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 September 30, 2000
-----------------------------------------
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.
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(Exact name of registrant as specified in its charter)
Delaware 36-3606475
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 North Jefferson Court, Chicago, Illinois 60661
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(Address of principal executive offices) (Zip Code)
312/575-0400
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(Registrant's telephone number, including area code)
547 West Jackson Boulevard, Suite 1510, Chicago, Illinois 60661
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(Former name,former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
HEARTLAND PARTNERS, L.P.
September 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets...............................3
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 Operations......................................13
Item 3 Quantitative and Qualitative Disclosure About Market Risk..... 23
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..............................................24
Item 6 Exhibits and Reports on Form 8-K...............................27
Signatures...............................................28
Page-2 of 29
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(amounts in thousands)
September 30, December 31,
2000 1999
Assets: (Unaudited) (Audited)
----------- ---------
Cash $ 71 $ 230
Restricted cash 4,054 4,182
Accounts receivable (net) 137 373
Due from affiliate 3,159 1,093
Prepaid and other assets 293 217
Investment in joint venture 568 410
---------- ---------
Total 8,282 6,505
---------- ---------
Property:
Land, buildings and other 3,556 4,049
Less accumulated depreciation 777 1,065
---------- ---------
Net land, buildings and other 2,779 2,984
Land held for sale 759 766
Housing inventories 29,279 34,263
Land held for development 5,102 5,287
Capitalized predevelopment costs 6,960 7,451
---------- ---------
Net properties 44,879 50,751
---------- ---------
Total assets $ 53,161 $ 57,256
============ ============
Liabilities:
Notes payable $ 25,229 $ 32,770
Accounts payable and accrued
expenses 6,453 10,330
Accrued real estate taxes 732 893
Allowance for claims and
liabilities 2,866 2,804
Unearned rents and deferred income 1,657 1,733
Other liabilities 2,831 3,074
---------- ---------
Total liabilities $ 39,768 $ 51,604
---------- ---------
Partners' Capital:
General Partner 39 -
Class A Limited Partners-2,142
units authorized,
issued and outstanding 3,802 -
Class B Limited Partner 9,552 5,652
---------- ---------
Total partners' capital 13,393 5,652
---------- ---------
Total liabilities and partners' capital $ 53,161 $ 57,256
============ ============
See accompanying notes to consolidated financial statements.
Page-3 of 29
<PAGE>
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEBER 30, 1999
(amounts in thousands except per unit data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
Income:
<S> <C> <C> <C> <C>
Property sales $ 17,463 $ 2,980 $ 39,957 $ 7,542
Less: Cost of property sales 12,068 2,696 29,046 6,660
-------- -------- -------- --------
Gross profit on property sales 5,395 284 10,911 882
-------- -------- -------- --------
Operating Expenses:
Selling expenses 574 913 1,975 2,607
General and administrative
expenses 410 734 1,740 2,039
Real estate taxes 23 68 68 209
Environmental expense 22 48 155 318
-------- -------- -------- --------
Total operating expenses 1,029 1,763 3,938 5,173
-------- -------- -------- --------
Net operating income (loss) 4,366 (1,479) 6,973 (4,291)
Other Income and (Expense):
Portfolio income 96 16 228 49
Rental income 210 124 578 517
Other income 161 154 465 523
Depreciation (89) (35) (184) (104)
Management fee (319) (105) (319) (318)
-------- -------- -------- --------
Total other income 59 154 768 667
-------- -------- -------- ---------
Net income (loss) $ 4,425 $ (1,325) $ 7,741 $ (3,624)
======== ======== ======== ========
Net income (loss) allocated to
General Partner $ 39 $ -- $ 39 $ --
======== ======== ======== ========
Net income (loss) allocated to Class B
Limited Partner $ 584 $ (1,325) $ 3,900 $ (3,624)
======== ======== ======== ========
Net income (loss) allocated to Class A
Limited Partners $ 3,802 $ -- $ 3,802 $ --
======== ======== ======== ========
Net income (loss) per Class A
Limited Partnership Unit $ 1.77 $ -- $ 1.77 $ --
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page-4 of 29
<PAGE>
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30,
2000 1999
-------- --------
Cash Flow from Operating Activities:
-----------------------------------
<S> <C> <C>
Net income (loss) ..............................................$ 7,741 $ (3,624)
Adjustments reconciling net income (loss) to net cash from
operating activities:
Depreciation .................................................... 184 104
Net change in allowance for claims and liabilities .............. 62 19
Net change in assets and liabilities:
(Increase) decrease in accounts receivable ...................... (1,830) 5
Decrease (increase) in housing inventories, net ................. 4,984 (8,168)
Decrease in land held for sale .................................. 7 99
Decrease in land held for development ........................... 185 --
Decrease (increase) in capitalized development costs ............ 491 (1,739)
Decrease in accounts payable and accrued liabilities ............ (3,877) (473)
Decrease in management fee due affiliate ............ -- (283)
Net change in other assets and liabilities ...................... (714) 474
-------- --------
Net cash provided by (used in) Operating Activities ............ 7,233 (13,586)
-------- --------
Cash Flow from Investing Activities:
------------------------------------
Sales of (additions to) land, buildings and other ............... 21 (317)
Net sales and maturities of marketable securities ............... -- 149
-------- --------
Net cash provided by (used in) investing activities ............. 21 (168)
-------- --------
Cash Flow from Financing Activities:
------------------------------------
Advances on notes payable, net .................................. (7,541) 13,779
Decrease (increase) in restricted cash .......................... 128 (942)
-------- --------
Net cash (used in) provided by financing activities ............. (7,413) 12,837
-------- --------
Decrease in cash ................................................ (159) (917)
Cash at beginning of the period ................................. 230 1,115
-------- --------
Cash at end of the period .......................................$ 71 $ 198
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page-5 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
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 1999 Annual
Report on Form 10-K (the "1999 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
1999 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; CMC I, 1%
general partnership interest owned by HDC and 99% owned by CMC; CMC II, CMC III,
CMC IV, CMC V, CMC VI, CMC VII, CMC VIII, 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
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.
