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 March 31, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
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)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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1
HEARTLAND PARTNERS, L.P.
March 31, 2002
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......................................17
Item 3 Quantitative and Qualitative Disclosure About Market Risk......25
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..............................................26
Item 6 Exhibits and Reports on Form 8-K...............................29
Signatures...............................................30
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(amounts in thousands)
(Unaudited)
March 31, December 31,
2002 2001
------------- -------------
Assets:
Cash $ 266 $ 103
Restricted cash 1,152 1,196
Accounts receivable 374 430
Due from affiliate 8,519 8,186
Prepaid and other assets 89 138
Investment in joint venture 129 166
------------- -------------
Total 10,529 10,219
------------- -------------
Property:
Land 1,072 1,072
Buildings and improvements 634 1,630
Less accumulated depreciation 164 1,144
------------- -------------
Net land, buildings and improvements 1,542 1,558
Land held for sale 718 723
Housing inventories 10,241 10,847
Land held for development 4,807 4,807
Capitalized predevelopment costs 10,891 10,266
------------- -------------
Net properties 28,199 28,201
------------- -------------
Total assets $ 38,728 $ 38,420
============= =============
Liabilities:
Notes payable $ 7,612 $ 6,746
Accounts payable and accrued
expenses 2,832 2,625
Cash overdraft -- 278
Accrued real estate taxes 924 817
Allowance for claims and liabilities 4,349 4,337
Unearned rents and deferred income 1,505 1,530
Other liabilities 2,027 2,027
------------- -------------
Total liabilities 19,249 18,360
------------- -------------
Partners' capital:
General Partner 76 81
Class A Limited Partners -
2,142 units authorized, issued
and 2,093 outstanding at March 31, 2002
and 2,095 outstanding at December 31, 2001 9,817 10,390
Class B Limited Partner 9,586 9,589
------------- -------------
Total partners' capital 19,479 20,060
------------- -------------
Total liabilities and partners' capital $ 38,728 $ 38,420
============= =============
See accompanying notes to consolidated financial statements.
3
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED
MARCH 31, 2002 AND 2001
(amounts in thousands except per unit data)
(Unaudited)
Quarter Ended
March 31,
2002 2001
--------- ---------
Income:
Property sales $ 1,044 $ 10,210
Less: Cost of property sales 1,044 7,003
--------- ---------
Gross profit on property sales -- 3,207
--------- ---------
Operating Expenses:
Selling expenses 325 979
General and administrative
expenses 458 523
Real estate taxes 23 24
Environmental expenses 20 19
--------- ---------
Total operating expenses 826 1,545
--------- ---------
Operating (loss) income (826) 1,662
Other Income and (Expenses):
Portfolio income 285 370
Rental income 86 91
Other income 29 202
Depreciation (16) (25)
Management fee (103) (106)
--------- ---------
Total other income 281 532
--------- ---------
Net (loss) income $ (545) $ 2,194
========= =========
Net (loss) income allocated to
General partner $ (5) $ 22
========= =========
Net (loss) income allocated to
Class B limited partner $ (3) $ 11
========= =========
Net (loss) income allocated to
Class A limited partners $ (537) $ 2,161
========= =========
Net (loss) income per Class A
Limited partnership unit $ (0.26) $ 1.01
========= =========
Weighted average number of Class A limited
partnership units outstanding 2,094 2,142
========= =========
See accompanying notes to consolidated financial statements.
4
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR QUARTERS ENDED MARCH 31, 2002 AND 2001
(amounts in thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
2002 2001
---------- ----------
Cash Flow from Operating Activities:
Net (loss) income $ (545) $ 2,194
Adjustments reconciling net (loss) income to net cash
(used in) provided by operating activities:
Equity in earnings of joint venture (11) (90)
Depreciation 16 25
Net change in allowance for claims and liabilities 12 (22)
Net change in assets and liabilities:
Decrease (increase) in accounts receivable 56 (19)
Decrease in housing inventories, net 606 2,304
Decrease in land held for sale 5 7
Decrease in land held for development -- 299
(Increase) decrease in capitalized predevelopment costs, net (625) 549
Increase in accounts payable and accrued liabilities 207 372
Net change in other assets and liabilities 131 (653)
---------- ----------
Net cash (used in) provided by operating activities (148) 4,966
---------- ----------
Cash Flow from Investing Activities:
Additions to land, building and other, net -- (7)
Increase in note receivable from affiliate (333) (1,380)
---------- ----------
Net cash used in investing activities (333) (1,387)
---------- ----------
Cash Flow from Financing Activities:
Advances (payoffs) on notes payable, net 866 (88)
Redemption of Class A Limited Partner units (36) --
Distributions received from joint venture 48 --
Decrease in restricted cash 44 29
Decrease in cash overdraft (278) --
---------- ----------
Net cash provided by (used in) financing activities 644 (59)
---------- ----------
Net increase in cash 163 3,520
Cash at beginning of period 103 150
---------- ----------
Cash at end of period $ 266 $ 3,670
========== ==========
See accompanying notes to consolidated financial statements.
