UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
-------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 1-10520
HEARTLAND PARTNERS, L.P.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3606475
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
53 W. Jackson Blvd., Suite 1150, Chicago, Illinois 60604
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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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No X
--- ---
HEARTLAND PARTNERS, L.P.
June 30, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..........................................................................................1
Item 1. Financial Statements....................................................................................1
Consolidated Balance Sheets............................................................................1
Consolidated Statements of Operations..................................................................2
Consolidated Statements of Cash Flows..................................................................3
Notes to Consolidated Financial Statements.............................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................32
Item 4. Controls and Procedures................................................................................32
PART II. OTHER INFORMATION............................................................................................34
Item 1. Legal Proceedings.....................................................................................34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................................34
Item 3. Defaults Upon Senior Securities.......................................................................34
Item 4. Submission of Matters to a Vote of Security Holders...................................................34
Item 5. Other Information.....................................................................................34
Item 6. Exhibits..............................................................................................35
Signatures............................................................................................36
Exhibit Index.........................................................................................37
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
June 30, December 31,
2005 2004
----------------- -----------------
Assets:
Cash and cash equivalents $ 1,329 $ 1,450
Restricted cash 2,500 --
Accounts receivable (net of allowance of $354
at June 30, 2005 and December 31, 2004) 478 905
Due from affiliate (net of allowance of $7,334 and
$7,234 at June 30, 2005 and December 31, 2004 respectively) 2,400 2,500
Prepaid and other assets 123 402
----------------- -----------------
Total 6,830 5,257
----------------- -----------------
Property:
Land 383 383
Buildings and improvements -- 141
Less accumulated depreciation -- (20)
----------------- -----------------
Net land, buildings and improvements 383 504
Land held for sale 2,342 5,912
----------------- -----------------
Net properties 2,725 6,416
----------------- -----------------
Total assets $ 9,555 $ 11,673
================= =================
Liabilities:
Accounts payable and accrued expenses $ 1,521 $ 1,234
Accrued real estate taxes 67 186
Allowance for claims and liabilities 2,455 4,228
Unearned rents and deferred income 850 888
Other liabilities -- 1
----------------- -----------------
Total liabilities 4,893 6,537
----------------- -----------------
Commitments and Contingencies (Note 6) -- --
Partners' capital:
General Partner -- --
Class A Limited Partners - 2,142 units
authorized and issued and 2,092 outstanding at
June 30, 2005 and December 31, 2004 -- --
Class B Limited Partner 4,662 5,136
----------------- -----------------
Total partners' capital 4,662 5,136
----------------- -----------------
Total liabilities and partners' capital $ 9,555 $ 11,673
================= =================
The accompanying notes are an integral part of these financial statements.
1
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per unit data)
(Unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,
2005 2004 2005 2004
----------- ----------- ------------ ------------
INCOME:
Property sales $ 170 $ 749 $ 4,373 $ 3,864
Less: Cost of property sales 6 413 3,958 1,157
----------- ----------- ------------ ------------
GROSS PROFIT ON PROPERTY SALES 164 336 415 2,707
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Selling expenses 85 141 372 482
General and administrative expenses 582 875 1,199 1,701
Depreciation 1 13 2 25
Bad debt expense -- 45 100 45
Real estate taxes (22) (35) 20 36
Environmental expenses and other charges (699) 600 (399) 1,086
----------- ----------- ------------ ------------
TOTAL OPERATING EXPENSES (53) 1,639 1,294 3,375
----------- ----------- ------------ ------------
OPERATING INCOME (LOSS) 217 (1,303) (879) (668)
OTHER INCOME AND (EXPENSES):
Interest income 17 5 23 10
Interest expense -- (6) -- (23)
Rental income and earned rental lease income 34 50 83 447
Other income (misc) 9 -- 66 20
Gain on sale of building and improvements 430 -- 430 --
Management fee (94) (103) (197) (206)
----------- ----------- ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 396 (54) 405 248
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ 613 $ (1,357) $ (474) $ (420)
=========== =========== ============ ============
Net (loss) income allocated to
General Partner $ -- $ (7) $ -- $ 2
=========== =========== ============ ============
Net income (loss) allocated to
Class B Limited Partner $ 613 $ (470) $ (474) $ (422)
=========== =========== ============ ============
Net loss allocated to
Class A Limited Partners $ -- $ (880) $ -- $ --
=========== =========== ============ ============
Net loss per Class A
Limited Partnership Unit $ -- $ (0.42) $ -- $ --
=========== =========== ============ ============
Weighted average number of Class A Limited
Partnership Units outstanding 2,092 2,092 2,092 2,092
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
2
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the Six Months Ended June 30,
2005 2004
--------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (474) $ (420)
Adjustments reconciling net loss to net cash provided by (used in)
operating activities:
Land write off to cost of sales -- 108
Land held for sale NRV write-down -- 57
Gain on sale of buildings and improvements ( 430) --
Provisions for bad debts 100 45
Depreciation 2 25
Net change in allowance for claims and liabilities (1,773) 522
Net change in assets and liabilities:
Decrease in accounts receivable 427 184
Decrease in land held for sale 3,570 876
Increase (decrease) in accounts payable and accrued expenses 287 (1,077)
Net change in other assets and liabilities 121 (717)
--------- ----------
Net cash provided by (used in) operating activities 1,830 (397)
--------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of buildings and improvements 549 --
--------- ----------
Net cash provided by investing activities 549 --
--------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in restricted cash (2,500) --
--------- ----------
Net cash used in financing activities (2,500) --
--------- ----------
Net decrease in cash (121) (397)
Cash at beginning of period 1,450 3,926
--------- ----------
Cash at end of period $ 1,329 $ 3,529
========= ==========
NON-CASH ACTIVITIES:
Write off of furniture, fixtures and equipment and
the related accumulated depreciation $ -- $ 52
========= ==========
The accompanying notes are an integral part of these financial statements.
3
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 2004 Annual
Report on Form 10-K (the "2004 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the notes included in the
2004 Form 10-K and present interim disclosures as required by the SEC. The
accompanying unaudited 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.
1. Organization
Organization and Purpose
------------------------
Heartland 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 originally organized to
engage in the ownership, purchasing, development, leasing, marketing,
construction and sale of real estate properties. Heartland is now attempting to
sell its remaining real estate holdings. It is pursuing a claim it has against a
local government unit in connection with the acquisition by condemnation of a
property in Milwaukee, Wisconsin. Additionally, the Company's Class B Interest
is currently held by a wholly-owned subsidiary of Heartland Technology, Inc.
