<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, 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3606475
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 North Jefferson Court, Chicago, Illinois 60661
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/575-0400
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
547 West Jackson Boulevard, Chicago, Illinois 60661
--------------------------------------------------------------------------------
(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.
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
<S> <C>
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................................22
PART II. OTHER INFORMATION
Item 1 Legal Proceedings and Contingencies......................................................22
Item 6 Exhibits and Reports on Form 8-K.........................................................26
Signatures..........................................................................27
</TABLE>
Page 2 of 28
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
Assets:
Cash $ 101 $ 230
Restricted cash 4,227 4,182
Accounts receivable (net) 157 373
Due from affiliate 2,539 1,093
Prepaid and other assets 330 217
Investment in joint venture 535 410
------- -------
Total 7,889 6,505
------- -------
Property:
Land, buildings and other 3,646 4,049
Less accumulated depreciation 1,219 1,065
------- -------
Net land, buildings and other 2,427 2,984
Land held for sale 760 766
Housing inventories 33,991 34,263
Land held for development 5,241 5,287
Capitalized predevelopment costs 7,928 7,451
------- -------
Net properties 50,347 50,751
------- -------
Total assets $58,236 $57,256
======= =======
Liabilities:
Notes payable $32,993 $32,770
Accounts payable and accrued expenses 8,174 10,330
Accrued real estate taxes 849 893
Allowance for claims and liabilities 2,851 2,804
Unearned rents and deferred income 1,682 1,733
Other liabilities 2,719 3,074
------- -------
Total liabilities $49,268 $51,604
------- -------
Partners' Capital:
General Partner -- --
Class A Limited Partners-2,142 units authorized,
issued and outstanding -- --
Class B Limited Partner 8,968 5,652
------- -------
Total partners' capital 8,968 5,652
------- -------
Total liabilities and partners' capital $58,236 $57,256
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 28
<PAGE>
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 2000 AND JUNE 30, 1999
(amounts in thousands except per unit data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
------
Property sales $ 19,844 $ 2,520 $ 22,494 $ 4,562
Less: Cost of property sales 14,384 2,019 16,978 3,964
-------- -------- -------- --------
Gross profit on property sales 5,460 501 5,516 598
-------- -------- -------- --------
Operating Expenses:
------------------
Selling expenses 814 1,074 1,401 1,694
General and administrative expenses 796 688 1,330 1,305
Real estate taxes 23 81 45 141
Environmental expense 56 240 133 270
-------- -------- -------- --------
Total operating expenses 1,689 2,083 2,909 3,410
-------- -------- -------- --------
Net operating income (loss) 3,771 (1,582) 2,607 (2,812)
Other Income and (Expense):
---------------------------
Portfolio income 78 15 132 33
Rental income 210 145 368 393
Other income 224 112 304 369
Depreciation (48) (35) (95) (69)
Management fee -- (107) -- (213)
-------- -------- -------- --------
Total other income 464 130 709 513
-------- -------- -------- --------
Net income (loss) $ 4,235 $ (1,452) $ 3,316 $ (2,299)
======== ======== ======== ========
Net income (loss) allocated to General Partner $ -- $ -- $ -- $ --
======== ======== ======== ========
Net income (loss) allocated to Class B
Limited Partner $ 4,235 $ (1,452) $ 3,316 $ (2,299)
======== ======== ======== ========
Net income (loss) allocated to Class A
Limited Partners $ -- $ -- $ -- $ --
======== ======== ======== ========
Net income (loss) per Class A
Limited Partnership Unit $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 28
<PAGE>
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30,
2000 1999
---- ----
<S> <C> <C>
Cash Flow from Operating Activities:
-----------------------------------
Net income (loss) ................................................................. $ 3,316 $(2,299)
Adjustments reconciling net income (loss) to net cash used in operating activities:
Depreciation ...................................................................... 95 69
Net change in allowance for claims and liabilities ................................ 47 16
Net change in assets and liabilities:
(Increase) decrease in accounts receivable .................................. (1,230) 110
Decrease (increase) in housing inventories, net ............................. 272 (5,861)
Decrease in land held for sale .............................................. 6 89
Decrease in land held for development ....................................... 46 --
Increase in capitalized development costs ................................... (477) (754)
(Decrease) increase in accounts payable and accrued liabilities ............. (2,156) 39
Decrease in management fee due affiliate .................................... -- (283)
Net change in other assets and liabilities .................................. (688) 330
------- -------
Net cash used in Operating Activities ............................................. (769) (8,544)
------- -------
Cash Flow from Investing Activities:
-----------------------------------
Sales of (additions to) land, buildings and other ................................. 462 (312)
Net sales and maturities of marketable securities ................................. -- 149
------- -------
Net cash provided by (used in) investing activities ............................... 462 (163)
------- -------
Cash Flow from Financing Activities:
-----------------------------------
Advances on notes payable, net .................................................... 223 8,437
Increase in restricted cash ....................................................... (45) (594)
------- -------
Net cash provided by financing activities ......................................... 178 7,843
------- -------
Decrease in cash .................................................................. (129) (864)
Cash at beginning of the period ................................................... 230 1,115
------- -------
Cash at end of the period ......................................................... $ 101 $ 251
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
-----------------
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. 131 establishes standards for
the way that public business enterprises report information regarding reportable
operating segments.
The Company has two primary reportable business segments, which consist of land
sales and property development (See Note 6 to the Consolidated Financial
Statements).
Page 6 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
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, 2000 (amounts in
thousands):
Land under development.................... $ 3,546
Direct construction costs................. 20,314
Capitalized project costs................. 10,131
-----------
$ 33,991
===========
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 June 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
Page 7 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
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.
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.
The Company expects to resolve both matters in connection with the sale of the
Bloomfield development in the third quarter of the year 2000.
3. Restricted Cash
The total restricted cash at June 30, 2000 and December 31, 1999 was $4,227,000
and $4,182,000, respectively. Restricted cash increased $45,000 from December
31, 1999 to June 30, 2000. This increase was additional earnest money deposited
on Kinzie Station sold units.
4. Notes Payable
Heartland has a line of credit agreement in the amount of $13.5 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 $12,522,000 and $8,653,000 as of June
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
$535,000 at June 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 June
30, 2000). At June 30, 2000, and 1999, $12,335,000 and $8,700,000, 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
(see Note 8 to the Consolidated Financial Statements).
As of June 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 June 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
Page 8 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
at the prime rate of B of A plus 1% (10.5% at June 30, 2000). At June 30, 2000,
B of A has advanced $179,000 against this loan. This loan matures September 29,
2000. At that time, all outstanding advances and any accrued interest must be
paid.
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 June 30, 2000. The loan term is for one
year and bears interest at the prime rate plus 1% (10.5% at June 30, 2000). At
June 30, 2000, FNB had advanced $173,000 to the Company on the 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 12 have closed as of June 30, 2000) from the developer for $690,500
and repay 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 June 30, 2000 is $1,528,000. The revolving credit line is for
a term of 1 year and bears interest at the prime rate (9.5% at June 30, 2000).
At June 30, 2000, $1,153,000 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 June 30, 2000). The outstanding loan
balance is $2,440,000 and $2,500,000 at June 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 June 30, 2000). The loans mature on January 31, 2001 and
December 31, 2000, respectively. At June 30, 2000 and 1999, $612,000 and
$294,000, respectively, had been advanced against the development loan and
$1,139,000 and $800,000, respectively, against the revolving line of credit. The
Company believes no additional financing will be needed for Phase I. The
carrying value of the collateral for these loans is $5,035,000 and $4,369,000 at
June 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 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 ("CB"). The loan bears interest at
the prime rate plus 1% (10.5% at June 30, 2000). This loan is collateralized by
the real estate contained in the project. In conjunction with the loan,
Page 9 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
a construction contract with the guaranteed maximum price of $24,710,000 was
entered into with a general contractor. At June 30, 2000 and 1999, $13,942,000
and $6,797,000, 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 June 30,
2000). The loan is collateralized by the 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 June 30, 2000,
$1,020,000 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 December 31, 1999. This fee was paid in full at
December 31, 1999.