5
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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 2001 Annual
Report on Form 10-K (the "2001 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
2001 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.
6
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
1. Summary of Significant Accounting Policies
Consolidation
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. At March
31, 2002, CMC Heartland Partners ("CMC") was an operating general partnership
owned 99.99% by Heartland and .01% by Heartland Technology, Inc. ("HTI"),
formerly known as Milwaukee Land Company ("MLC"). HTI was the general partner of
Heartland. HTI transferred its general partner interest in the Company to HTI
Interests, LLC ("HTII"), a Delaware limited liability company, owned 99.9% by
HTI and .1% by HTI Principals, Inc., a Delaware corporation, owned by four of
HTI's Board of Directors and a former director of HTI. HTII is now the General
Partner of Heartland, (in such capacity, the "General Partner").
The following table sets forth various entities formed by the Company since its
inception, date and purpose of formation,development location and ownership:
YEAR
COMPANY FORMED BUSINESS PURPOSE
--------------------------------------------------- ------ ------------------------------------------------------------
Heartland Development Corporation ("HDC") 1993 General Partner of CMC Heartland Partners I, Limited Partnership
CMC Heartland Partners I, Limited ("CMCLP") 1993 Owned Bloomfield development
Partnership
CMC Heartland Partners I, LLC ("CMCI") 1998 Owns Kinzie Station Phase II
CMC Heartland Partners II, LLC ("CMCII") 1997 Owns the Goose Island Industrial Park joint venture
CMC Heartland Partners III, LLC ("CMCIII") 1997 Owns Kinzie Station Phase I
CMC Heartland Partners IV, LLC ("CMCIV") 1998 Developing approximately 177 acres in Fife, Washington
CMC Heartland Partners V, LLC ("CMCV") 1996 Owns lots and homes in Osprey Cove
CMC Heartland Partners VI, LLC ("CMCVI") 1997 To acquire and hold future acquisitions
CMC Heartland Partners VII, LLC ("CMCVII") 1997 Owns lots and homes in the Longleaf Country Club
CMC Heartland Partners VIII, LLC ("CMCVIII") 1998 To acquire and hold future acquisitions
Lifestyle Construction Company,Inc. ("LCC") 1998 Serves as the general contractor in North Carolina
Lifestyle Communities, Ltd. ("LCL") 1996 Serves as the exclusive sales agent in the
Longleaf and Kinzie Station Phase I & II developments
DEVELOPMENT
COMPANY LOCATION OWNERSHIP
--------------------------------------------------- ------------------------------ ----------
Heartland Development Corporation ("HDC") Not applicable 100% (1)
CMC Heartland Partners I, Limited ("CMCLP") Rosemount, Minnesota 100% (2)
Partnership
CMC Heartland Partners I, LLC ("CMCI") Chicago,Illinois 100% (3)
CMC Heartland Partners II, LLC ("CMCII") Chicago,Illinois 100% (3)
CMC Heartland Partners III, LLC ("CMCIII") Chicago,Illinois 100% (3)
CMC Heartland Partners IV, LLC ("CMCIV") Fife,Washington 100% (3)
CMC Heartland Partners V, LLC ("CMCV") St. Marys,Georgia 100% (3)
CMC Heartland Partners VI, LLC ("CMCVI") Not Applicable 100% (3)
CMC Heartland Partners VII, LLC ("CMCVII") Southern Pines, North Carolina 100% (3)
CMC Heartland Partners VIII, LLC ("CMCVIII") Not Applicable 100% (3)
Lifestyle Construction Company,Inc. ("LCC") Not Applicable 100% (4)
Lifestyle Communities, Ltd. ("LCL") Not Applicable 100% (4)
(1) Stock wholly owned by Heartland.
(2) HDC owns a 1% General Partnership interest and CMC owns a 99% Limited
Partnership interest.
(3) Membership interest owned by CMC.
(4) Stock wholly owned by CMC.
7
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
Except as otherwise noted herein, references herein to "Heartland" or the
"Company" include CMC, HDC, CMCLP, CMCI, CMCII, CMCIII, CMCIV, CMCV, CMCVI,
CMCVII, CMCVIII, LCC and LCL. The consolidated financial statements include the
accounts of Heartland. All intercompany transactions have been eliminated in
consolidation.
Organization
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account such net loss shall be allocated only among partners having positive
balances in their capital account.
Subject to the limitations described in the preceding paragraph, the General
Partner has the discretion to cause Heartland to make distributions of
Heartland's available cash in an amount equal to 98.5% to the Unitholders, 0.5%
to the holder of the Class B Interest and 1% to the General Partner. Liquidating
distributions, upon dissolution of the partnership, are made pro rata to each
partner in accordance with its positive Capital Account balance after certain
adjustments set out in the Partnership agreement. There can be no assurance as
to the amount or timing of Heartland's cash distributions or whether the General
Partner will cause Heartland to make a cash distribution if cash is available.
On December 4, 1997, Heartland's partnership agreement was amended to allow the
General Partner in its discretion to establish a record date for distributions
on the last day of any calendar month. No cash distribution were made during the
three months ended March 31, 2002.