Page-6 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
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 September 30, 2000 (amounts in
thousands):
Land under development............... $ 3,301
Direct construction costs............ 16,349
Capitalized project costs............ 9,629
-------
$29,279
=======
In December, 1999, Heartland decided to cease building operations in its Osprey
Cove and Bloomfield communities. The homes and lots will be sold in the ordinary
course of business.
2. Contingencies
At September 30, 2000, Heartland's allowance for claims and liabilities was
approximately $2.9 million of which $0.4 million was for the resolution of
non-environmental claims and $2.5 million was for environmental matters.
Significant legal proceedings and contingencies are discussed in the 1999 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 demanded specific
performance by conveyance to it of the vacant 5.95 acre parcel in Minneapolis,
Minnesota in consideration of $562,000. By findings of Fact and Conclusions of
Law dated April 13, 2000, the District Court ruled in favor of the Company's
motion for summary judgement.
Also, the Company is a third party defendant in a suit filed in the United
States District Court for the Northern District of Illinois in which the
plaintiff railroad employee alleges that while he was riding the bottom step of
a locomotive a piece of rail struck the step, causing the step to bend and
injure the plaintiff's foot. The defendant/third party plaintiff alleges that
the Company negligently removed trackage so as to leave the rail piece in place.
The Company has forwarded this matter to its insurance carrier and has not yet
determined its exposure. The insurance carrier is defending the Company in this
matter.
Page-7 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
Two suits have been filed with regard to the Company's Bloomfield project in
Rosemount, Minnesota. On April 5, 2000, Richard Knutson, Inc. filed suit against
CMC Heartland Partners I, Limited Partnership in Dakota County District Court to
enforce a mechanic's lien of $401,000. On June 30, 2000, the City of Rosemount
filed suit against CMC Heartland Partners I, Limited Partnership in Dakota
County District Court alleging that the City has incurred $110,000 in
unreimbursed engineering fees for which the Company has the obligation to pay.
These two suits were resolved by payment of the claims with the sale and closing
of the Bloomfield developed acreage on October 4, 2000.
3. Restricted Cash
The total restricted cash at September 30, 2000 and December 31, 1999 was
$4,054,000 and $4,182,000, respectively. Restricted cash decreased $128,000 from
December 31, 1999 to September 30, 2000. This decrease was primarily due to
earnest money deposited on Kinzie Station Phase I sold units that was credited
to the buyers of 110 Tower building units that closed during the nine months
ended September 30, 2000.
4. Notes Payable
Heartland has a line of credit agreement in the amount of $10 million with
LaSalle National Bank ("LNB"), pursuant to which CMC granted LNB a first lien on
certain parcels of land in Chicago, Illinois, Milwaukee, Wisconsin and Fife,
Washington which had a carrying value of $11,254,000 and $8,769,000 as of
September 30, 2000, and 1999, respectively. The Company has also pledged as
collateral its interest in the Goose Island Joint Venture which has a carrying
value of $568,000 at September 30, 2000. 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 December 31, 2000. Advances
against the line of credit bear interest at the prime rate of LNB plus 1.5%
(11.0% at September 30, 2000). At September 30, 2000, and 1999, $9,750,000 and
$11,100,000, respectively, had been advanced to the Company by LNB against the
line of credit. On June 29, 2000, Heartland closed on a parcel of land it owned
at Kinzie Station in Chicago, Illinois at a sales price of $2,457,000. At that
time, $1,800,000 of the sales proceeds was used to permanently reduce the line
of credit amount from $15.3 million to $13.5 million. On August 3, 2000, the
Company closed on the last parcel of land it owned at Galewood in Chicago,
Illinois at a sales price of $5,500,000. At that time $3,500,000 of the sales
proceeds was used to permanently reduce the line of credit amount from $13.5
million to $10 million. On October 15, 2000, LNB increased the line of credit
agreement amount from $10,000,000 to $11,000,000 (see Note 8 to the Consolidated
Financial Statements).