("HTI") and secures outstanding loans from the Company to HTI that HTI has
indicated it will be unable to repay. On June 15, 2005, HTI filed for
bankruptcy. The bankruptcy restructuring plan for HTI has received the requisite
creditor approvals and is scheduled for a confirmation hearing in front of the
bankruptcy court on August 23, 2005. If it is confirmed, the Class B Interest
will be returned to the Company in satisfaction of the loans from the Company to
HTI. In addition, the Company is undertaking to resolve its remaining
liabilities. Heartland's most significant liabilities are actual or contingent
environmental liabilities. Heartland is also involved in lawsuits with its
former Chief Executive Officer. The amount and timing of future cash
distributions will depend on generation of cash from sales and claims,
resolution of liabilities and associated costs.
HTI Interests, LLC, a Delaware limited liability company and sole general
partner of Heartland (the "General Partner" or "HTII"), is owned 99.9% by HTI, a
Delaware corporation formerly known as Milwaukee Land Company, and 0.1% by HTI
Principals, Inc., a Delaware corporation owned by four current members and one
former member of HTI's board of directors. CMC Heartland Partners, a Delaware
general partnership ("CMC"), is an operating general partnership owned 99.99% by
Heartland and 0.01% by HTII.
4
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth certain entities formed by Heartland since its
inception that currently hold real estate and other assets, the 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 III, LLC ("CMCIII") 1997 Owned Kinzie Station Phase I and Kinzie Station
Phase II
COMPANY DEVELOPMENT LOCATION OWNERSHIP
HDC Not Applicable 100% (1)
CMCIII Chicago, Illinois 100% (2)
(1) Stock wholly owned by Heartland.
(2) Membership interest owned by CMC.
2. Summary of Significant Accounting Policies
Consolidation
-------------
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCIII,
100% owned by CMC. All intercompany transactions have been eliminated in
consolidation.
Accounts Receivable
-------------------
The Company provides an allowance for doubtful accounts against the portion of
accounts receivable that is estimated to be uncollectible. Accounts receivable
in the consolidated balance sheets are shown net of an allowance for doubtful
accounts of $354,000 as of June 30, 2005 and December 31, 2004, respectively.
Fair Value of Financial Instruments
-----------------------------------
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair values
because of the short maturity of these financial instruments.
Revenue Recognition
-------------------
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.
5
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property
--------
Properties and improvements are carried at their historical cost. Depreciation
is provided for financial statement purposes over the estimated useful life of
the respective assets ranging from thirty one and one-half (31 1/2) years to
forty (40) years for building and improvements using the straight-line method.
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 in the six months ended June
30, 2005 that resulted in the recognition of an impairment loss. The Company
reviews its properties held for sale for impairment on a quarterly basis.
Reclassification
----------------
Certain reclassifications have been made to the prior period's financial
statements to conform with the current period presentation.
Restricted Cash
---------------
As of June 30, 2005 the Company had $2,500,000 of restricted cash. The
restricted cash is collateral for a letter of credit obtained to comply with a
court order discussed further in Footnote 6 below.
3. Liquidation of Heartland Partners, L.P.
The Company is attempting to sell its remaining real estate holdings with a view
towards winding up the Company and expects to develop a program for the next
phase of wind up over the next few months. Currently, the Company is evaluating
paying a third party to assume the Company's environmental liabilities and/or
purchasing insurance to cover its liabilities. Regardless of whether or not the
Company is successful in this regard, the Company may determine to dissolve and
liquidate the Company in the near future pursuant to the dissolution and
liquidation provisions of its partnership agreement or by filing for bankruptcy.
The Unitholders will not have control over the divestiture of the Company's
remaining assets or, if the partnership is dissolved or files for bankruptcy,
the liquidation process. The Company cannot make any assurance that changes in
its policies will serve fully the interests of all Unitholders or that under any
liquidation scenario the Unitholders will receive any liquidating distributions
of cash or other property, or if they do, that the distributions will reflect
the true value of the Units. The Company is working to resolve its remaining
liabilities, which primarily consist of environmental matters and a claim
against the Company by the former President and Chief Executive Officer of CMC,
Edwin Jacobson. In addition, the Company is pursuing recovery on the
Redevelopment Authority of the City of Milwaukee ("RACM") claim it has against
local governmental units in Wisconsin. The Company is also attempting to have
the Class B Interest currently held by HTI transferred to the Company as further
explained in Footnote 5, "Related Party Transactions--Claims Against HTI
Purchased by Heartland." Significant estimates are used in the preparation of
financial statements to value the Class B Interest, which represents the
collateral of the HTI note receivable owed to the Company and CMC, the
recoverability of the total cost of properties and the Company's environmental
liabilities. The amount and timing of any future cash distributions will depend
on generation of cash from sales and claims and the resolution of liabilities.
The Company has experienced recurring operating losses for the six months ended
June 30, 2005 and for the years ended December 31, 2004, 2003, and 2002 and
6
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
there can be no assurance that the amounts available from internally generated
funds, cash on hand, and sale of the remaining assets of the Company will be
sufficient to fund Heartland's anticipated operations and meet existing and
future liabilities. These losses, uncertainty as to the amount and timing of
additional compensation from the RACM claim, if any, and the uncertainty
surrounding such environmental liabilities and other claims, particularly the
Edwin Jacobson lawsuit, create uncertainties about the Company's ability to meet
existing and future liabilities as they become due. The Company has taken
certain steps, including the reduction of fixed overhead and conservation of
cash, in light of these uncertainties. The Company may be required to seek
additional capital in the form of bank financing; however, there is no assurance
that such bank financing will be available or, if available, will be on terms
favorable to the Company.
4. Real Estate Sale Activities
Property sales during the six months ended June 30, 2005 totaled $4,373,000.
These included the sale of 1.25 acres of land in Chicago, Illinois (Kinzie
Station Phase II) for $4,200,000, sale of the balance of the Company's Rockford,
Illinois property for $170,000, and various minor land held for sale parcels.
The Company donated a property in Deer Lodge, Montana to a local government
during the six months ended June 30, 2005. The Company did not receive any cash
for the donation but the local government assumed responsibility for any
environmental liabilities associated with the property.
During the six months ended June 30, 2005, the Company sold its 4,000 square
foot office space in Chicago, IL for $550,000, with a net gain on sale of
$430,000.