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. All amounts due from HTI bear interest at the prime rate plus
2.25%. At June 30, 2000, HTI owed Heartland approximately $2,539,000. This was
an increase of $1,446,000 from December 31, 1999.
Page 10 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 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
June 30, June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income:
Property sales $ 320 $ 694 $ 19,524 $ 1,826 $ -- $ -- $ 19,844 $ 2,520
Less: Cost of property sales 102 151 14,282 1,868 -- -- 14,384 2,019
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit on property sales 218 543 5,242 (42) -- -- 5,460 501
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling expenses 384 160 430 914 -- -- 814 1,074
General and administrative -- -- 9 246 787 442 796 688
Real estate taxes -- 20 23 61 -- -- 23 81
Environmental expense 56 50 -- 190 -- -- 56 240
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 440 230 462 1,411 787 442 1,689 2,083
-------- -------- -------- -------- -------- -------- -------- --------
Net operating income (loss) (222) 313 4,780 (1,453) (787) (442) 3,771 (1,582)
Other Income and (Expense):
Portfolio income -- -- -- -- 78 15 78 15
Rental income 210 145 -- -- -- -- 210 145
Other income -- -- 224 112 -- -- 224 112
Depreciation -- -- (23) (22) (25) (13) (48) (35)
Management fee -- -- -- -- -- (107) -- (107)
-------- -------- -------- -------- -------- -------- -------- --------
Total other income and
(expense) 210 145 201 90 53 (105) 464 130
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (12) $ 458 $ 4,981 $ (1,363) $ (734) $ (547) $ 4,235 $ (1,452)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Page 11 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
(1) The Land Sales business segment consists of approximately 14,353 acres of
land located throughout 12 states for sale as of June 30, 2000, and the
related sales and marketing and general and administrative expenses.
(2) The Property Development business segment consists of the approximately
862 acres representing 15 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 and 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 June 30, 2000, $160,000 had been earned under the
plans.
8. Subsequent Events
On August 3, 2000, Heartland closed on the sale of the last 50 acres of
its Galewood property located in Chicago, Illinois for $5,500,000. At
that time, $3,500,000 of the sale proceeds were used to reduce the LNB
line of credit amount from $13.5 million to $10 million.
Page 12 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 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 $4,328,000 (including $4,227,000 of
restricted cash) at June 30, 2000, and $4,412,000 (including $4,182,000 of
restricted cash) at December 31, 1999.
Net cash used in operating activities was $769,000 in the first six months of
2000, compared to $8,544,000 used in operating activities in the first six
months of 1999. The decrease in net cash used in operating activities between
the years of $7,775,000 is mainly attributable to a $6,133,000 decrease in
expenditures for housing inventories.
At the quarter ending June 30, 2000, property designated for development
consisted of 15 sites comprising approximately 862 acres. The book value of this
land is $8.8 million or an average of $10,200 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
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 of the 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 24% and the dollar sales volume has increased 33%.
The Company closed 64 Tower building units in the second quarter of the year
2000.
Page 13 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
Kinzie Station
Phase I
Unit Detail
As of June 30, 2000
Total Number
of Units
Tower Building 163
Plaza 24
Townhomes 5
-----
Total 192
=====
In addition to the 3.88 acre site, the Company owns approximately 9 acres of
land and 4 acres of air rights adjacent to Kinzie Station. 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 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 June 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 June 30,
2000, is $13,942,000.
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 June 30, 2000). The loan is collateralized by the 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 June 30, 2000, $1,020,000 had been advanced by Bank One to the
Company.
Osprey Cove
Included in the aforementioned 862 acres are approximately 6 acres consisting
of 19 lots purchased for $722,000, 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.