As of September 30, 2000, the CMC V revolving line of credit agreement in the
amount of $3 million with Bank of America (formerly NationsBank) ("B of A") to
acquire lots and construct homes in the Osprey Cove subdivision, St. Marys,
Georgia, was paid in full. All lots securing the revolving line of credit were
released as collateral. At September 30, 2000, Heartland has one loan (on an
inventory home) outstanding with B of A in the amount of $209,000. The carrying
value of the home is $275,000. The loan bears interest at the prime rate of B of
A plus 1% (10.5% at September 30, 2000). At September 30, 2000, B of A has
advanced $179,000 against this loan. This loan matured September 29, 2000. The
Company is currently in negotiations with B of A to extend the maturity date of
this loan. While the Company has no reason to believe the extension will not be
granted, there can be no assurance that it will take place.
Page-8 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
In the fourth quarter of 1999, First National Bank of St. Mary's ("FNB") in
Georgia made two loans totaling $588,374 to build two inventory homes in Osprey
Cove. One home sold and closed in May, 2000. The carrying value of the one
remaining inventory home is $203,000 at September 30, 2000. The loan term is for
one year and bears interest at the prime rate plus 1% (10.5% at September 30,
2000). At September 30, 2000, FNB had advanced $172,000 to the Company on the
one loan.
In December, 1998, the Company signed a commitment letter for a $3,000,000 line
of credit with B of A to construct homes in the Longleaf community. B of A
provided individual loans on each home as it was started. The developer
subordinated its lot to B of A's construction loan. The term of each loan was
one year and interest accrued at the B of A prime rate plus 1%. On December 9,
1999, Heartland executed an agreement for a $5,000,000 revolving credit line for
the construction of homes in Longleaf with Bank One of Illinois ("Bank One").
The first draw from Bank One on December 9, 1999 was used to purchase 22 lots
(of which 13 have closed as of September 30, 2000) from the developer for
$690,500 and repaid B of A all outstanding principal and accrued interest. As
new homes to be built are added to the revolving credit line, the developer will
subordinate its lot to Bank One's revolving credit line. The carrying value of
the collateral at September 30, 2000 is $2,059,000. The revolving credit line is
for a term of 1 year and bears interest at the prime rate (9.5% at September 30,
2000). At September 30, 2000, $1,495,000 had been advanced by Bank One to the
Company.
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 (9.5% at September 30, 2000). The outstanding
loan balance is $2,440,000 and 2,500,000 at September 30, 2000 and 1999,
respectively. As a condition of the loan, $500,000 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 $2,000,000
(originally was $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 (9.5% at September 30, 2000). The loans mature on
January 31, 2001 and December 31, 2000, respectively. At September 30, 2000 and
1999, $607,000 and $415,000, respectively, had been advanced against the
development loan and $1,187,000 and $1,027,000, respectively, against the
revolving line of credit. The carrying value of the collateral for these loans
is $5,143,000 and $4,870,000 at September 30, 2000 and 1999, respectively. On
March 31, 2000, the Company extended the revolving line of credit that had
matured January 31, 2000 to December 31, 2000 and reduced the revolving loan
amount from $4,000,000 to $2,000,000. On October 3, 2000, Heartland sold the
Bloomfield developed acreage and home inventory (approximately 104 acres) to
Centex Homes for $7,338,500. This transaction closed October 4, 2000. At that
time, the total Bank One debt was reduced from $4,234,000 to $450,000. The Bank
One $500,000 interest reserve and all letters of credit were released. There are
still approximately 122 acres of undeveloped acreage owned by the Company.
Page-9 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
On January 6, 1999, the Kinzie Station Tower building 2.5 year loan agreement in
the amount of $29,812,000 was signed with Corus Bank N.A ("CB"). The loan bears
interest at the prime rate plus 1% (10.5% at September 30, 2000). 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 September 30, 2000
and 1999, the net amount of $6,663,000 and $9,479,000, respectively, had been
advanced by CB to the Company.
On October 20, 1999, the Company executed loan documents with Bank One for a
loan of $5,250,000 to construct the Kinzie Station Plaza building. The loan is
for a term of 3 years and bears interest at the prime rate (9.5% at September
30, 2000). The loan is collateralized by real estate contained in the project.
On September 7, 1999, a construction contract with the guaranteed maximum price
of $4,864,022 was entered into with a general contractor. At September 30, 2000,
$2,736,000 had been advanced by Bank One to the Company.
5. Related Party Transactions
Heartland had a management agreement with Heartland Technology, Inc. ("HTI")
pursuant to which the Company was required to pay HTI an annual management fee
in the amount of $425,000 until June 26, 2000. This fee was paid in full at
December 31, 1999. On October 19, 2000, the term of the management agreement was
extended to June 27, 2005. As of September 30, 2000, $319,000 has been accrued
as an expense and the $319,000 owed to HTI has been offset against the amounts
owed to the Company.
Under a management services agreement, HTI reimburses the Company for reasonable
and necessary costs and expenses for services. Heartland also makes cash
advances to HTI. At September 30, 2000, HTI owed Heartland approximately
$3,159,000. This was an increase of $2,066,000 from December 31, 1999.
Page-10 of 29
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HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
6. Reportable Segments
The following tables set forth the reconciliation of net income for Heartland's
reportable segments for the quarters ended September 30, 2000 and 1999 (See Note
1 to the Consolidated Financial Statements).