At June 30, 2005, the Company had remaining property and air rights at Kinzie
Station in Chicago, Illinois, of approximately 2.85 acres, a 20 acre property in
Glendale, Wisconsin, a five acre site in Minneapolis, Minnesota and
approximately 143 acres of land scattered over 9 states. The Company also owns
rights to lease or sell easements for fiber optics lines on a 70-mile commuter
rail system in the Chicago area. The Company receives 2/3 of any consideration.
5. Related Party Transactions
Management Agreement
--------------------
Heartland had a management agreement with HTII pursuant to which Heartland is
required to pay HTII an annual management fee in the amount of $413,000. The
management agreement terminated on June 27, 2005. Total management fee expense
for the six months ended June 30, 2005 was $197,000, of which $75,000 has been
paid. At June 30, 2005, the Company has accrued $122,000 of management fee
expense in accounts payable and accrued expenses.
Conflicts of Interest of General Partner and its Officers and Directors
The officers and directors of HTI, the officers of Heartland and the managers of
HTII, including Lawrence S. Adelson, Chairman of the Board of HTI and a Manager
of HTII, will not devote their entire business time to the affairs of Heartland.
The Heartland Partnership Agreement provides that (i) whenever a conflict of
interest exists or arises between the General Partner or any of its affiliates,
on the one hand, and Heartland, or any Unitholder on the other hand, or (ii)
whenever the Heartland Partnership Agreement or any other agreement contemplated
therein provides that the General Partner shall act in a manner which is, or
provide terms which are, fair and reasonable to Heartland, or any Unitholder,
the General Partner shall resolve such conflict of interest, take such action or
provide such terms, considering in each case the relative interests of each
7
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
party (including its own interest) to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interests, any customary
or accepted industry practices, and any applicable generally accepted accounting
practices or principles. Thus, unlike the strict duty of a fiduciary who must
act solely in the best interests of his beneficiary, the Heartland Partnership
Agreement permits the General Partner to consider the interests of all parties
to a conflict of interest, including the General Partner. The Heartland
Partnership Agreement also provides that, in certain circumstances, the General
Partner will act in its sole discretion, in good faith or pursuant to other
appropriate standards. The General Partner has sole authority over the timing
and amount of distributions as well as dissolution of the partnership.
Claims Against HTI Purchased by Heartland
-----------------------------------------
As of June 30, 2005 and December 31, 2004, HTI owed Heartland an aggregate of
$9,734,000, of which $8,464,000 relates to promissory notes issued in 2000 and
2001 (the "2000 Notes") and $1,270,000 relates to the Company's purchase of
certain notes from PG Oldco, Inc., a creditor of HTI ("PG Oldco Notes"). The
2000 Notes and the PG Oldco Notes are collateralized by a security interest in
the Class B Interest (the "Collateral"). Heartland has recorded an allowance for
doubtful accounts of approximately $7,334,000 and $7,234,000 on the 2000 Notes
and PG Oldco Notes receivable balance of $9,734,000 at June 30, 2005 and
December 31, 2004, respectively. An additional allowance for doubtful accounts
of $100,000 was recorded for the six months ended June 30, 2005 due to continued
operating costs above amounts estimated in prior periods. On June 15, 2005, HTI
filed for bankruptcy protection in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division. HTI has filed a plan of
liquidation under Chapter 11 of the federal bankruptcy laws, and the plan has
been accepted by requisite creditors entitled to vote on the plan. The
confirmation hearing has been scheduled for August 23, 2005. The plan includes a
settlement agreement under which, among other things, HTI will transfer all of
its rights to the Class B Interests to Heartland. Because of the anticipated
settlement, Heartland has determined that the amount due from affiliate should
reflect the value of the Class B Interest based on the estimated amount of
potential future cash distributions distributable in respect of the Class B
Interest upon a liquidation of Heartland (assuming that the Class B Interest is
not cancelled and remains outstanding). If the Class B Interest is acquired by
Heartland, the receivable amount in respect of the 2000 Notes and the PG Oldco
Notes reflected in the "Due from Affiliate" account will be reduced to zero, and
the Class B Interest and the Class B Interest's capital account balance will be
cancelled. If cancelled, the Class B Interest will no longer be entitled to
receive any distributions of cash or other property from Heartland. Although
Heartland's management believes it is unlikely, there can be no assurance that
the settlement agreement contained in the bankruptcy plan will be approved by
the bankruptcy court. Currently, Heartland is unable to foreclose on the Class B
Interest due to the automatic stay of the bankruptcy court. If the Class B
Interest is not cancelled, it will be entitled to receive distributions in
accordance with the terms of the partnership agreement. Additionally, if
approved, the HTI bankruptcy plan also requires Heartland to pay HTI $669,000.
Of this amount, Heartland has paid $75,000 as an offset against management fees
payable by Heartland during the six months ended June 30, 2005.
Other
-----
A senior partner of a law firm who provides services to the Company owns
approximately 7.5% of the stock of HTI. Lawrence S. Adelson, Chief Executive
Officer of CMC, owns 119,500 shares of HTI. Mr. Adelson is also the Chairman of
the Board of HTI and a Manager of HTII. In addition to Mr. Adelson, Richard P.
Brandstatter, a Manager of HTII and a consultant to the Company, is a director
of HTI.
8
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Legal Proceedings and Contingencies
At June 30, 2005 and December 31, 2004, Heartland's allowance for claims and
liabilities was approximately $2,455,000 and $4,228,000, respectively.
Krachtt Litigation
------------------
On September 21, 2004, the surviving spouse of an employee of a contractor
demolishing buildings on what was then Company owned property filed suit against
the Company, the contractor and the contractor's insurer in Milwaukee County,
Wisconsin Circuit Court alleging wrongful death of the employee and other
damages. The matter has been referred to the Company's insurer, which has
accepted the defense of this litigation.
Maples
------
Under the terms of a lot agreement with the Longleaf Associates Limited
Partnership ("LALP"), one of Heartland's subsidiaries was required to pay
$135,000, $250,000, $135,000 and $250,000 on April 1, 2002, November 1, 2002,
April 1, 2003, and November 1, 2003, respectively, to Maples, the owner and
operator of the golf course and club house located at the Longleaf Country Club
in Southern Pines, North Carolina. The four payments totaling $770,000 were not
made, which constituted an event of default under the lot agreement. The Company
believes Maples is in default of its obligations under the golf membership
agreements. In addition, LALP, the seller of the Longleaf lots, did not notify
the Company's subsidiary that it was in default. LALP would have been entitled
to seek specific performance and/or other remedies as provided for in the
membership agreement. However, due to its belief that Maples had breached the
membership agreement, the Company's subsidiary did not make these payments. On
June 19, 2003, Maples joined the Company's subsidiary as a defendant in a
lawsuit Maples filed against LALP in the North Carolina General Court of Justice
Superior Court Division of Moore County for breach of contract. Maples is
seeking $3,515,000 in compensatory damages from the defendants. On February 15,
2005, the litigation against the Company's subsidiary was dismissed.