On August 22, 2001, Heartland announced that it had been authorized by its
General Partner to purchase up to 50,000 of its outstanding Class A partnership
units. As of March 31, 2002 and December 31, 2001, the Company had repurchased
49,760 and 47,360 Class A partnership units at a total cost of $830,000 and
$794,000, respectively. These repurchases are shown as a reduction of Partners'
Capital.
As of March 31, 2002 and December 31, 2001, Heartland and CMC loaned HTI an
aggregate of $8,519,000 and $8,186,000, respectively. The loans are
collateralized by a security interest in the Class B limited partner interest
and bear interest at 13%. The Company has also received as compensation for the
loans a Series C Warrant that entitles Heartland to purchase 320,000 shares of
HTI common stock at an exercise price of $1.05 per share. HTI and the Company
have provided loans, on market terms, to each other from time to time, as
provided in the agreements between them. The initial terms of the loan were
based on the collateral of the Class B interest and prevailing borrowing rates.
When HTI raised capital through the issuance of subordinated debentures at 13%
interest and the grant of warrants, the loan terms were changed to reflect HTI's
cost of capital.
8
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
At March 31, 2002, HTI owed Heartland and CMC approximately $8,519,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,519,000 is
recoverable through the Company's security interest in the Class B limited
partner interest.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The cash and cash
equivalents of the Company are held at two financial institutions.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, cash in escrow, accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair values because of the short maturity of theses financial instruments.
The carrying value of the Company's notes payable approximate fair value at
March 31, 2002 due to the short duration and variable nature of the financial
instruments.
Revenue Recognition
Residential sales are recognized at closing when title to the home has passed to
the buyer. The Company's homes are generally offered for sale in advance of
their construction. To date, most of the Company's homes have been sold pursuant
to standard sales contracts entered into prior to commencement of construction.
The Company's standard sales contracts generally require the customer to make an
earnest money deposit. This deposit may range from 5% to 10% of the purchase
price for a buyer using conventional financing.
9
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
Land sales are recognized when the Company has received an adequate cash down
payment and all other conditions necessary for profit recognition have been
satisfied.
Investment in Joint Venture
Investment in joint venture represents recording of the Company's interest under
the equity method of accounting. Under the equity method of accounting, the
Company recorded its initial interest at cost and adjusts its investment
accounts for additional capital contributions, distributions and its share of
joint venture income or loss.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates used in the preparation of the
financial statements include the value of the Class B limited partner interest
which represents the collateral of the Heartland Technology, Inc. note
receivable owed to the Company and CMC, estimated costs to complete long term
development projects, the recoverability of the total cost of properties and the
estimates used in determining the Company's environmental liabilities. Actual
results could differ from those estimates.
Income Taxes
A publicly-traded partnership generally is not liable for Federal income taxes,
provided that for each taxable year at least 90% of its gross income consists of
certain passive types of income. In such case, each partner includes its
proportionate share of partnership income or loss in its own tax return.
Accordingly, no provision for income taxes is reflected in Heartland's financial
statements.
Heartland's assets are carried at historical cost. At March 31, 2002, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
10
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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 real estate taxes that are directly
identified with a specific development project are capitalized. Interest and
related debt issuance costs are capitalized to qualifying real estate
inventories as incurred, in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest Costs", and charged to cost of
sales as revenue from residential and land sales are recognized. Repairs and
maintenance are charged to expense as incurred. Depreciation is provided for
financial statement purposes over the estimated useful life of the respective
assets ranging from 7 years for office equipment and fixtures to 40 years for
building and improvements using the straight-line method.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the particular development property may not be
recoverable. If these events or changes in circumstances are present, the
Company estimates the sum of the expected future cash flows (undiscounted) to
result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss the Company would
measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property. No event occurred
during the first quarter of the year 2002 that resulted in an impairment loss
being recognized.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property. No event occurred during the first quarter of
the year 2002 that resulted in an impairment loss being recognized.
Housing inventories, (including completed model homes), consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost which is not in excess of fair value. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units closed
in relation to the total anticipated units in the related development project;
such allocation approximates the relative sales value method. Direct
construction costs are allocated to the specific units closed for purposes of
determining costs of sales. Selling and marketing costs, not including those
costs incurred related to furnishing and developing the models and sales office,
are expensed in the period incurred. Costs incurred in the construction of the
model units and related furnishings are capitalized at cost. The Company intends
to offer these units for sale at the completion of a project and, accordingly,
no amortization of direct construction costs is provided. Housing inventories
are reviewed for impairment whenever events or circumstances indicate the fair
value less the cost to dispose of the inventories, is less than the capitalized
costs. If these events or changes in circumstances are present, the Company then
writes down the inventory to its fair value. No event occurred during the year
2002 that resulted in an impairment loss being recognized.