<TABLE>
<CAPTION>
Property
Land Sales (1) Development (2) Corporate (3) Consolidated
-------------- --------------- ------------- ------------
(amounts in thousands)
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property sales ............... $ 61 $ 447 $ 17,402 $ 2,533 $ -- $ -- $ 17,463 $ 2,980
Less: Cost of property sales . 19 32 12,049 2,664 -- -- 12,068 2,696
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit on property sales .... 42 415 5,353 (131) -- -- 5,395 284
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling expenses ............. 167 185 407 728 -- -- 574 913
General and administrative ... -- -- 22 221 388 513 410 734
Real estate taxes ............ -- 20 23 48 -- -- 23 68
Environmental expense ........ 22 17 -- 31 -- -- 22 48
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses .......... 189 222 452 1,028 388 513 1,029 1,763
-------- -------- -------- -------- -------- -------- -------- --------
Net operating income (loss) .. (147) 193 4,901 (1,159) (388) (513) 4,366 (1,479)
Other Income and (Expense):
Portfolio income ............. -- -- -- -- 96 16 96 16
Rental income ................ 210 124 -- -- -- -- 210 124
Other income ................. -- -- 161 154 -- -- 161 154
Depreciation ................. -- -- (23) (22) (66) (13) (89) (35)
Management fee ............... -- -- -- -- (319) (105) (319) (105)
-------- -------- -------- -------- -------- -------- -------- --------
Total other income and
(expense) .................... 210 124 138 132 (289) (102) 59 154
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ................. $ 63 $ 317 $ 5,039 $ (1,027) $ (677) $ (615) $ 4,425 $ (1,325)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Page-11 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
(1) The Land Sales business segment consists of approximately 14,302 acres of
land located throughout 12 states for sale as of September 30, 2000, and
the related sales and marketing and general and administrative expenses.
(2) The Property Development business segment consists of the approximately 811
acres representing 14 sites that Heartland is in the process of developing
or homebuilding 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.
(3) The Corporate level expenses consist of portfolio income from investments,
salaries and general and administrative expenses for the employees and
occupied office space in Chicago, Illinois.
7. Employee Compensation Arrangements
Effective January 1, 2000, the Company approved the CMC HEARTLAND PARTNERS
INCENTIVE PLAN ("CMC Plan") and the SALES INCENTIVE PLAN ("Sales Plan") to
provide incentives to attract, retain or motivate highly competent
employees of CMC Heartland Partners. The aggregate benefits payable under
the CMC Plan shall be computed by multiplying the following percentages (3%
for the years 2000 and 2001, 2 % for the year 2002 and 1% for the year
2003) by the net proceeds from the sale of certain land parcels during
those years. The aggregate benefits payable under the Sales Plan shall be
computed by multiplying 3% for the years 2000 and 2001 by the net proceeds
from the sale of certain real estate during those years. As of September
30, 2000, $353,000 had been earned under the plans.
8. Subsequent Events
On October 4, 2000, Heartland closed on the sale of approximately 104 acres
of developed land in its Bloomfield development located in Rosemount,
Minnesota for $7,338,500. At that time, a portion of the sales proceeds was
used to reduce the Bank One outstanding Bloomfield debt from $4,234,000 to
$450,000.
In October, 2000, the Company increased the LNB line of credit from
$10,000,000 to $11,000,000. The $1,000,000 increase was then borrowed and
advanced to HTI and another related party. The related party borrowed
$375,000 from Heartland. The note is due October 17, 2005 and interest is
payable quarterly (first interest payment due December 31, 2000) at the
rate of 11% per year.
Page-12 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
ITEM 2. 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 Financial Condition and Results of Operations 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 Operations
section, and elsewhere in this Form 10-Q. The Company's actual future results,
performance or achievement of results and the value of the partnership Units,
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 proceeds of
property sales and rental income. Cash was $4,125,000 (including $4,054,000 of
restricted cash) at September 30, 2000, and $4,412,000 (including $4,182,000 of
restricted cash) at December 31, 1999.
Net cash provided by operating activities was $7,233,000 in the first nine
months of 2000, compared to $13,586,000 used in operating activities in the
first nine months of 1999. The increase in net cash provided by operating
activities between the years of $20,819,000 is mainly attributable to a net
decrease of $13,152,000 in capital expenditures for housing inventories as the
Company closed 110 Tower building units in Kinzie Station Phase I for the nine
months ended September 30, 2000.
Development Property
At the quarter ending September 30, 2000, property designated for development
consisted of 14 sites comprising approximately 811 acres. The book value of this
land is $6,960,000 or an average of $8,600 per acre. Heartland reviews these
properties to determine whether to hold, develop, joint venture or sell.
Heartland's objective for these properties is to maximize unitholder value over
a period of years.
Kinzie Station Phase I
Heartland has a 1.23 acre site in the City of Chicago known as Kinzie Station
Phase I. Zoning approval for the construction of 381 dwelling units was received
in 1997. The construction of this first phase of the project started on October
1, 1998. Since last reported in the 1999 Form 10-K, the number of units sold at
Kinzie Station Phase I has increased 28% and the dollar sales volume has
increased 38%. The Company has closed 110 Tower building units for the nine
months ended September 30, 2000.