Edwin Jacobson Lawsuit
----------------------
On August 19, 2002, the former President and Chief Executive Officer of CMC,
Edwin Jacobson, filed two lawsuits against the Company, CMC and certain officers
and/or managers of the General Partner. One of the lawsuits alleges CMC breached
the terms of his employment contract and that the officers and/or board members
wrongfully interfered with his contract. Jacobson is seeking compensatory and
punitive damages ($1,000,000 in salary and $11,000,000 in incentive
compensation). Jacobson asked the court to enforce his contract and enjoin the
Company from selling property or making distributions to the Unitholders until
the Company has appraised its properties and paid him according to the terms of
his employment contract. Jacobson's second lawsuit was for defamation. On
January 31, 2003, the Company filed motions to dismiss the amended lawsuits. On
May 29, 2003, the court dismissed, with prejudice, the defamation lawsuit
against the Company, CMC and certain officers and/or managers of the General
Partner. At the same time, the court dismissed, with prejudice, Jacobson's
motion to enjoin the Company from selling its real estate properties. Jacobson
also filed a motion for summary judgment on his contract claims, which the court
denied. Jacobson filed a motion for reconsideration, which was denied on April
8, 2005. CMC has filed a counterclaim alleging breach of fiduciary duty and a
motion to dismiss the claim for tortious interference with a contract. Jacobson
filed a motion for summary judgment on CMC's counterclaim alleging breach of
fiduciary duty, which was denied on April 8, 2005.
9
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 28, 2003, the Company filed suit against Jacobson in Delaware state
court to collect a note from Jacobson to the Company in the amount of $332,000,
which includes $16,000 of interest that has not been recorded in the Company's
consolidated financial statements. On July 8, 2003, the Delaware Court stayed
that action pending resolution of Jacobson's action against the Company.
CMC is vigorously defending itself against Jacobson's lawsuit and, in the
opinion of management, has valid defenses against the remaining lawsuit relating
to the Company's alleged breach of Jacobson's employment contract. At this time,
the probability that a liability will be incurred and the amount of any
potential liability cannot be determined. However, this litigation may not be
resolved in the Company's favor, and the Company may incur significant costs
associated therewith. If the Company is required to pay substantial amounts with
respect to the Jacobson litigation, the Company may not be left with any cash or
other property to distribute to the Unitholders. The parties have agreed to
voluntary, non-binding mediation. If the mediation is unsuccessful, the Company
expects that this matter will likely go to trial in the first half of 2006.
RACM
----
On July 30, 2003, the Company conveyed 142 acres of property in Milwaukee,
Wisconsin to the RACM in consideration of $3.55 million in lieu of condemnation.
The Company reserved the right to appeal the fair market value of the property
and filed that appeal on April 6, 2004, in Milwaukee County, Wisconsin Circuit
Court. The most recent appraisal performed on behalf of the Company opines that
the property had a fair market value of $15 million. There is no assurance that
a court will award that amount at trial or that RACM would offer that amount to
settle the litigation. The two most recent appraisals obtained by RACM conclude
that the property had a value of $3.7 million and ($925,000) respectively. A
court could find that the property was worth less than $3.55 million and order
the Company to return money to RACM. Any determination of fair market value and
award to the Company will be net of the $3.55 million which the Company has
already received. In the event of a court decision that determines the value of
the property to be more than 115% of $3.55 million, the Company will be entitled
to recover certain costs of the appeal.
Non-binding court-ordered mediation in this matter has been scheduled for
October 7, 2005. If a settlement is not reached, this matter will probably go to
trial in the second quarter of 2006.
Lite Yard
---------
Until August 8, 2005, CMC owned a 5 acre site in Minneapolis, Minnesota that is
impacted with arsenic and lead ("Lite Yard"). On April 29, 2004, a Response
Action Plan for the site was approved by the Minnesota Department of
Agriculture. The Company filed suit against US Borax Inc. ("Borax") on July 23,
2003, in the United States District Court for the District of Minnesota for
contribution. Borax, which discontinued operations in 1968, is a former operator
of a pesticide/herbicide facility on the property. This matter was settled
pursuant to a Confidential Settlement Agreement and Release dated September 27,
2004, between the Company and Borax. Pursuant to the settlement agreement, Borax
10
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
has agreed to pay a portion of the Company's past and future response costs at
the site. During the three months ended June 30, 2005, the Company received
$238,000 in payments from Borax reimbursing the Company for certain costs of the
Lite Yard remediation that the Company had paid before the Company and Borax
settled their dispute over responsibility for the costs of the Lite Yard
remediation. At June 30, 2005 and December 31, 2004, the Company's aggregate
allowance for claims and liabilities for this site was $767,000 and $1,588,000,
respectively. Of this amount, $622,000 was billed, but not yet paid and is
included in accounts payable, in respect of work related to the site through
June 30, 2005. The allowance for claims and liabilities for the Lite Yard
decreased at June 30, 2005 compared to December 31, 2004 due to payments made by
the Company and Borax for the remediation.
At June 30, 2005, the Company has recorded a $478,000 receivable for the portion
of these amounts due from Borax under the settlement agreement.
On September 3, 2004, the United States Environmental Protection Agency
("USEPA") issued an order ("Order") requiring the Company and Borax to remediate
arsenic in the soils of a nearby residential neighborhood on an emergency basis.
On January 24, 2005, the USEPA issued a general notice letter ("Letter") to the
Company and Borax requesting that the Company and Borax perform a remedial
investigation and feasibility study on the soils of the same nearby residential
neighborhood on a non-emergency basis for matters not covered by the Order.
Neither the Order nor the Letter are covered by the Confidential Settlement
Agreement and Release between the Company and Borax.
The Company offered the USEPA $300,000 to settle the Company's obligations under
the Order and Letter. The USEPA has not yet responded to the Company's offer.
The Company believes, based on USEPA publications, that the USEPA has provided
$1,500,000 for past and future remediation activities in the residential
neighborhood. This amount does not necessarily represent the entire cost of the
cleanup being undertaken by the USEPA. The entire cost could be higher or lower.