Page 14 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
The homes under construction will be completed and closed during the year 2000.
The 17 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 June 30, 2000, 50 contracts have closed in Osprey; 15 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 six months ended June 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 June 30, 2000
Inventory homes under construction 2
Lots owned-inventory 17
----
Total unit inventory 19
====
As of June 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
June 30, 2000). At maturity, on September 29, 2000, all outstanding advances and
any accrued interest must be paid. At June 30, 2000, $179,000 has been advanced
by B of A against the loan.
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 June 30, 2000). One home sold and closed in May, 2000. At June 30,
2000, FNB had advanced $173,000 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 June 30, 2000, the
Company owned 10 lots purchased for approximately $285,000, an average of
$28,500 per lot. These 10 lots comprising approximately 3 acres of land, are
also included in the aforementioned 862 acres. Also, the Company closed the 1
home it was building on an individual's own lot.
In Longleaf, the Company has closed 23 homes as of June 30, 2000; 10 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 June 30, 2000, the
Company has sold 32 units and 3 lots for these owners since April 1, 1998.
Page 15 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
Longleaf
Unit Inventory Detail
As of June 30, 2000
Model homes 2
Sold homes under construction 2
Inventory homes under construction 6
----
Total unit inventory 10
====
Sold homes not started (lots not owned) 3
====
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 12
have closed as of June 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 June 30, 2000). At June 30, 2000,
$1,153,000 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 103 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.
Page 16 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
As of June 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 June 30, 2000
Model homes 3
Inventory homes under construction 6
Townhome building foundation 6
Lots owned 130
----
Total unit inventory 145
====
In December 1999, Heartland decided to cease homebuilding operations in
Bloomfield. On June 13, 2000, the Company executed a sales contract to sell the
entire Rosemount 226 acres to Centex Homes. The contract included all model
homes, homes under construction and the 6 townhome building foundation. The
contract is expected to close on September 13, 2000. While the Company has no
reason to believe the sale will not close, the contract contains contingencies
typical of such contracts and there can be no assurance the transaction will be
completed.
A contract on the aforementioned 103 adjacent acres was executed in January,
2000 for $4,000,000 and is projected to close by September 30, 2000. While the
Company has no reason to believe the above described sale will not close, the
contract contains contingencies typical of such contracts and there can be no
assurance the transaction will be completed.
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 June 30, 2000). The outstanding loan
balance is $2,440,000 at June 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. The loans bear
interest at the prime rate (9.5% at June 30, 2000). The loans mature on January
31, 2001 and December 31, 2000, respectively. At June 30, 2000, $612,000 had
been advanced against the development loan and $1,139,000 against the revolving
line of credit. The Company believes no additional financing will be needed for
Phase I. 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.
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
Page 17 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 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 June 30, 2000, the buildings had
been built and leases had been signed for all of the 265,000 square feet.
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 year
2000.
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.
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 14,353 acres
located throughout 12 states. The book value of this inventory is approximately
$760,000. 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.
Page 18 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
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.
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 June 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 June 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 19 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 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. The Company has a line of credit with LNB in the
amount of $13.5 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
June 30, 2000). At June 30, 2000, $12,335,000 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.
Results of Operations
For the second quarter and six months ended June 30, 2000, operations resulted
in a net income of $4,235,000 and $3,316,000, respectively, or $0 per Class A
Unit. Operations for the second quarter and six months ended June 30, 1999,
resulted in a net loss of $1,452,000 and $2,299,000, respectively, or $0 per
Class A Unit. No loss is 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. No income has been allocated to the Class A
Unitholders because the prior losses allocated to the Class B Limited Partners
have not been used up as of June 30, 2000.
The increase in net income for the second quarter of 2000 compared to the net
loss in the second quarter of 1999 of $5,687,000 is due to the closing of 64
Tower building units in Kinzie Station producing gross revenues of $12,100,000
and the closing of the Galewood and Kinzie parcels of land producing gross
revenues of $1,660,000 and $2,457,000, respectively, in the second quarter of
the year 2000. Also, the reduction in total operating expenses of $394,000 from
the second quarter of 2000 as compared to 1999, was a factor in the increased
net income.
