due to a decrease in general and
administrative expenses of $444,000 and an increase in net revenues of $711,000
due to improved gross profit on property sales and the receipt of a
reimbursement in the first quarter of 1999 of $190,000 for prior year
environmental expense.
Heartland has approximately 188 active leases on its real estate properties,
which generated $145,000 and $258,000 of revenue for the second quarter of 1999
and 1998, respectively. Rental income during the three months ended June 30,
1999 compared to the three months ended June 30, 1998 decreased $113,000. This
was due to the one time recognition of old unbilled lease income during June
1998.
Total expenses were $2,225,000 and $2,159,000 for the quarters ended June 30,
1999 and 1998, respectively. The second quarter 1999 total expenses were not
significantly greater than those in the second quarter of 1998. Total expenses
were $3,692,000 and $4,104,000 for the six months ended June 30, 1999 and 1998,
respectively. The decrease of $412,000 is due to a decrease in general and
administrative expenses of $444,000.
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 such
as the company 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 condition 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 June 30, 1999, Heartland's total
consolidated indebtedness was approximately $21,929,000. 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
Page 16 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
assurance can be given that such financing will be available or, if available,
will be on terms favorable to Heartland. If Heartland is not successful in
obtaining sufficient capital to fund the implementation of its business strategy
and other expenditures, development projects may be delayed or abandoned. Any
such delay or abandonment could result in a reduction in sales and would
adversely affect Heartland's future results of operations.
Period-to-Period Fluctuations.
Heartland's real estate projects are long-term in nature. Sales activity varies
from period to period, and the ultimate success of any development cannot always
be determined from results in any particular period or periods. Thus, the timing
and amount of revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage effectively their
cash flows from operations would have an adverse effect on their ability to
service debt, and to meet working capital requirements.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at June 30, 1999, is $21,929,000.
The Company pays interest on 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 quarterly interest
incurred by approximately $55,000.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
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 properly 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
Page 17 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
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 September 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. The testing
phase for all significant systems is completed, with all remediated systems
fully tested and expected to be implemented by September 30, 1999, with 100%
completion targeted for October 31, 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 50% 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
September 30, 1999. Testing and implementation of affected equipment is
expected to be completed by October 31, 1999.
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 $190,000 ($30,000 expensed and $160,000 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 $10,000 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 Year 2000 issues could also materially
affect the Company. The Company
Page 18 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
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 have began to formulate our contingency plans if we do not complete all
phases of the Year 2000 program. We plan to evaluate the status of completion
in September 1999 and determine whether additional planning or implementation 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 3. Quantitative and Qualitative Disclosures about Market Risk
See Management's Discussion and Analysis of Financial Condition and Results of
Operations: Economic and Other Conditions Generally, Access to Financing and
Interest Rate Sensitivity.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings and Contingencies
At June 30, 1999, Heartland's allowance for claims and liabilities was
approximately $2.8 million. During the quarter ended June 30, 1999, an increase
of approximately $160,000 in the provision was recorded in respect to
environmental matters. Material legal matters are discussed below.
Soo Line Matters
- ----------------
The Soo Line Railroad Company (the "Soo") has asserted that the Company is
liable for certain occupational injury claims filed after the consummation of an
Asset Purchase Agreement and related agreements ("APA") by former employees now
employed by the Soo. The Company has denied liability for each of these claims
based on a prior settlement with the Soo. The Soo has also asserted that the
Company is liable for the remediation of releases of petroleum or other
regulated materials at six different sites acquired from the Company located in
Iowa, Minnesota and Wisconsin. The Company has denied liability based on the
APA.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements on many of these
claims. As a result of Soo's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
- ------------------
Page 19 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
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, subsequently modified effective June 1999, in which the Port released all
claims and the Company agreed either to (a) pay the Port $1.1 million on or
before December 31, 2000, plus interest from January 1, 1999, or (b) convey to
the Port real property to be agreed upon at a later date. At June 30, 1999,
Heartland's allowance for claims and liabilities for this matter was $1.1
million.