11
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
Housing inventories consisted of the following at March 31, 2002 (amounts in
thousands):
Land under development............... $ 3,335
Direct construction costs............ 3,596
Capitalized project costs............ 3,310
-------
Total $10,241
=======
2. Contingencies
At March 31, 2002, Heartland's allowance for claims and liabilities was
approximately $4,300,000 of which approximately $300,000 was for the resolution
of non-environmental claims and $4,000,000 was for environmental matters.
Significant legal proceedings and contingencies are discussed in the 2001 Form
10-K.
On January 9, 2002, 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 $1,100,000
on or before December 31, 2002, plus interest from January 1, 1999, or (b)
convey real property to be agreed upon at a later date. At March 31, 2002 and
December 31, 2001, Heartland's allowance for claims and liabilities for this
site was $1,110,000. At March 31, 2002, interest owed to the Port had been paid
to date.
On December 2, 2000, the Redevelopment Authority of the City of Milwaukee
("RACM") filed suit in Milwaukee County Circuit Court to obtain access to
appraise, survey and conduct environmental and geo-technical investigations on
certain property owned by the Company adjacent to the Milwaukee Brewers baseball
stadium in furtherance of RACM's efforts to acquire the property by
condemnation. The Company and RACM entered into an agreement under which RACM
will perform, at RACM's cost, limited investigations and provide the results to
Heartland.
In February, 2002, the Company filed suit against the Southeast Wisconsin
Professional Baseball District to enforce a provision of a contract between the
District and Heartland providing for the construction of an additional two lane
bridge to the Company's Menomonee Valley project.
3. Notes Payable
Heartland has a line of credit agreement in the amount of $5,000,000 with
LaSalle National Bank ("LNB"), pursuant to which Heartland granted LNB a first
lien on certain parcels of land in Chicago, Illinois, Milwaukee, Wisconsin and
Fife, Washington which had a carrying value of $16,065,000 and $15,456,000 as of
March 31, 2002, and December 31, 2001, respectively. The Company has also
pledged as collateral its interest in the Goose Island Joint Venture which has a
12
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
carrying value of $129,000 and $166,000 at March 31, 2002, and December 31,
2001, respectively. Also, pursuant to the line of credit agreement, Heartland
had pledged cash in the amount of $1,150,000 as an interest reserve. The loan
matured February 28, 2002. Advances against the line of credit bear interest at
the prime rate of LNB plus 1.5% (6.25% at March 31, 2002). At March 31, 2002,
and December 31, 2001, $5,000,000 and $3,500,000, respectively, had been
advanced to the Company by LNB against the line of credit. The Company has
negotiated with LNB an increase in the line of credit loan amount from
$5,000,000 to $5,350,000, the release as collateral the parcels of land located
in Milwaukee, Wisconsin and Fife, Washington and the release of the interest
reserve of $1,150,000 to Heartland. The documents amending the line of credit
have been received by Heartland from LNB and are currently being reviewed by
management. The Company anticipates that the documents will be signed.
As of December 8, 2000, Heartland has an agreement for a $3,000,000 revolving
line of credit for the construction of homes in its Longleaf community located
in Southern Pines, NC with Bank One of Illinois ("Bank One"). Also, on December
8, 2000, Heartland borrowed $250,000 from Bank One to purchase the remaining
lots owned by the developer of Longleaf. This $250,000 was the first payment
related to certain liabilities assumed by the Company in accordance with a
purchase agreement executed on December 12, 2000. The carrying value of the land
and housing inventories for these two loans at March 31, 2002, and December 31,
2001, is $2,723,000 and $2,938,000, respectively. The line of credit and the
$250,000 loan mature on April 12, 2002, and bear interest at the prime rate
(4.75% at March 31, 2002). At March 31, 2002 and December 31, 2001, $1,112,000
and $1,358,000, respectively, had been advanced by Bank One to Heartland on
these two loans. Heartland has negotiated with Bank One to change the maturity
dates of the two loans to April 12, 2003. The documents amending the two loans
have been received by the Company from Bank One and are currently being reviewed
by management. Heartland has no reason to believe the documents will not be
signed.
On January 30, 2001, the final principal and interest payment was made on the
$5,250,000 Kinzie Station Plaza building loan. On February 23, 2001, the Company
amended this loan agreement with Bank One, and borrowed an additional $3,000,000
and changed the maturity date of the loan to February 23, 2002. On February 23,
2002, the company modified this loan and changed the maturity date to June 23,
2002. The loan bears interest at the prime rate (4.75% at March 31, 2002). The
outstanding loan balance is $1,500,000 at March 31, 2002 and December 31, 2001.
As of March 31, 2002, Heartland's total consolidated indebtedness was
$7,612,000. This amount is due within one year from May 1, 2002. 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.
13
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
4. Related Party Transactions
Heartland has a management agreement with HTII pursuant to which Heartland is
required to pay HTII an annual management fee in the amount of $413,000 for the
year 2002. The management fee for the year 2001 was $425,000. The management
agreement terminates on June 27, 2005. The management fee for the first three
months of 2002 of $103,000 has been accrued as an expense and reduced the amount
owed Heartland and CMC by HTI.