The USEPA could seek substantial penalties against the Company in addition to
remediation costs. The Company engaged an environmental engineering consultant
to review information available regarding the possible scope and cost of USEPA
activities. The consultant projected a range of possible costs of $2,927,000 to
$3,965,000. However, this estimate was based on limited data available to the
consultant. The Company has reserved $1,231,000 in connection with the Order and
Letter. This reserve amount takes into consideration the estimated range of
possible costs and the allocation of costs among PRPs for the on-site
remediation at the Lite Yard.
A former consultant for the Company at the Lite Yard, Exponent, Inc., filed suit
against the Company in Minnesota state court on January 27, 2005. The complaint
alleged that the Company owed Exponent $361,000 in unpaid consultant fees that
were previously recorded in accounts payable. CMC disputed the reasonableness of
Exponent's invoices. This dispute was settled on August 3, 2005, with CMC
agreeing to pay $140,000 and Borax agreeing to pay part of the unpaid fees. At
June 30, 2005, the Company had reduced its liability to $140,000 as a result of
the settlement agreement.
The Lite Yard was sold on August 8, 2005. The sale does not affect the Company's
obligation to complete the remediation.
11
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Miles City Yard
---------------
By letter dated June 10, 2004, the Montana Department of Environmental Quality
(the "DEQ") demanded that the Company perform a remedial investigation of a
railyard in Miles City, Montana previously owned and operated by the Milwaukee
Road. The Company has, for many years, been conducting a clean-up of a
substantial diesel fuel release at this site. On September 7, 2004, Trinity
Railcar Repair, Inc. ("Trinity") filed suit against the Company and CMC in
Custer County, Montana state court, for contribution under state environmental
law, for indemnification under sale agreements between the Company's
predecessors-in-interest and Trinity's alleged predecessors and for injunctive
relief prohibiting the Company from dissolving or making any distributions to
its Unitholders. On September 14, 2004, Trinity filed a motion for a preliminary
injunction to prohibit the Company from liquidating or making distributions to
its Unitholders. On January 10, 2005, the court held a hearing at which the
Company's engineering witness testified that the maximum cost of investigation
and remediation could be as much as $1,250,000. However, this estimate was not
based on any direct investigation of conditions at the site. On March 24, 2005,
the court ordered the Company to escrow cash, post a bond, or provide another
guarantee, of $2,500,000 to cover possible remediation and clean-up costs for
the site. The court did not make a determination as to the requirement for any
remediation, the costs of remediation or liability for any costs. The Company is
considering an appeal of this order and has posted a letter of credit in the
amount of $2,500,000 to comply with the terms of such order. The letter of
credit is currently secured with $2,500,000 of the Company's cash. The Company
expects to substitute one of its Kinzie Station properties as partial collateral
for the letter of credit. The Company, based on current review of the site,
believes that the range of costs of investigation under the June 10, 2004, DEQ
letter and completion of the ongoing diesel fuel remediation, could be between
$234,000 and $1,740,000. The Company's aggregate allowance for claims and
liabilities for this site (including costs of investigation, remediation and
legal fees relating to the litigation) is $592,000 and $618,000 at June 30, 2005
and December 31, 2004, respectively.
On August 16, 2005, the DEQ filed a motion in Montana district court to
intervene in the litigation Trinity has brought against the Company to allocate
liability at the Miles City, Montana facility. The motion seeks leave to file a
complaint asking, among other things, that both Trinity and CMC be held jointly
and severally liable for remediation of the facility.
Bozeman
-------
In 2001, the Company sold a 14 acre property to the City of Bozeman, Montana
that was known to be contaminated with asbestos ore. As part of the sale, the
City of Bozeman released the Company from all environmental liability. The City
of Bozeman performed a clean-up of the north half of the property. In September
2003, the Company received a letter from the DEQ requesting an investigation of
possible asbestos ore on the south half of the property sold to the City of
Bozeman and a neighboring property. By letter dated November 3, 2004, the
Company was notified by the DEQ that the City of Bozeman, Montana had initiated
a proceeding under the Montana Controlled Allocation of Liability Act ("CALA")
with regard to the sold property. In the administrative proceeding, the DEQ will
allocate environmental liability among potentially liable parties. The Company
has projected that the total cost of the remediation already performed by the
City of Bozeman plus additional remediation which may be required for the north
half of the property is approximately within a range from $912,000 to $920,000.
Additional studies by the City of Bozeman on the south half of the property
indicate that no further remediation will be required for the south half of the
property. The estimated range of costs for the neighboring property is $111,000
12
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to $176,000. The Company believes it has valid defenses to any CALA allocated
liability for the clean-up of the north half of the property and could assert a
claim against the City of Bozeman for liabilities for any clean-up of the south
half of the property. The Company has reserved an aggregate of $126,000 and
$332,000 at June 30, 2005 and December 31, 2004, respectively, for all claims
and liabilities associated with this property and the neighboring property. This
reserve amount reflects the ranges of costs for both on-site and off-site
remediation and the Company's limited liability to the City of Bozeman under the
terms of the sale of the property to the City of Bozeman. The reserve decreased
based on information from the City of Bozeman following their additional
investigation of the property in the six months ended June 30, 2005.
Other 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 DEQ has asserted that the Company is liable for some or all of the
investigation and remediation of certain properties in Montana sold by its
predecessor's reorganization trustee prior to the consummation of its
predecessor's reorganization. The Company has denied liability at certain of
these sites based on the reorganization bar of the Company's predecessor. The
Company's potential liability for the investigation and remediation of these
sites was discussed in detail at a meeting with the DEQ in April 1997. While the
DEQ has not formally changed its position, DEQ has not elected to file suit.
At two 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 Canadian Pacific Railroad, formerly known as the Soo Line Railroad Company,
has asserted that the Company is liable for, among other things, the remediation
of releases of petroleum or other regulated materials at six different sites
located in Iowa, Minnesota and Wisconsin that Canadian Pacific acquired from the
Company. The Company has denied liability based on the underlying sale
agreement. The environmental claims are all currently being handled by Canadian
Pacific, and the Company understands that Canadian Pacific has paid settlements
on certain of these claims. Because Canadian Pacific has been handling these
matters exclusively, the Company has made no determination as to the merits of
the claims and is unable to determine their materiality.
In November 1995, the Company settled a claim with respect to the so-called
"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. Heartland's allowance for claims and
liabilities for this site is $191,000 at June 30, 2005 and December 31, 2004. By
letter dated April 6, 2005, the lead PRP at this site offered to settle the
Company's future obligations for approximately $266,000. Additionally, the lead
PRP at this site previously made a demand for monitoring costs of $53,000
incurred through March of 2004. The Company has not paid any amounts to the PRP
in respect of monitoring costs for this site to date.