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 Company's only outstanding obligation under
the settlement is to pay 32% of the monitoring costs for twenty-five years
beginning in 1997.
Miscellaneous Environmental Matters
- -----------------------------------
Under environmental laws, liability for releases of hazardous substances 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 substances were
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
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 predecessor. 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.
Page 20 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
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.
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. No
potentially responsible parties ("PRPs") have been formally named at this site.
The Company sold its interest in this property to the City of St. Paul on April
30, 1999, with the City agreeing to indemnify the Company against certain
environmental liability.
The Company has an interest in property at Moses Lake, Washington previously
owned and operated 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.
In July 1999, suit was filed against the Company in Minnesota District Court by
a buyer under an expired real estate sale contract originally entered into in
1995, and extended to June 30, 1999. The plaintiff in the suit is demanding
specific performance by conveyance to it of the vacant 5.95 acre parcel in
Minneapolis, Minnesota originally to be sold to the buyer for $562,000 pursuant
to the real estate contract. Environmental sampling in 1995 disclosed that the
parcel was impacted by releases of regulated materials from the 1960s operations
of a former lessee. The Company continues to investigate the environmental
condition of the property on a voluntary basis under the direction of the
Minnesota Department of Agriculture.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company,
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
Page 21 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
Page 22 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
------------- -------------------------------------------------
10.18 Second Amendment to Amended and Restated Loan and
Security Agreement dated April 29, 1999 among CMC
Heartland Partners, and Heartland Partners, L.P.
and LaSalle National Bank (filed herewith)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K; No report on Form 8-K was filed during the quarter
ended June 30, 1999.
Page 23 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
(Registrant)
Date: August 16, 1999 BY: /s/ Edwin Jacobson
-----------------------------------------
Edwin Jacobson
President and Chief Executive Officer of
Heartland Technology, Inc.
the General Partner
Date: August 16, 1999 BY: /s/ Richard P. Brandstatter
------------------------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer of
Heartland Technology, Inc.
the General Partner
Page 24 of 25
<PAGE>
HEARTLAND PARTNERS, L.P.
June 30, 1999
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------------- ------------------------------------------------------------
10.18 Second Amendment to Amended and Restated Loan and Security
Agreement dated April 29, 1999 among CMC Heartland Partners,
and Heartland Partners, L.P. and LaSalle National Bank
(filed herewith)
27 Financial Data Schedule (filed herewith)
Page 25 of 25
<PAGE>
SECOND AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
---------------------------
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "Amendment") is dated as of the 29th day of April, 1999 by and among CMC
HEARTLAND PARTNERS, a Delaware general partnership ("CMC") and HEARTLAND
PARTNERS, L.P., a Delaware limited partnership ("Heartland"), jointly and
severally (CMC and Heartland are referred to herein from time to time
individually as a "Borrower" and collectively as "Borrowers"); and LASALLE
NATIONAL BANK, a national banking association ("Bank").
W I T N E S S E T H:
WHEREAS, Bank and Borrowers entered into that certain Amended and Restated
Loan and Security Agreement dated as of June 30, 1998, as amended by that
certain Amendment to Amended and Restated Loan and Security Agreement dated as
of October 23, 1998 (the "Agreement"), and now desire to amend the Agreement to,
among other things, (i) increase Bank's commitment to Borrowers, (ii) waive a
certain financial covenant and (iii) add a certain parcel of real property
located in Milwaukee, Wisconsin to the collateral securing the Loans (as defined
in the Agreement) as further set forth in this Amendment.
NOW, THEREFORE, for and in consideration of the premises and mutual
agreements herein contained and for the purposes of setting forth the terms and
conditions of this Second Amendment, the parties, intending to be bound, hereby
agree as follows:
1. Incorporation of the Agreement. All capitalized terms which are not
------------------------------
defined hereunder shall have the same meanings as set forth in the Agreement,
and the Agreement to the extent not inconsistent with this Amendment is
incorporated herein by this reference as though the same were set forth in its
entirety. To the extent any terms and provisions of the Agreement are
inconsistent with the amendments set forth in Paragraph 2 below, such terms and
-----------
provisions shall be deemed superseded hereby. Except as specifically set forth
herein, the Agreement shall remain in full force and effect and its provisions
shall be binding on the parties hereto.