Page-13 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
Kinzie Station
Phase I
Unit Detail
As of September 30, 2000
Total Number
of Units
Tower Building 163
Plaza 24
Townhomes 5
------
Total 192
======
In addition to the 1.23 acre site, the Company owns approximately 9 acres of
land and 4 acres of air rights adjacent to Kinzie Station Phase I. This acreage
is currently zoned for industrial and manufacturing uses. In October, 1999,
Heartland executed a sales contract to sell a part of this acreage to Home Depot
U.S.A., Inc. However, the Company retained certain air rights associated with
this property. The Company expects to close this sale during the year 2001. Also
during 1999, the Company executed contracts to sell 3 2/3 acres of industrial
land west of Kinzie Station to 2 other parties for approximately $3,900,000. On
June 29, 2000, 1 of these 2 contracts closed at a sales price of $2,457,000. The
remaining contract on 1 2/3 acres of land is expected to close by the end of the
year 2000. While the Company has no reason to believe the above described sales
will not close, the contracts contain contingencies typical of such contracts
and there can be no assurance the transactions will be competed.
On January 6, 1999, the Kinzie Station Tower building 2.5 year loan agreement in
the amount of $29,812,000 was signed with Corus Bank N.A ("CB"). The loan bears
interest at the prime rate plus 1% (10.5% at September 30, 2000). 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 outstanding balance
at September 30, 2000, is $6,663,000.
On October 20, 1999, the Company executed loan documents with Bank One of
Illinois ("Bank One") for a loan of $5,250,000 to construct the Kinzie Station
Plaza building. The loan is for a term of 3 years and bears interest at the
prime rate (9.5% at September 30, 2000). The loan is collateralized by real
estate contained in the project. On September 7, 1999, a construction contract
with the guaranteed maximum price of $4,864,022 was entered into with a general
contractor. At September 30, 2000, $2,736,000 had been advanced by Bank One to
the Company.
Kinzie Station Phase II
Heartland has a 2.65 acre site in the City of Chicago known as Kinzie Station
Phase II. On approximately 1.75 acres, the Company expects to construct 242
dwelling units with the remaining .9 acres available for future commercial
development. Zoning approval should be received in the year 2000.
Page-14 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
Kinzie Station
Phase II
Unit Detail
As of September 30, 2000
Total Number
of Units
Tower Building 226
Townhomes 16
------
Total 242
======
As of October 6, 2000, the Company has presold 22 Tower building units for a
total sales volume of $7,190,000.
Osprey Cove
Included in the aforementioned 811 acres are approximately 6 acres consisting
of 18 lots purchased for $684,000, or an average of $38,000 per lot at Osprey
Cove in St. Marys, GA. Osprey Cove is a master-planned residential community
with a wide range of natural and recreation amenities, which includes a
recreational complex, lakes, a boat dock and a boat launch. In December, 1999,
the Company decided to cease operations at Osprey Cove.
The homes under construction will be completed and closed during the year 2000.
The 16 lots owned by Heartland are being marketed and will be sold and closed in
the ordinary course of business. It is anticipated it may take to the end of the
year 2001 to sell all the lots.
As of September 30, 2000, 51 contracts have closed in Osprey; 16 in 2000, 20 in
1999, 13 in 1998, and 2 in 1997. In addition to selling its own units, CMC also
sold homes and lots for the developer of Osprey Cove, and Osprey Cove
homeowners. For the nine months ended September 30, 2000, CMC had sold 5 lots
for those owners. Heartland is no longer selling homes and lots for those
owners.
Osprey Cove
Unit Inventory Detail
As of September 30, 2000
Inventory homes under construction 2
Lots owned-inventory 16
------
Total unit inventory 18
======
Page-15 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
As of September 30, 2000, the CMC revolving line of credit agreement in the
amount of $3,000,000 with Bank of America (formerly NationsBank, N.A.) ("B of
A") had been paid in full. The Company has one loan outstanding with B of A in
the amount of $209,000. This loan bears interest at the prime rate of B of A
plus 1% (10.5% at September 30, 2000). At September 30, 2000, $179,000 has been
advanced by B of A against the loan. This loan matured September 29, 2000. The
Company is currently in negotiations with B of A to extend the maturity date of
this loan. While the Company has no reason to believe the extension will not be
granted, there can be no assurance that it will take place.
In the fourth quarter of 1999, First National Bank of St. Mary's ("FNB") in
Georgia made two loans totaling $588,374 to build two inventory homes in Osprey
Cove. The loan terms were for one year and bear interest at the prime rate plus
1% (10.5% at September 30, 2000). One home sold and closed in May, 2000. At
September 30, 2000, FNB had advanced $172,000 to the Company on the one
remaining loan.
Longleaf
The Company has signed a contract to be the exclusive homebuilder and marketer
for the Longleaf Country Club in Southern Pines, North Carolina. Under the terms
of the contract, CMC is entitled to sell and build up to 244 homes on lots
currently owned by Longleaf Associates Limited Partnership ("LALP"), an
affiliate of General Investment & Development, an unrelated party. Heartland
assumed the day to day operations on April 1, 1998. At September 30, 2000, the
Company owned 9 lots purchased for approximately $249,000, an average of $27,700
per lot. These 9 lots comprising approximately 3 acres of land, are also
included in the aforementioned 811 acres. Also, the Company closed the 1 home it
was building on an individual's own lot.