13
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 20, 2005, the Company transferred title to a property at Deer Lodge,
Montana to a local government which agreed to take over responsibility for and
release the Company from liability for environmental conditions related to the
property. The Company has reduced its reserve by $119,000 to $0 at June 30, 2005
for this site.
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 that issued policies to the
Milwaukee Road railroad 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.
7. Compensation and Benefits
Effective March 1, 2002, an employment agreement with Lawrence S. Adelson, Chief
Executive Officer of CMC, was approved by the HTII Board of Managers. The term
of the employment agreement was from March 1, 2002 to June 27, 2005 and his
salary is $200,000 per year. His incentive compensation is the economic (but not
tax) equivalent of ownership of 100,000 (non-voting) Heartland Class A
Partnership Units and is payable at the time of any distributions to the
Unitholders. The Phantom Units awarded under the incentive compensation plan are
accounted for in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations.
Compensation expense is recognized when the amount of the underlying
distribution is probable and estimable. No compensation expense related to these
Phantom Units has been recorded in the consolidated statements of operations for
the six months ended June 30, 2005 and 2004. The employment agreement has been
extended on a month-to-month basis following its expiration on June 27, 2005.
Effective January 1, 2002, the CMC Heartland Partners 2002 Incentive Plan ("2002
CMC Plan") was approved by the Company. The aggregate benefits payable under the
2002 CMC Plan shall be computed by multiplying 2% by the net proceeds from the
sale of certain land parcels for the period January 1, 2002 to December 31,
2004. Effective December 22, 2004, the 2002 CMC Plan was amended to extend to
the later of December 31, 2006, or the conclusion of litigation brought by the
Company against the RACM for recovery of the fair value of 142 acres of property
previously conveyed to RACM. One current and two former officers of the Company
are eligible for benefits under the 2002 CMC Plan. Total compensation expense
under the 2002 CMC Plan was $88,000 for the six months ended June 30, 2005,
which was recorded as a component of cost of property sales.
14
HEARTLAND PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In 2005 the Company entered into a separation and consulting agreement with Mr.
Brandstatter. Under the agreement, Mr. Brandstatter will receive an annual
consulting fee of $100,000 for ongoing consulting services during 2005 and can
receive $15,000 for assistance with any transition to a trustee for dissolution
or liquidation. Additionally, Mr. Brandstatter was paid a $45,000 bonus during
the first quarter of 2005, which was accrued at December 31, 2004, based upon
the achievement of certain criteria established by the General Partner.
8. Subsequent Events
As discussed in Footnote 6, on August 3, 2005, CMC settled its lawsuit with
Exponent as described above. CMC agreed to pay Exponent $140,000.
On August 8, 2005, CMC closed the sale of its Lite Yard property in Minneapolis,
MN for $490,000. The Buyer of the Lite Yard assumed responsibility for
environmental conditions at the site, if any, beyond the remediation being done
by the Company and Borax. The sale did not relieve the Company or Borax of any
of the costs reflected in the allowance for claims and liabilities for the Lite
Yard.
The bankruptcy restructuring plan for HTI has received the required creditor
approvals and is scheduled for a confirmation hearing in front of the bankruptcy
court on August 23, 2005. For further information, see Footnote 4, "Related
Party Transactions--Claims Against HTI Purchased by Heartland."
On August 16, 2005, the DEQ filed a motion in Montana district court to
intervene in the litigation Trinity has brought against the Company to allocate
liability at the Miles City, Montana facility. The motion seeks leave to file a
complaint asking, among other things, that both Trinity and CMC be held jointly
and severally liable for remediation of the facility. For further information,
see Footnote 6, "Legal Proceedings and Contingencies--Miles City Yard."
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This report includes forward-looking statements intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements generally can be identified by
phrases such as Heartland or the Company, or its management "believes,"
"expects," "anticipates," "foresees," "forecasts," "estimates," or other words
or phrases of similar import. Similarly, statements in this report that describe
the Company's plans, outlook, objectives, intentions or goals are also
forward-looking statements. Forward-looking statements are not guarantees of
future performance. They involve risks and uncertainties that are difficult to
predict. The Company's actual future results, actions, performance or
achievement of results and the value of the partnership Units may differ
materially from what is forecasted in any forward-looking statements. We caution
you not to put undue reliance on any forward-looking statement in these
documents. The Company does not undertake any obligation to update or publicly
release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this report.
Risk Factors
Real Estate Investment Risks; General Economic Conditions Affecting Real Estate
-------------------------------------------------------------------------------
Industry
--------
The Company faces risks associated with local real estate conditions in areas
where the Company owns properties. These risks include, but are not limited to:
liability for environmental hazards; changes in general or local economic
conditions; changes in real estate and zoning laws; changes in income taxes,
real estate taxes, or federal or local taxes; floods, earthquakes, and other
acts of nature; and other factors beyond the Company's control. The illiquidity
of real estate investments generally may impair the Company's ability to respond
promptly to changing circumstances. The inability of management to respond
promptly to changing circumstances could adversely affect the Company's
financial condition and ability to make distributions to the Unitholders.
The real estate industry generally 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. Sellers of real estate are
subject to various risks, many of which are outside the control of the seller,
including real estate market conditions, changing demographic conditions,
adverse weather conditions and natural disasters, such as hurricanes and
tornadoes, changes in government regulations or requirements and increases in
real estate taxes and other local government fees. The occurrence of any of the
foregoing could have a material adverse effect on the financial condition of
Heartland.
Environmental Liabilities
-------------------------
Under various federal, state and local laws, ordinances, and regulations, the
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances located on or in, or emanating
from, such property, as well as costs of investigation and property damages.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner or operator's ability
to sell or lease a property or borrow using the property as collateral. Other
statutes may require the removal of underground storage tanks. Noncompliance
with these and other environmental, health or safety requirements may result in
substantial costs to us or may result in the need to cease or alter operations
on the property and may reduce the value of the property or our ability to sell
it.
16
In addition, the Company acquired its real estate portfolio from the successors
to the Chicago, Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee Road")
under a Conveyance Agreement dated June 27, 1990 (the "Conveyance Agreement").
The Milwaukee Road emerged from reorganization in 1985. Under the Conveyance
Agreement, the Company agreed to assume certain environmental liabilities of the
Milwaukee Road that survived the Milwaukee Road's reorganization proceedings.