2. Amendment of the Agreement. The Agreement is hereby amended as
--------------------------
follows:
(1) Any and all references to the Agreement shall be deemed to refer
to and include this Amendment, as the same may be further amended, modified or
supplemented from time to time.
<PAGE>
(2) The definition of the term "Environmental Indemnity Agreement" in
Paragraph 1.1 is hereby amended and restated to read in its entirety as follows:
- -------------
"Environmental Indemnity Agreement" means that
---------------------------------
certain Amended and Restated Environmental Indemnity
Agreement dated as of June 30, 1998 made by Borrowers
in favor of Bank, as amended by that certain Amendment
to Amended and Restated Environmental Indemnity Agreement
dated as of April 29, 1999.
(3) The definition of the term "Galewood Assignment of Rents" in
Paragraph 1.1 is hereby amended and restated to read in its entirety as follows:
- -------------
"Galewood Assignment of Rents" means that certain
----------------------------
Assignment of Rents and Leases dated as of June 30,
1998 between CMC and Bank with respect to the Galewood
Mortgaged Property, as amended by that certain Amendment
to Assignment of Rents and Leases dated as of October 23,
1998 and that certain Second Amendment to Assignment of
Rents and Leases dated as of April 29, 1999, as the same
may be amended, modified or supplemented from time to time.
(4) The definition of the term "Galewood Mortgage" in Paragraph 1.1
-------------
is hereby amended and restated to read in its entirety as follows:
"Galewood Mortgage" means that certain Mortgage and
-----------------
Security Agreement dated June 30, 1998 between CMC and
Bank with respect to the Galewood Mortgaged Property,
as amended by that certain Amendment to Mortgage and
Security Agreement dated as of October 23, 1998 and that
certain Second Amendment to Mortgage and Security
Agreement dated as of April 29, 1999, as the same may be
amended, modified or supplemented from time to time.
(5) The definition of the term "Kinzie Station Assignment of Rents"
in Paragraph 1.1 is hereby amended and restated to read in its entirety as
-------------
follows:
"Kinzie Station Assignment of Rents" means that
----------------------------------
certain Assignment of Rents and Leases dated as of
March 15, 1996 made by CMC in favor of Bank with respect
to the Kinzie Station Mortgaged Property, as amended by
that certain Amendment to Assignment of Rents and Leases
dated as of
<PAGE>
May 14, 1997, that certain Second Amendment to
Assignment of Rents and Leases dated as of April 30,
1998, that certain Third Amendment to Assignment of Rents
and Leases dated as of June 30, 1998, that certain Fourth
Amendment to Assignment of Rents and Leases dated as of
October 23, 1998 and that certain Fifth Amendment to
Assignment of Rents and Leases dated as of April 29, 1999
herewith, as the same may be further amended, modified or
supplemented from time to time.
(6) The definition of the term "Kinzie Station Mortgage" in Paragraph
---------
1.1 is hereby amended and restated in its entirety to read as follows:
- ---
"Kinzie Station Mortgage" means that certain Mortgage and
-----------------------
Security Agreement dated as of March 15, 1996, made by
CMC in favor of Bank with respect to the Kinzie Station
Mortgaged Property, as amended by that certain Amendment
to Mortgage and Security Agreement dated as of May 14,
1997, that certain Second Amendment to Mortgage and
Security Agreement dated as of April 30, 1998, that
certain Third Amendment to Mortgage and Security Agreement
dated as of June 30, 1998, that certain Fourth Amendment
to Mortgage and Security Agreement dated as of October
23, 1998 and that certain Fifth Amendment to Mortgage and
Security Agreement dated as of April 29, 1999, as the
same may be further amended, modified or supplemented
from time to time.
(7) The definition of the term "Letter of Credit Maturity Date" in
Paragraph 1.1 is hereby amended and restated to read in its entirety as follows:
- -------------
"Letter of Credit Maturity Date" means April 29, 2000.