In Longleaf, the Company has closed 24 homes as of September 30, 2000; 11 in
2000 and 13 in 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 September 30,
2000, the Company has sold 33 units and 4 lots for these owners since April 1,
1998.
Longleaf
Unit Inventory Detail
As of September 30, 2000
Model homes 2
Sold homes under construction 3
Inventory homes under construction 4
------
Total unit inventory 9
======
Sold homes under construction (lots not owned) 4
======
Inventory homes under construction (lot not owned) 1
======
Page-16 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
In December, 1998, the Company signed a commitment letter for a $3,000,000 line
of credit with B of A to finance the construction of homes in the Longleaf
community. B of A provided individual loans on each home as it was started. The
developer subordinated its lot to B of A's construction loan. The term of each
loan was one year and interest accrued at the B of A prime rate plus 1%. On
December 9, 1999, Heartland executed an agreement for a $5,000,000 revolving
credit line for the construction of homes in Longleaf with Bank One. The first
draw from Bank One on December 9, 1999 was used to purchase 22 lots (of which 13
have closed as of September 30, 2000) from LALP for $690,500 and repaid B of A
all outstanding principal and accrued interest. As new homes to be built are
added to the revolving credit line, the developer will subordinate its lot to
Bank One's revolving credit line. The revolving credit line is for a term of 1
year and bears interest at the prime rate (9.5% at September 30, 2000). At
September 30, 2000, $1,495,000 had been advanced by Bank One to the Company.
Bloomfield
Heartland has received approval for the development of the 226 acre site it owns
in Rosemount, Minnesota from the city of Rosemount. 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. The Company also owns 113 acres of land adjacent to this
development.
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 has completed the
Phase I infrastructure. Phase I consists of 120 townhomes, 27 single-family
homes and 10 twinhomes. Phase II of Bloomfield has site plan approval from the
City of Rosemount for the construction of 20 twinhomes and 97 single-family
homes.
As of September 30, 2000, 9 townhomes and 3 single-family detached homes were
closed; 6 in 2000 and 6 in 1999.
Rosemount
(Phase I)
Unit Inventory Detail
As of September 30, 2000
Model homes 3
Inventory homes under construction 6
Townhome building foundation 6
Lots owned 130
------
Total unit inventory 145
======
Page-17 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
In December 1999, Heartland decided to cease homebuilding operations in
Bloomfield. On October 3, 2000, Heartland sold the developed acreage and home
inventory (approximately 104 acres) to Centex Homes for $7,338,500. This
transaction closed October 4, 2000. Centex has an option until January 15, 2001
to purchase the remaining, approximately 122 acres of undeveloped acreage.
The closing of the sale of the aforementioned 113 acre site had been scheduled
for September 30, 2000. The buyer was unable to close the transaction and sought
to exercise a contractual provision extending the closing until March 31, 2001.
The company is evaluating its rights and options under the contract. The company
does not know if the buyer will be able to close this transaction. Two other
parties have expressed interest in buying the property in the event this
contract is terminated.
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 (9.5% at September 30, 2000). The outstanding
loan balance is $2,440,000 at September 30, 2000. As a condition of the loan,
$500,000 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 (reduced to $2,000,000) revolving credit line for the
construction of homes; these credit facilities were executed on February 1,
1999. These loans bear interest at the prime rate (9.5% at September 30, 2000).
The loans mature on January 31, 2001 and December 31, 2000, respectively. At
September 30, 2000, $607,000 had been advanced against the development loan and
$1,187,000 against the revolving line of credit. As described above, the Company
closed on the sale of all of its developed acreage in Bloomfield on October 4,
2000. At that time, the total Bank One debt of $4,234,000 was reduced to
$450,000. Also, the Bank One $500,000 interest reserve and all letters of credit
were released.
Galewood
The Company executed a sales contract on March 24, 2000 to sell 50 acres of its
Galewood property located in Chicago, Illinois for $7.75 million to an
industrial park developer. This sale closed on August 3, 2000 for $5.5 million.
Heartland could receive up to $2.25 million of additional consideration in the
event certain tax increment financing can be arranged.
On April 19, 2000, Heartland sold the remaining 17 acres of its Galewood
property to METRA, the Chicago commuter rail authority for $1,660,000. This sale
closed April 24, 2000.
Other Development Activities
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 September 30, 2000, the buildings
had been built and leases had been signed for all of the 265,000 square feet.
Page-18 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
On December 1, 1998 the Fife property was annexed to the City of Fife,
Washington. A Local Improvement District (LID) has been approved in order to
support the improvement and extension of sewers and sewer capacity for the site.
The city of 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 the first
quarter of the year 2001.