Under a management services agreement, HTI reimburses CMC for reasonable and
necessary costs and expenses for services. These totaled $165,000 for the three
months ended March 31, 2002. Heartland and CMC also make loans to HTI. HTI owed
the Company and CMC, in the aggregate, $8,519,000 and $8,186,000 as of March 31,
2002, and December 31, 2001, respectively, related to these expenses and loans.
On December 29, 2000, HTI executed a line of credit promissory note that is due
on demand, payable to Heartland and CMC in the amount of $6,000,000. At that
time, HTI granted the Company a Series C Warrant that entitles Heartland to
purchase 320,000 shares of HTI common stock at an exercise price of $1.05. The
warrant is exercisable on or before February 16, 2006. On May 11, 2001, HTI
executed an additional line of credit promissory note in the amount of
$1,000,000. On July 3, 2001, the $1,000,000 promissory note was cancelled and a
replacement line of credit promissory note in the amount of $1,500,000 was
executed. On October 11, 2001, the $1,500,000 line of credit promissory note was
cancelled and a replacement line of credit promissory note in the amount of
$2,000,000 was executed. The line of credit promissory notes bear interest at
13%. The total principal amount of the two line of credit promissory notes is
$8,000,000. As collateral for these two notes, HTI Class B, LLC pledged, on
December 14, 2000, to Heartland a senior lien and a senior security interest in
the Heartland Class B Limited Partnership Interest owned by HTI Class B, LLC.
At March 31, 2002, HTI owed Heartland and CMC approximately $8,519,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,519,000 is
recoverable through the Company's security interest in the Class B limited
partner interest.
14
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
On March 31, 2001, the two Kinzie Station Phase I model homes (a one bedroom
unit and a two bedroom unit) and furniture were purchased by two officers of the
Company at fair market value. Heartland has leased these model homes back from
the officers starting April 1, 2001 and ending April 1, 2004. The monthly rent
on the one bedroom model is $2,350 and on the two bedroom model is $4,200. The
leases contain standard insurance and maintenance clauses as customary in these
types of leases.
5. Employee Compensation Arrangements
The former President and Chief Executive Officer of CMC, Edwin Jacobson, who
retired February 25, 2002, has received from January 1, 2000 to February 28,
2002 incentive payments equal to 1/2% of the net proceeds from sales of certain
real estate after deducting any debt obligations, closing costs and any real
estate brokers commission. As of March 31, 2002, $170,000 had been accrued as
compensation expense under this plan. As of March 31, 2002, $170,000 had been
paid to Mr. Jacobson by CMC. On October 18, 2000, Mr. Jacobson borrowed $375,000
from CMC, of which approximately $307,000 remains outstanding at March 31, 2002
and is included as part of accounts receivable at March 31, 2002. The note is
due October 17, 2005, and interest is payable quarterly at the rate of 11% per
year. On October 17, 2000, an amendment to the employment agreement authorized
CMC to deduct from any incentive payment made to him 40% of that payment and
apply it to his outstanding note due to CMC. As a result of this amendment,
$68,000 of the above described payments of $170,000 was applied to the
outstanding note balance. Mr. Jacobson continues to receive his salary from CMC.
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
the Company. The aggregate benefits payable under the CMC Plan shall be computed
by multiplying the following percentages (3% for the year 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
were computed by multiplying 3% for the year 2001 by the net proceeds from the
sale of certain real estate during that year. As of March 31, 2002, $973,000 had
been accrued as compensation expense under the plans. As of March 31, 2002,
$329,000 had been paid to the officers by the Company.
15
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
6. Subsequent Events
On August 22, 2001, the Company was authorized by its General Partner to
repurchase up to 50,000 of its Class A partnership units. As of May 15, 2002,
Heartland had repurchased the 50,000 Class A partnership units at a total cost
of $833,000. These repurchases have been shown as a reduction of Partners'
Capital.
On April 30, 2002, LNB released the $1,150,000 interest reserve which was
deposited in Heartland's bank account.
16
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
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. Cash was $1,418,000 (including $1,152,000 of restricted cash) at
March 31, 2002 and $1,299,000 (including $1,196,000 of restricted cash) at
December 31, 2001.
Net cash used in operating activities was ($148,000) in the first three months
of 2002, compared to $4,966,000 provided by operating activities in the first
three months of 2001 or an increase in net cash used in operating activities of
$5,114,000 between the two three month periods. This is primarily attributable
to a decrease from 2000 to 2001 in sales revenue from Kinzie Station Phase I
closings of $5,045,000.
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 March 31, 2002, the Company had a line of
credit with LaSalle National Bank ("LNB") in the amount of $5,000,000. Cash in
the amount of $1,150,000 was pledged as an interest reserve. This $1,150,000 was
released to the Company April 30, 2002. The line of credit matured February 28,
2002. Advances against the line of credit bear interest at the prime rate of LNB
plus 1.5% (6.25% at March 31, 2002). At March 31, 2002, $5,000,000 had been
advanced to the Company by LNB against the line of credit. Heartland has
negotiated an amendment to the LNB line of credit agreement that extends the
maturity date to March 31, 2003, increases the line of credit amount from
$5,000,000 to $5,350,000, releases as collateral the parcels of land located in
Milwaukee, Wisconsin and Fife, Washington and released the interest reserve of
$1,150,000 to the Company. The documents amending the LNB line of credit have
been received by the Company and are currently being reviewed by management.