------------------------------
(8) The definition of the term "Loan" or "Loans" in Paragraph 1.1 is
-------------
hereby amended and restated to read in its entirety as follows:
"Loan" or "Loans" means and includes all loans made
---- -----
under the Revolving Credit Commitment (including, but
not limited to, any Letters of Credit), unless the
context in which such term is used shall otherwise require.
(9) The definition of the term "Mortgaged Properties" in Paragraph
---------
1.1 is hereby amended and restated to read in its entirety as follows:
- ---
3
<PAGE>
"Mortgaged Properties" means the Galewood Mortgaged
--------------------
Property, the Kinzie Station Mortgaged Property and the
Milwaukee Mortgaged Property.
(10) The definition of the term "Other Agreements" in Paragraph 1.1 is
-------------
hereby amended and restated to read in its entirety as follows:
"Other Agreements" means all agreements, instruments
----------------
and documents, including, without limitation, Letters
of Credit, guaranties, mortgages, deeds of trust, pledges,
powers of attorney, consents, assignments, contracts,
notices, security agreements, leases, financing statements
and all other written matter heretofore, now and/or from
time to time hereafter executed by and/or on behalf of
Borrowers in favor of Bank including, without limitation,
the Revolving Note, the Pledge Agreement, the Galewood
Mortgage, the Galewood Assignment of Rents, the Kinzie
Station Mortgage, the Kinzie Station Assignment of Rents,
the Milwaukee Mortgage, the Milwaukee Assignment of Rents
and the Environmental Indemnity Agreement, all as may be
modified, amended or supplemented from time to time.
(11) The definition of the term "Pledge Agreement" in Paragraph 1.1 is
-------------
hereby amended and restated to read in its entirety as follows:
"Pledge Agreement" means that certain Amended and
----------------
Restated Pledge Agreement dated as of June 30, 1998,
as amended by that certain Amendment to Amended and
Restated Pledge Agreement dated as of April 29, 1999,
made by Borrowers in favor of Bank pledging $1,150,000 in
cash or cash equivalents as an interest reserve pursuant
to a certificate of deposit having a rolling maturity of
180 days or less.
(12) The definition of the term "Revolving Credit Maturity Date" in
Paragraph 1.1 is hereby amended and restated to read in its entirety as follows:
- -------------
"Revolving Credit Maturity Date" means April 29, 2000.
------------------------------
(13) The definition of the term "Revolving Note" in Paragraph 1.1 is
-------------
hereby amended and restated to read in its entirety as follows:
4
<PAGE>
"Revolving Note" means that certain Substitute Revolving
--------------
Note dated as of April 29, 1999 made by Borrowers, jointly
and severally, in favor of Bank, in the maximum principal
amount available of Eleven Million Five Hundred Thousand
and 00/100 Dollars ($11,500,000), as the same may be
amended, modified or supplemented from time to time,
together with any renewals thereof or exchanges or
substitutes therefor.
(14) The following definitions are hereby added to Paragraph 1.1 to
--------------
read in their entirety as follows:
"Milwaukee Assignment of Rents" means that certain
-----------------------------
Assignment of Rents and Leases dated as of April 29, 1999
between CMC and Bank with respect to the Milwaukee
Mortgaged Property, as the same may be amended, modified
or supplemented from time to time.
"Milwaukee Mortgage" means that certain Mortgage and
------------------
Security Agreement dated as of April 29, 1999 between CMC
and Bank with respect to the Milwaukee Mortgaged Property,
as the same may be amended, modified or supplemented from
time to time.
"Milwaukee Mortgaged Property" means that certain parcel
----------------------------
of vacant land located in Milwaukee, Wisconsin commonly
known as 3301 Canal Street, Milwaukee, Wisconsin, serving
as collateral hereunder and legally described on Schedule
--------
1.1C attached hereto and made a part hereof.
----
(15) The definitions of the terms "Term Credit Commitment", "Term
---------------------- ----
Credit Maturity Date", "Term Credit Termination Date", and "Term Note" are
- -------------------- ---------------------------- ---------
hereby deleted from Paragraph 1.1 in their entirety.