Environmental laws may impose liability on a previous owner or operator of a
property that owned or operated the property at a time when hazardous or toxic
substances were disposed on, or released from, the property. A conveyance of the
property, therefore, does not relieve the owner or operator from liability. The
Company cannot assure that environmental liability claims will not arise in the
future.
Heartland is subject to federal and state requirements for protection of the
environment, including those for discharge of hazardous materials and
remediation of contaminated sites. Heartland is in the process of assessing its
environmental exposure, including obligations and commitments for remediation of
contaminated sites and assessments of ranges and probabilities of recoveries
from other responsible parties. Because of the regulatory complexities and risk
of unidentified contaminants on its properties, the potential exists for
remediation costs to be materially different from the costs Heartland has
estimated. Some of the property owned by the Company consists of land formerly
used for railroad purposes. Other properties were leased to tenants that used
hazardous materials in their businesses. Any contamination of that property may
affect adversely the Company's ability to sell such property.
For a discussion of the amount and methodology used to determine the amount of
the Company's reserve for environmental liabilities and claims and certain risks
associated therewith, see "Summary of Significant Accounting Estimates - Reserve
for Environmental Liabilities".
Notes Receivable from HTI
-------------------------
HTI owes Heartland, in the aggregate, approximately $9,734,000 under the
promissory notes issued in 2000 and 2001 (the "2000 Notes") and notes purchased
by the Company's from notes from PG Oldco, Inc., a creditor of HTI (the "PG
Oldco Notes"), both of which are secured by the Class B Interest. Heartland has
recorded an allowance for doubtful accounts of approximately $7,334,000 related
thereto. See "Treatment of Certain Loans from HTI to Heartland" for more
information. On June 15, 2005, HTI filed for bankruptcy protection in the United
States Bankruptcy Court for the Northern District of Illinois, Eastern Division.
HTI has filed a plan of liquidation under Chapter 11 of the federal bankruptcy
laws, and the plan has been accepted by requisite creditors entitled to vote on
the plan. The confirmation hearing has been scheduled for August 23, 2005. The
plan includes a settlement agreement under which, among other things, HTI will
transfer all of its rights to the Class B Interests to Heartland. If the Class B
Interest is acquired by the Company, the receivable amount in respect of the
2000 Notes and the PG Oldco Notes reflected in the "Due from Affiliate" account
will be reduced to zero, and the Class B Interest and the Class B Interest's
capital account balance will be cancelled. If cancelled, the Class B Interest
will no longer be entitled to receive any distributions of cash or other
property from Heartland. Although Heartland's management believes it is
unlikely, there can be no assurance that the settlement agreement will be
approved by the bankruptcy court. Currently, Heartland is unable to foreclose on
the Class B Interests due to the automatic stay of the bankruptcy court. If the
Class B Interest is not cancelled, it will be entitled to receive distributions
in accordance with the terms of the Partnership Agreement. Additionally, if
approved, the HTI bankruptcy plan also requires Heartland to pay HTI $669,000.
Of this amount, Heartland has paid $75,000 as an offset against management fees
payable by Heartland during the six months ended June 30, 2005.
17
Pending Litigation
------------------
The Jacobson litigation may not be resolved in the Company's favor, and the
Company may incur significant costs associated therewith. If the Company is
required to pay substantial amounts with respect to the Jacobson litigation, the
Company may not be left with any cash or other property to distribute to the
Unitholders. See "Summary of Significant Accounting Estimates--Jacobson
Litigation" and Footnote 6 to the unaudited consolidated financial statements
for further information.
Access to Financing
-------------------
As of June 30, 2005, Heartland's total consolidated indebtedness was zero. There
can be no assurance that the amounts available from internally generated funds,
cash on hand and sale of assets will be sufficient to fund Heartland's
anticipated operations. Heartland may be required to seek additional capital in
the form of bank financing. 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 liquidation strategy and for other expenditures,
properties might be sold for far less than their market value. Any such
discounted sale could adversely affect Heartland's future results of operations
and future cash flows. However, management does not have any intention to
discount the sale of properties for far less than their market value.
The Company has obtained a $2.5 million letter of credit from LaSalle Bank, NA
to comply with an order of a state court in Montana in connection with
litigation over the Miles City Yard. The litigation is discussed in Footnote 6
to the unaudited consolidated financial statements. The Company has pledged $2.5
million of cash as collateral for the letter of credit.
Period-to-Period Fluctuations
-----------------------------
Heartland's sales activity varies from period to period, and the ultimate
success of this sales activity cannot always be determined from results in prior
periods. Thus, the timing and amount of revenues arising from this sales
activity 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 any future debt, and to meet working capital
requirements.
Potential Dissolution and/or Liquidation in Bankruptcy
------------------------------------------------------
The Company is attempting to sell its remaining real estate holdings with a view
towards winding up the Company and expects to develop a program for the next
phase of wind up over the next few months. Currently, the Company is evaluating
paying a third party to assume the Company's environmental liabilities and/or
purchasing insurance to cover its liabilities. Regardless of whether or not the
Company is successful in this regard, the Company may determine to dissolve and
liquidate the Company in the near future pursuant to the dissolution and
liquidation provisions of its partnership agreement or by filing for bankruptcy.
As part of any dissolution and liquidation, the Company will need to make
reasonable provisions to pay all claims and obligations, which include
contingent and conditional claims as well as unknown claims that may arise after
dissolution. Because the amount of reserve required is uncertain, the Company
may reserve a higher amount than necessary. The consequence is that Unitholders
may not receive any distributions, or if they do, the distributions may be lower
than the true value of the Units. Alternatively, the Company may determine to
dissolve and liquidate in the context of a bankruptcy proceeding if the Company
18
believes that such a proceeding would likely serve to maximize value for the
Company's Unitholders by providing greater certainty with respect to the
satisfaction of, or provision for, the Company's known and contingent
liabilities. However, even in the context of a bankruptcy proceeding, the
Company will still face uncertainty, especially with respect to the
environmental claims. Additionally, under any liquidation scenario, the
Unitholders will not have control over the divestiture of the Company's
remaining assets or the liquidation process. The Company cannot make any
assurance that changes in its policies will serve fully the interests of all
Unitholders or that under any liquidation scenario the Unitholders will receive
any liquidating distributions of cash or other property, or if they do, that the
distributions will reflect the true value of the Units.
The Company is working to resolve its remaining liabilities which primarily
consist of environmental matters and Edwin Jacobson's claim against the Company.