Heartland anticipates that the documents will be signed. The consolidated
financial statements do not contain any adjustments to reflect the ultimate
outcome of this uncertainty.
17
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
As of March 31, 2002, Heartland and CMC loaned HTI an aggregate of $8,519,000.
The loans are collateralized by a security interest in the Class B limited
partner interest and bear interest at 13%. The Company has also received as
compensation for the loans a Series C Warrant that entitles Heartland to
purchase 320,000 shares of HTI common stock at an exercise price of $1.05 per
share. HTI and the Company have provided loans, on market terms, to each other
from time to time, as provided in the agreements between them. The initial terms
of the loan were based on the collateral of the Class B interest and prevailing
borrowing rates. When HTI raised capital through the issuance of subordinated
debentures at 13% interest and the grant of warrants, the loan terms were
changed to reflect HTI's cost of capital.
At March 31, 2002, HTI owed Heartland and CMC approximately $8,519,000. On
February 25, 2002, the Company and CMC demanded immediate payment in full of all
obligations due under the Line of Credit Promissory Notes from HTI. Heartland
has initiated steps to protect its security interest in the Class B limited
partner interest (the "Collateral"). PG Oldco, Inc., a creditor of HTI under
notes aggregating $2,200,000 in principal amount, also has a security interest
in the Collateral and has commenced steps to protect its interest. Under the
Lien Subordination and Inter-Creditor Agreement ("Inter-Creditor Agreement")
among Heartland, CMC, PG Oldco, Inc. and HTI, Heartland and CMC have a first and
prior security interest in the Collateral and the proceeds thereof up to the
Senior Debt Priority Amount (as defined in the Inter-Creditor Agreement) and PG
Oldco, Inc. has a first and prior security interest in the Collateral and the
proceeds thereof for all amounts in excess of the Senior Debt Priority Amount.
Because of the competing interests in the Collateral, Heartland is not at this
time able to predict the ultimate outcome of its efforts to protect its
interests in the Collateral or the effect thereof on the Class A limited
partners. Nevertheless, management believes the note receivable of $8,519,000 is
recoverable through the Company's security interest in the Class B limited
partner interest.
Development Property
At March 31, 2002, property designated for development consisted of 12 sites
comprising approximately 520 acres. The book value of this land is $8,142,000 or
an average of $15,700 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.
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.
18
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Kinzie Station
Heartland has a 2.68 acre site in the City of Chicago known as Kinzie Station.
Zoning approval for the construction of 381 residential units on this 2.68 acre
site was received in 1997. On March 28, 2001, zoning approval to increase the
total number of residential units from 381 to 442 units was received from the
City of Chicago. In addition to the 2.68 acre site, the Company owns
approximately 8 acres of land and 4 acres of air rights adjacent to Kinzie
Station. This acreage is currently zoned for industrial and manufacturing uses.
Kinzie Station Phase I
Kinzie Station Phase I is situated on 1.23 acres. The construction of Kinzie
Station Phase I, which is substantially complete, started on October 1, 1998.
The Company has closed 160 Tower units and 18 Plaza units during the period May
1, 2000 to March 31, 2002.
Kinzie Station
Phase I
Unit Detail
As of March 31, 2002
Total Number Sale Contracts
of Units To-Date
------------ --------------
Tower Building 163 161
Plaza 24 19
------------ --------------
Total 187 180
============ ==============
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. On January 30, 2001, the final principal and interest payment
was made on the $5,250,000 Kinzie Station Plaza building loan. On February 23,
2001, the Company amended this loan agreement with Bank One, and borrowed an
additional $3,000,000, of which $1,500,000 remains outstanding at March 31,
2002, and changed the maturity date of the loan to February 23, 2002. The
maturity date of the loan has been extended to June 23, 2002. The loan bears
interest at the prime rate (4.75% at March 31, 2002).
Kinzie Station Phase II
Heartland has a 1.45 acre site in the City of Chicago known as Kinzie Station
Phase II. The Company has zoning to construct a 267 unit residential tower
building.
19
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Longleaf
At March 31, 2002, the Company owns 202 lots in its Longleaf community located
in Southern Pines, North Carolina. At March 31, 2002, the book value of the lots
is $2,310,000, an average of $11,400 per lot.
In Longleaf, the Company has closed, as of March 31, 2002, a total of 39
contracts; 2 in 2002, 9 in 2001, 15 in 2000 and 13 in 1999. When the Company
assumed day to day operations of Longleaf in April, 1998, there were a number of
homes under construction which were owned by the developer, as well as resale
homes, on the market. As of March 31, 2002, the Company has sold 45 homes and 5
lots for these owners since April 1, 1998.