-------------
(16) Paragraph 2.1 is hereby amended and restated to read in its
-------------
entirety as follows:
2.1 Revolving Credit Commitment. On the terms and
---------------------------
subject to the conditions set forth in this Agreement,
Bank agrees to make revolving credit available and
Letters of Credit available to Borrowers from time to
time prior to the Revolving Credit Termination Date with
respect to revolving credit loans and the Letter of
Credit Termination Date with
5
<PAGE>
respect to Letters of Credit, in such aggregate amounts
as Borrowers may from time to time request but in no
event exceeding Eleven Million Five Hundred Thousand
Dollars ($11,500,000) in the aggregate (the "Revolving
Credit Commitment"); provided, however, that in no event
shall the aggregate amount of Letters of Credit outstanding
at any one time exceed the Letter of Credit Limit. The
Revolving Credit Commitment shall be available to Borrowers
by means of Loans, it being understood that the Loans may
be repaid and used again during the period from the date
hereof to and including the Revolving Credit Termination
Date, at which time the Revolving Credit Commitment shall
expire.
(17) Paragraph 2.5 entitled "Term Credit Commitment" is hereby deleted
------------- ----------------------
from the Agreement in its entirety.
(18) Paragraph 3.2 is hereby amended and restated to read in its
entirety as follows:
3.2 Recordation. The type, date and amount of each Loan made by
-----------
Bank, the interest rate, and the date and amount of
each repayment of principal received by Bank shall be
recorded by Bank in its records. The aggregate unpaid
principal amount so recorded shall be prima facie evidence
of the principal amount owing and unpaid on the Revolving
Note. The failure to so record any such amount or any error
in so recording any such amount shall not limit or otherwise
affect the obligations of Borrowers hereunder or under the
Revolving Note to repay the principal amount of the Revolving
Loans together with all interest accrued thereon.
(19) Paragraph 3.3 entitled "Secured Term Note" is hereby deleted from
------------- -----------------
the Agreement in its entirety.
(20) Paragraph 4.1(a) is hereby amended and restated to read in its
----------------
entirety as follows:
4.1 Interest Rate; Applicable Borrowing Amounts.
-------------------------------------------
(a) Borrowers' Liabilities arising under Paragraph 2.1
-------------
hereof in respect of each Revolving Loan shall bear
interest at the fluctuating rate per annum equal to the
sum of the Prime Rate plus the Revolving Margin from time
to time in
6
<PAGE>
effect for the period commencing on the date of such
Revolving Loan until such Revolving Loan is paid in full.
(21) Paragraph 4.7 is hereby deleted from the Agreement in its
entirety.
(23) Section (a) of Paragraph 5.1 of is hereby amended and restated to
-------------
read in its entirety as follows:
(a) principal payable on account of the Loans made by
Bank to Borrowers pursuant to this Agreement shall be
payable by Borrowers, jointly and severally, to Bank, as
provided in the Revolving Note, the applicable Letter of
Credit or corresponding Letter of Credit application or
the applicable instrument or document in respect of the
Loans, as applicable;
(24) Paragraph 8.2(g) is hereby amended and restated to read in its
----------------
entirety as follows:
(g) Financial Covenants. Borrowers must maintain, at
-------------------
all times, Tangible Net Worth in excess of $5,500,000.
3. Limited Waiver of Compliance with Loan Clean-Up Period.
------------------------------------------------------
Notwithstanding contained in the Agreement or this Amendment to the contrary,
Bank hereby waives Borrowers' non-compliance with the "Loan Clean-Up Period"
requirement set forth in Paragraph 4.6 of the Agreement for the one-year period
-------------
ending June 30, 1999 only (the "Loan Clean-Up Period"). Nothing in this
Amendment shall be construed to mean that any such waiver of the Loan Clean-Up
Period will extend to any other measuring period commencing after the date
specified herein. As a condition of Bank's agreement to waive compliance with
the Loan Clean-Up Period, Borrowers hereby agree to pay to Bank a covenant
waiver fee equal to Forty-Five Thousand Five Hundred Dollars ($45,500) which
shall be due and payable as of the date of this Amendment (the "Covenant Waiver
Fee").