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 has made applications with the state
and federal governments to have the approximately $4 million in funds
appropriated for this facility. The appropriation of the funds should be
completed during the year 2000. The Company started preliminary design work on
this project in the third quarter of 1999. In October, 2000, the Building
Commission of the State of Wisconsin approved the purchase by the State of
Wisconsin of Kilbourn Station for $1.4 million. This transaction is expected to
close in the fourth quarter of the year 2000. While the Company has no reason to
believe the sale will not close, there can be no assurance this transaction will
be completed.
On October 24, 2000, the Building Commission of the State of Wisconsin approved
the purchase by the State of Wisconsin of 3.97 acres of land in Milwaukee,
Wisconsin for $415,000. This transaction is expected to close in the fourth
quarter of the year 2000. While the Company has no reason to believe the sale
will not close, there can be no assurance the transaction will be completed.
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 14,302 acres
located throughout 12 states. The book value of this inventory is approximately
$759,000. The majority of the land is former railroad rights-of-way, long,
narrow 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
2002.
Page-19 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
The Company has a current active lease portfolio of approximately 160 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 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.
The Company performs annual reviews on major properties to determine that the
capitalized cost of development properties does not exceed the current fair
value without regard to the property's expected net realizable value from
development. If the capitalized cost of any property exceeds the current fair
value, then a loss is recognized and the capitalized cost is reduced in
accordance with FAS 121. No loss is included in the statement of operations for
the quarters ended September 30, 2000, and 1999.
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 $2.5 million at September 30, 2000 for possible environmental
liabilities, including remediation, legal and consulting fees. A reserve is
established with regard to potential environmental liabilities when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. The amount of any liability is determined independently
from any claim for recovery. If the amount of the liability cannot be reasonably
estimated, but management is able to determine that the amount of the liability
is likely to fall within a range, and no amount within that range can be
determined to be the better estimate, then a reserve in the minimum amount of
the range is accrued.
In addition, Heartland has established an allowance for resolution of
non-environmental claims of $.4 million.
Heartland does not at this time anticipate that these claims or assessments will
have a material effect on the Company's liquidity, financial position and
results of operations beyond the reserve which the Company has established for
such claims and assessments. In making this evaluation, the Company has assumed
that the Company will continue to be able to assert the bankruptcy bar arising
from the reorganization of its predecessor and that resolution of current
pending and threatened claims and assessments will be consistent with the
Company's experience with similar previously asserted claims and assessments.
While the timing of the payment in respect of environmental claims has not
significantly adversely 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.
Page-20 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
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. As of September 30, 2000, the Company had a line
of credit with LNB in the amount of $10 million. Cash in the amount of
$1,150,000 is pledged as an interest reserve. The line of credit matures
December 31, 2000. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.5% (11.0% at September 30, 2000). At September 30,
2000, $9,750,000 had been advanced to the Company by LNB against the line of
credit. On June 29, 2000, Heartland closed on a parcel of land it owned at
Kinzie Station in Chicago, Illinois at a sales price of $2,457,000. At that
time, $1,800,000 of the sales proceeds was used to permanently reduce the line
of credit amount from $15.3 million to $13.5 million. On August 3, 2000, the
Company closed on the last parcel of land it owned at Galewood in Chicago,
Illinois at a sales price of $5,500,000. At that time $3,500,000 of the sales
proceeds was used to permanently reduce the line of credit amount from $13.5
million to $10 million. On October 15, 2000, LNB increased the line of credit
from $10 million to $11 million.
Results of Operations
Operations for the third quarter and nine months ended September 30, 2000
resulted in net income of $4,425,000 and $7,741,000, respectively. For both the
quarter and nine months ended September 30, 2000, the income allocated to the
Class A Limited Partners is $3,802,000 or $1.77 per Class A Unit. The Class B
Limited Partner has been allocated income of $584,000 for the quarter ending
September 30, 2000 and a total of $3,900,000 for the nine months ended September
30, 2000. Operations for the third quarter and nine months ended September 30,
1999, resulted in a net (loss) of $(1,325,000) and $(3,624,000), respectively.
The loss was allocated 100% to the Class B Limited Partner.
In prior periods, no losses were allocated to the Class A Unitholders because
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. However, the Class A Limited
Partners Capital accounts have been restored to a positive balance and income in
the third quarter was allocated to the Class A Limited Partners according to
their proper percentage.
The increase in net income for the third quarter of 2000 compared to the net
loss in the third quarter of 1999 of $5,750,000 is due to the closing of 46
Tower building units in the third quarter at Kinzie Station Phase I producing
gross revenues of $11,542,000 and the closing of the final 50 acres of the
Galewood parcel of land for $5,500,000 in the third quarter of the year 2000.
Also, the reduction in total operating expenses of $734,000 from the third
quarter of 2000 as compared to 1999, was a factor in the increased net income.
Page-21 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
Heartland has approximately 160 active leases on its real estate properties,
which generated $210,000 and $124,000 of revenue for the third quarter of 2000
and 1999, respectively. The increase in the rental income from the third quarter
of 2000 compared to 1999 of $86,000 is due to an increase in the percentage of
rents earned on a parking lot owned by the Company.