Longleaf
Unit Inventory Detail
As of March 31, 2002
Model homes 2
Sold home under construction 1
Inventory homes under construction 5
Lots owned 194
---------
Total unit inventory 202
=========
As of December 8, 2000, Heartland has an agreement for a $3,000,000 revolving
line of credit for the construction of homes in Longleaf with Bank One. Also, on
December 8, 2000, Heartland borrowed $250,000 to purchase the remaining lots
owned by the developer of Longleaf. This $250,000 was the first payment related
to certain liabilities assumed by the Company in accordance with a purchase
agreement executed on December 12, 2000. The revolving line of credit and
$250,000 loan mature April 12, 2002 and bear interest at the prime rate (4.75%
at March 31, 2002). At March 31, 2002, $1,112,000 had been advanced by Bank One
to Heartland on these two loans. Heartland has negotiated with Bank One to
change the maturity dates of the two loans to April 12, 2003. The documents
amending the two loans have been received by the Company from Bank One and are
currently being reviewed by management. Heartland has no reason to believe the
documents will not be signed. The consolidated financial statements do not
contain any adjustments to reflect the ultimate outcome of this uncertainty.
Goose Island Joint Venture
Heartland, along with Colliers, Bennett and Kahnweiler, a Chicago based real
estate company, and Wooton Construction, have formed a joint venture to develop
approximately 265,000 square feet of industrial space in the Goose Island
Industrial Park in Chicago, Illinois. As of March 31, 2002, the buildings had
been built and leases had been signed for all of the 265,000 square feet.
20
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Fife, Washington
On December 1, 1998, the Company's 177 acre 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. The
Fife City Council approved the preliminary plat for the project on September 25,
2001.
On December 28, 2001, Heartland executed a construction management agreement
with Crab Apple Beach, L.L.C., an unrelated party, to assist in the management
of the development, in phases, of the Fife property. Also, the Company
anticipates completing the engineering for the first phase of the development
and submitting to the City of Fife the final first phase plat for its approval
in the second quarter of the year 2002. Development of the property has started
during the first quarter of the year 2002.
Menomonee Valley
The Company owns approximately 142 acres of property in the Menomonee River
Valley in Milwaukee, Wisconsin. The property is located next to Miller Park, the
home stadium of the Milwaukee Brewers baseball team. The Company has proposed a
mixed use development to include retail and entertainment uses complementary to
the baseball park as a recreational destination. The City of Milwaukee has
stated that it believes industrial development would be more appropriate for the
site and the Redevelopment Authority of the City of Milwaukee ("RACM") has
announced it will seek to acquire the property through eminent domain if
necessary. RACM is required to negotiate with the Company before it can file an
eminent domain proceeding. The Company may assert legal challenges to RACM's
authority if RACM does condemn the property. The outcomes of any eminent domain
proceeding or legal challenges to it are uncertain.
Osprey Cove
At Osprey Cove in St. Marys, Georgia, Heartland owns 1 unsold lot purchased for
$41,000. 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. As of March 31, 2002, a total of 68 contracts
have closed in Osprey; 3 in 2002, 14 in 2001, 16 in 2000, 20 in 1999, 13 in 1998
and 2 in 1997. The First National Bank of St. Marys ("FNB") in Georgia had made
two loans of $170,000 and $235,000 to the Company. These two loans were paid in
full during the quarter ended March 31, 2002.
21
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Property Sales and Leasing Activities
The Company has the right to sell easements for fiber optic lines along or
across 83 miles of rail right of way running from downtown Chicago west to Elgin
and Northwest to Fox Lake, Illinois. The Company actively markets fiber optics
easements and is seeking opportunities to generate additional proceeds through
the sale of these rights. The Company receives 2/3 of the proceeds of any sale.
Heartland's current inventory of land held for sale consists of 13,986 acres
located throughout 12 states. The book value of this inventory is approximately
$718,000. The majority of the land is former railroad rights-of-way, long,
narrow strips of land approximately 100 feet in width. Some of Heartland's sites
located in small rural communities or outlying mid-cities, are leased to third
parties for agricultural use and these properties may be improved with the
lessee's structures.
The sale, management and leasing of the Company's non-development real estate
inventory is conducted by Heartland's Sales and Property Management Department.
The volume of the Company's sales has slowed over the last seven years due to
the less desirable characteristics of the remaining properties.
The Company leases less than 1% of its total acreage under operating leases. 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.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property.
Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. If the Company were to use a
different approach, the reserve could be materially higher. However, estimates
can be affected by various uncertainties including future changes in technology,
changes in regulations or requirements of local governmental authorities, third
party claims, the scope and cost to be performed at each site, the portion of
costs that may be shared and the timing of the remediation work. Environmental
costs which are incurred in connection with Heartland's development activities
are expensed or capitalized as appropriate.
22
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives. As additional information becomes
available, the Company will reassess its reserves which may then be modified and
related charges/credits against earnings may then be made.
At March 31, 2002, the Company has recorded a liability in the amount of
$4,000,000 for possible environmental liabilities, including legal, remediation
and consulting fees. In addition, Heartland has established an allowance for
resolution of non-environmental claims of $300,000.