4. Closing Documents. All the documents on the Closing Checklist
-----------------
(attached hereto as Exhibit A) shall be delivered concurrently with this
---------
Amendment, each in form and substance satisfactory to Bank. In addition to the
foregoing, Borrower hereby agrees to deliver to Bank a good standing certificate
for Heartland Technology, Inc. from the Secretary of State of Illinois within
thirty (30) days of the date hereof. Borrower hereby agrees that in the even
Borrower fails to deliver such good standing certificate to bank within thirty
(30) days of the date hereof, it will constitute an Event of Default under the
Loan Agreement.
5. Representations and Warranties; No Event of Default; Schedules. The
--------------------------------------------------------------
representations and warranties set forth in Paragraph 8.1 are deemed remade as
-------------
of the date hereof
7
<PAGE>
and each Borrower represents that such representations and warranties are true
and correct as of the date hereof. No Event of Default exists nor does there
exist any event or condition which with notice, lapse of time and/or the
consummation of the transactions contemplated hereby would constitute an Event
of Default. The following schedules to the Agreement, attached hereto as Exhibit
-------
B, are hereby deemed amended and restated: Schedule 8.1(f) and Schedule 8.1 (n).
- -
A new Schedule 1.1C attached hereto is hereby added to the Agreement in its
entirety.
6. Fees and Expenses. The Borrowers agree to pay on demand all costs and
-----------------
expenses of or incurred by Bank in connection with the evaluation, negotiation,
preparation, execution and delivery of this Amendment and the other instruments
and documents executed and delivered in connection with the transactions
described herein (including the filing or recording thereof), including, but not
limited to, the fees and expenses of counsel for the Bank and any future
amendments to the Agreement. Borrowers also agree to pay to Bank, on demand, a
closing fee equal to $7,500, together with the Covenant Waiver Fee.
7. Effectuation. The amendments to the Agreement contemplated by this
------------
Amendment shall be deemed effective immediately upon the full execution of this
Amendment and without any further action required by the parties hereto. There
are no conditions precedent or subsequent to the effectiveness of this
Amendment.
8. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Second
Amendment as of the date first above written.
CMC HEARTLAND PARTNERS, a
Delaware general partnership
By: HEARTLAND TECHNOLOGY, INC., a
Delaware corporation and an
authorized general partner
By: _______________________________________
Its President
By: HEARTLAND PARTNERS, L.P., a
Delaware limited partnership and an
authorized general partner
By: Heartland Technology, Inc.,
Its: General Partner
By: _______________________________________
Its President
HEARTLAND PARTNERS, L.P.,
a Delaware limited partnership
By: Heartland Technology, Inc.
Its: General Partner
By: _______________________________________
Its President
LASALLE NATIONAL BANK, a national
banking association
By: _______________________________________
Its:________________________________
9
<PAGE>
EXHIBIT A
---------
[Closing Checklist Attached]
<PAGE>
EXHIBIT B
---------
[See Attached Schedules]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 1999 FORM 10 Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 251 1,115
<SECURITIES> 0 149
<RECEIVABLES> 659 769
<ALLOWANCES> 416 416
<INVENTORY> 19,839 13,978
<CURRENT-ASSETS> 1,198 2,337
<PP&E> 35,821 28,983
<DEPRECIATION> 1,000 931
<TOTAL-ASSETS> 39,455 33,231
<CURRENT-LIABILITIES> 27,767 19,198
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 7,110 9,409
<TOTAL-LIABILITY-AND-EQUITY> 39,455 33,231
<SALES> 4,562 2,252
<TOTAL-REVENUES> 5,357 2,805
<CGS> 3,964 2,123
<TOTAL-COSTS> 3,692 4,104
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,299) (3,422)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,299) (3,422)
<EPS-BASIC> 0 (1.57)
<EPS-DILUTED> 0 0
</TABLE>