Total operating expenses were $1,029,000 and $1,763,000 for the third quarter
ending September 30, 2000 and 1999, respectively. The decrease of $734,000 is
primarily due to decreased selling expenses of $339,000 and a decrease in
general and administrative expenses of $324,000. Total operating expenses were
$3,938,000 and $5,173,000 for the nine months ending September 30, 2000 and
1999, respectively. The decrease of $1,235,000 is primarily due to a decrease in
selling expenses of $632,000 and a decrease in general and administrative
expense of $299,000.
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 September 30, 2000, Heartland's
total consolidated indebtedness was $25,229,000. 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.
Page-22 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
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 September 30, 2000 is
$25,229,000. The Company pays interest on its outstanding borrowings under
revolving credit facilities and fixed loan amounts at the prime rate plus 0.00%
to 1.5%. An adverse change of 1.00% in the prime rate would increase the
quarterly interest incurred by approximately $63,000.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
Year 2000
As of December 31, 1999, the Company had completed its two-year technology plan,
which included initiatives to mitigate any material risks associated with the
year 2000 issues. This technology plan resulted in the re-design and replacement
of most of the Company's information systems and equipment platforms.
The Company also identified areas other than these information systems for which
it might be at risk due to the year 2000, including telecommunications systems
and third party vendors. As of December 31, 1999, the Company had upgraded or
replaced all non-compliant telecommunications systems, identified risk issues
and installed upgrade software system-wide.
Through November 13, 2000, the Company has not encountered any year 2000 related
issues which would have affected its operations in the areas described above. It
will continue to monitor its internal software and equipment over the next few
months to detect whether any such problems arise. No future significant
expenditures are expected related to year 2000 compliance.
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.
Page-23 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At September 30, 2000, Heartland's allowance for claims and liabilities was
approximately $2.9 million. During the nine months ended September 30, 2000, an
increase of approximately $62,000 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
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 $1.1 million on or before
December 31, 2000, plus interest from January 1, 1999, or (b) to convey to the
Port real property to be agreed upon at a later date. At September 30, 2000,
Heartland's allowance for claims and liabilities for this site was $1,100,000.
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.
Page-24 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
Rosemount, Minnesota
Two suits have been filed with regard to the Company's Bloomfield project in
Rosemount, Minnesota. On April 5, 2000, Richard Knutson, Inc. filed suit against
CMC Heartland Partners I, Limited Partnership in Dakota County District Court to
enforce a mechanic's lien of $401,000. On June 30, 2000, the City of Rosemount
filed suit against CMC Heartland Partners I, Limited Partnership in Dakota
County District Court alleging that the City has incurred $110,000 in
unreimbursed engineering fees for which the Company has the obligation to pay.
These two suits were resolved by payment of the claims with the sale and closing
of the Bloomfield developed acreage on October 4, 2000.
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 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 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.
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. A portion
of the Company's property is located over a well field which was placed on the
national priority list in October, 1992. 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. The Company has not been named as a PRP.
Page-25 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
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 20, 1999. The Plaintiff in the suit demanded 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. By findings of Fact and Conclusions of Law, dated April 13,
2000, the court ruled in favor of the Company's motion for summary judgement.
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, or
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
Page-26 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------------------------------------------------------------------------
10.30 LaSalle Bank National Association loans to CMC
Heartland Partners, Heartland Partners, L.P. and
CMC Heartland Partners, IV increase in Revolving
Credit Commitment letter dated October 15, 2000
(filed herewith).
10.31 Promissory Note dated October 17, 2000 between CMC
Heartland Partners and Edwin Jacobson for $375,000
(filed herewith).
10.32 Second Amendment to Edwin Jacobson December 20,
1999 Employment Agreement dated October 17, 2000
(filed herewith).
10.33 Amendment Agreement to Management Agreement
between CMC Heartland Partners and Heartland
Technology, Inc. dated October 19, 2000 (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 September 30, 2000.
Page-27 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
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: November 13, 2000 BY: /s/ Edwin Jacobson
-----------------------------
Edwin Jacobson
President and Chief Executive Officer
Heartland Technology, Inc.
the General Partner
(Principal Executive Officer)
Date: November 13, 2000 BY: /s/ Richard P. Brandstatter
-------------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer of
Heartland Technology, Inc.
the General Partner
(Principal Financial and Accounting Officer)
Page-28 of 29
<PAGE>
HEARTLAND PARTNERS, L.P.
SEPTEMBER 30, 2000
EXHIBIT INDEX
Exhibit No. Description
----------------------------------------------------------------------------
10.30 LaSalle Bank National Association loans to CMC
Heartland Partners, Heartland Partners, L.P. and
CMC Heartland Partners, IV increase in Revolving
Credit Commitment letter dated October 15, 2000
(filed herewith).
10.31 Promissory Note dated October 17, 2000 between CMC
Heartland Partners and Edwin Jacobson for $375,000
(filed herewith).
10.32 Second Amendment to Edwin Jacobson December 20,
1999 Employment Agreement dated October 17, 2000
(filed herewith).
10.33 Amendment Agreement to Management Agreement
between CMC Heartland Partners and Heartland
Technology, Inc. dated October 19, 2000 (filed
herewith).
27 Financial Data Schedule (filed herewith).
Page-29 of 29
<PAGE>