At March 31, 2002, there is not sufficient information to reasonably estimate
all the environmental liabilities of which management is aware. Accordingly,
management is unable to determine whether environmental liabilities which
management is unable to reasonably estimate will or will not have a material
effect on Heartland's results of operations or financial condition.
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
it 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.
23
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Results of Operations
Operations for the first quarters ended March 31, 2002, and 2001, resulted in a
net loss of ($545,000), and net income of $2,194,000, respectively. For the
first quarters ended March 31, 2002, and 2001, the loss allocated to the Class A
Limited Partners is ($537,000), and net income of $2,161,000, respectively or
($.26), and $1.01, respectively per Class A Unit.
The decrease in net income for the first three months of 2002 compared to net
income in the first three months of 2001 of $2,739,000 is attributable to a
decrease in the gross profit on property sales of $3,207,000.
Total operating expenses were $826,000 and $1,545,000 for the first three months
ending March 31, 2002, and 2001, respectively. The decrease of $719,000 is due
to decreased sales and marketing expenses of $654,000 and a reduction in general
and administrative expenses of $65,000.
Economic and Other Conditions Generally
The real estate industry is highly cyclical and is affected by changes in local,
national, and global 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 and
tornadoes, 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 March 31, 2002, Heartland's
total consolidated indebtedness was $7,612,000. This amount is due within one
year from May 1, 2002. 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.
24
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
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 March 31, 2002 is $7,612,000.
The Company pays interest on its outstanding borrowings under revolving credit
facilities and fixed loan amounts at the prime rate and the prime rate plus 1.5%
and at a fixed rate of 8%. An adverse change of 1.00% in the prime rate would
increase the quarterly interest incurred by approximately $19,000.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
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.
25
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 2002, Heartland's allowance for claims and liabilities was
approximately $4,300,000. During the three months ended March 31, 2002, an
increase of approximately $12,000 in the provision was recorded in respect to
environmental matters. Material legal matters are discussed below.
Canadian Pacific Railroad Matters
The Canadian Pacific Railroad ("CPRR"), formerly the Soo Line Railroad Company,
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 CPRR. The Company has
denied liability for each of these claims based on a prior settlement with CPRR.
CPRR 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
CPRR, and the Company understands the CPRR has paid settlements on many of these
claims. As a result of CPRR'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 January 9, 2002, in which the Port released all claims and the Company
agreed either to, (a) pay $1.1 million on or before December 31, 2002, plus
interest from January 1, 1999 or, (b) to convey to the Port real property to be
agreed upon at a later date. At March 31, 2002, Heartland's allowance for claims
and liabilities for this site was $1,110,000. 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.
26
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
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.
Milwaukee, Wisconsin
On December 2, 2000, the Redevelopment Authority of the City of Milwaukee
("RACM") filed suit in Milwaukee County Circuit Court to obtain access to
appraise, survey and conduct environmental and geo-technical investigations on
certain property owned by the Company adjacent to the Milwaukee Brewers baseball
stadium in furtherance of RACM's efforts to acquire the property by
condemnation. The Company and RACM entered into an agreement under which RACM
will perform, at RACM's cost, limited investigations and provide the results to
Heartland.
Miscellaneous Environmental Matters
Under environmental laws, liability for hazardous substance contamination is
imposed on the current owners and operators of the contaminated site, as well as
the owner or the operator of the site at the time the hazardous substance was
disposed or otherwise released. In most cases, this liability is imposed without
regard to fault. Currently, the Company has known environmental liabilities
associated with certain of its properties arising out of the activities of its
predecessor or certain of its predecessor's lessees and may have further
material environmental liabilities as yet unknown. The majority of the Company's
known environmental liabilities stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad or in operations
conducted by its predecessor's lessees. The following is a summary of material
known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is liable for some or all of the investigation and remediation of
certain properties in Montana sold by its predecessor's reorganization trustee
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.
27
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
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 potentially
responsible party.
In 1995, at a 5.95 acre parcel in Minneapolis, Minnesota, environmental sampling
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.
Sampling performed in November, 2000, has indicated the presence of solvents in
the groundwater under certain property owned by the Company in Milwaukee,
Wisconsin. Management will not be able to determine the materiality of the
remediation costs, if any, of these materials until the concentrations and
location of the release has been quantified.
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.
28
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------- ---------------------------------------------------------------
None
(b) Reports on Form 8-K;
A Form 8-K was filed by the Company on March 6, 2002 announcing, pursuant to a
press release dated February 26, 2002, that Lawrence S. Adelson had been
appointed Chief Executive Officer, replacing Edwin Jacobson who had retired
February 25, 2002.
29
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEARTLAND PARTNERS, L.P.
------------------------
(Registrant)
Date: May 15, 2002 By /s/ Lawrence S. Adelson
-----------------------
Lawrence S. Adelson
(Manager of HTI Interests, LLC,
General Partner)
30
HEARTLAND PARTNERS, L.P.
MARCH 31, 2002
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- ---------------------------------------------------------------
None
31