Heartland has approximately 160 active leases on its real estate properties,
which generated $210,000 and $145,000 of revenue for the second quarter of 2000
and 1999, respectively. The increase in the rental income from the second
quarter of 2000 compared to 1999 of $65,000 is due to an increase in the
percentage of rents earned on a parking lot owned by the Company.
Total operating expenses were $1,689,000 and $2,083,000 for the second quarter
ending June 30, 2000 and 1999, respectively. The decrease of $394,000 is
primarily due to decreased selling expenses of $260,000 and a decrease in
environmental expenses of $184,000. Total operating expenses were $2,909,000 and
$3,410,000 for the six months ending June 30, 2000 and 1999, respectively. The
decrease of $501,000 is primarily due to a decrease in selling expenses of
$293,000 and a decrease in environmental expense of $137,000.
Page 20 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
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 June 30, 2000, Heartland's total
consolidated indebtedness was $32,993,000. There can be no assurance that the
amounts available from internally generated funds, cash on hand, Heartland's
existing credit facilities and sale of non-strategic assets will be sufficient
to fund Heartland's anticipated operations. Heartland may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financing and sales of debt or
equity securities. No assurance can be given that such financing will be
available or, if available, will be on terms favorable to Heartland. If
Heartland is not successful in obtaining sufficient capital to fund the
implementation of its business strategy and other expenditures, development
projects may be delayed or abandoned. Any such delay or abandonment could result
in a reduction in sales and would adversely affect Heartland's future results of
operations.
Period-to-Period Fluctuations
Heartland's real estate projects are long-term in nature. Sales activity varies
from period to period, and the ultimate success of any development cannot always
be determined from results in any particular period or periods. Thus, the timing
and amount of revenues arising from capital expenditures are subject to
considerable uncertainty. The inability of Heartland to manage effectively their
cash flows from operations would have an adverse effect on their ability to
service debt, and to meet working capital requirements.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at June 30, 2000 is $32,993,000.
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 $82,000.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
Page 21 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
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.
The Company incurred approximately $200,000 to complete this project.
Approximately $150,000 was capitalized for new systems, software and equipment
and approximately $50,000 was expensed.
Through August 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings and Contingencies
At June 30, 2000, Heartland's allowance for claims and liabilities was
approximately $2.9 million. During the six months ended June 30, 2000, an
increase of approximately $56,000 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
Page 22 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
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 June 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.
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.
The Company expects to resolve both matters in connection with the sale of the
Bloomfield development in the third quarter of the year 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
Page 23 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
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.
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.
Page 24 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
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 25 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------- --------------------------------------------------------------
10.28 Payoff letter dated June 29, 2000 to Near North National Title
Corporation among CMC Heartland Partners and LaSalle Bank
National Association, a national banking association (filed
herewith).
10.29 Payoff letter dated August 1, 2000 to Near North National
Title Corporation among CMC Heartland Partners and LaSalle
Bank National Association, a national banking association
(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, 2000.
Page 26 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 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: August 14, 2000 BY: /s/ Edwin Jacobson
-------------------------------------
Edwin Jacobson
President and Chief Executive Officer
Heartland Technology, Inc.
the General Partner
(Principal Executive Officer)
Date: August 14, 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 27 of 28
<PAGE>
HEARTLAND PARTNERS, L.P.
JUNE 30, 2000
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- --------------------------------------------------------------
10.28 Payoff letter dated June 29, 2000 to Near North National Title
Corporation among CMC Heartland Partners and LaSalle Bank
National Association, a national banking association (filed
herewith).
10.29 Payoff letter dated August 1, 2000 to Near North National
Title Corporation among CMC Heartland Partners and LaSalle
Bank National Association, a national banking association
(filed herewith).
27 Financial Data Schedule (filed herewith).
Page 28 of 28