In addition, the Company is pursuing a condemnation claim against the
Redevelopment Authority of the City of Milwaukee ("RACM") and having its Class B
Interests returned to the Company in satisfaction of loans from the Company to
HTI. Significant estimates are used in the preparation of financial statements
to value the Class B Interest which represents the collateral of the HTI note
receivable owed to the Company and CMC, the recoverability of the total cost of
properties and the Company's environmental liabilities. The amount and timing of
any future cash distributions will depend on generation of cash from sales and
claims and the resolution of liabilities. The Company has experienced recurring
operating losses for the six months ended June 30, 2005 and the years ended
December 31, 2004, 2003, and 2002 and there can be no assurance that the amounts
available from internally generated funds, cash on hand, and sale of the
remaining assets of the Company will be sufficient to fund Heartland's
anticipated operations and meet existing and future liabilities. These losses,
uncertainty as to the amount and timing of additional compensation from the RACM
claim, if any, and the uncertainty surrounding such environmental liabilities
and other claims, particularly the Edwin Jacobson lawsuit, create uncertainties
about the Company's ability to meet existing and future liabilities as they
become due. The Company has taken certain steps, including the reduction of
fixed overhead and conservation of cash, in light of these uncertainties. The
Company may be required to seek additional capital in the form of bank
financing, however, there is no assurance that such bank financing will be
available or, if available, will be on terms favorable to the Company. If the
Company is not successful in obtaining sufficient capital to fund the
implementation of its liquidation strategy and for other expenditures,
properties might be sold for far less than their market value. Any such
discounted sale could adversely affect Heartland's future financial condition
and results of operations. However, management does not have any intention to
discount the sale of properties for far less than their market value.
Risks Related to the Class A Units
----------------------------------
The market value of the Class A units could decrease based on the Company's
performance, market perception and conditions. The market value of the Class A
units may be based primarily upon the market's perception of the Company's
current and future cash distributions, and may be secondarily based upon the
real estate market value of the Company's underlying assets. The market price of
the Class A units may be influenced by the distributions on the Class A units
relative to market interest rates. Rising interest rates may lead potential
buyers of the Class A units to expect a higher distribution rate, which would
adversely affect the market price of the Class A units. In addition, if the
Company were to borrow, rising interest rates could result in increased expense,
thereby adversely affecting the cash flow and the Company's ability to service
its indebtedness and make distributions.
19
The Class A units have been traded since June 20, 1990. The Company believes
that factors such as (but not limited to) announcements of developments related
to the Company's business, fluctuations in the Company's quarterly or annual
operating results, failure to meet expectations, results of pending litigation
(including the Company's pending suit against RACM and Trinity's suit against
the Company) and general economic conditions, could cause the price of the
Company's units to fluctuate substantially. In recent years the stock market has
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of the underlying companies. Such fluctuations could
adversely affect the market price of the Class A units.
The Class A units are currently traded on the American Stock Exchange under the
symbol "HTL". The Class A units are thinly traded. There are no assurances that
the Company will maintain its listing on the exchange. Additionally, the Company
may engage in a going private transaction as an interim step in its wind up plan
so that the Company would no longer be subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. If the Class A units should be
delisted from the exchange or if the Company engaged in a going private
transaction, it is likely that it could materially and/or adversely affect any
future liquidity in the Class A units.
Conflicts of Interest of General Partner and its Officers and Directors
-----------------------------------------------------------------------
The officers and directors of HTI, the officers of Heartland and the managers of
HTII, including Lawrence S. Adelson, Chairman of the Board of HTI and a Manager
of HTII, will not devote their entire business time to the affairs of Heartland.
The Heartland Partnership Agreement provides that (i) whenever a conflict of
interest exists or arises between the General Partner or any of its affiliates,
on the one hand, and Heartland, or any Unitholder on the other hand, or (ii)
whenever the Heartland Partnership Agreement or any other agreement contemplated
therein provides that the General Partner shall act in a manner which is, or
provide terms which are, fair and reasonable to Heartland, or any Unitholder,
the General Partner shall resolve such conflict of interest, take such action or
provide such terms, considering in each case the relative interests of each
party (including its own interest) to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interests, any customary
or accepted industry practices, and any applicable generally accepted accounting
practices or principles. Thus, unlike the strict duty of a fiduciary who must
act solely in the best interests of his beneficiary, the Heartland Partnership
Agreement permits the General Partner to consider the interests of all parties
to a conflict of interest, including the General Partner. The Heartland
Partnership Agreement also provides that, in certain circumstances, the General
Partner will act in its sole discretion, in good faith or pursuant to other
appropriate standards. The General Partner has sole authority over the timing
and amount of distributions as well as dissolution of the partnership.
SUMMARY OF SIGNIFICANT ACCOUNTING ESTIMATES
The Company's most significant accounting estimates relate to the net realizable
value of assets, potential environmental liabilities, the Jacobson litigation
and the treatment of certain loans from Heartland to the General Partner.
Net Realizable Value of Assets
------------------------------
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. There have been no events in the second quarter
of 2005 giving rise to recognition of impairment loss.
20
Reserve for Environmental Liabilities
-------------------------------------
Estimation of Amount of Reserve for Environmental Claims and Liabilities:
The Company evaluates the environmental liabilities associated with its
properties on a regular basis. The Company records an allowance, or reserve, for
known potential environmental claims and liabilities, including remediation,
legal and consulting fees, to the extent it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated. The
reserve amount does not include any estimated amounts for unknown claims and
liabilities. The Company estimates its reserve for known environmental claims
and liabilities independent from any claims the Company may have for recovery
against third parties, including from governmental sponsored clean-up funds. If
the Company cannot reasonably estimate the amount of an environmental claim or
liability, but (i) the Company's management is able to determine that the amount
of the liability is likely to fall within a range and (ii) no amount within that
range can be determined to be a better estimate than any other amount, then the
Company records the reserve at the minimum amount of the range. At June 30,
2005, the reserve for environmental claims and liabilities was $2,455,000, which
represents the minimum amount of the range of the Company's estimate of
environmental claims and liabilities. The upper range of the Company's
environmental claims and liabilities is estimated to be approximately $9,486,000
based on an estimate by outside consultants.
Actual Costs Likely to Exceed Amount of Reserve:
If the Company were to use a different approach than that described above, the
amount of the reserve could be materially higher. Additionally, the Company
believes it is likely that the actual amount of the Company's environmental
claims and liabilities, when fully resolved or provided for, will be higher than
the reserve amount because it is unlikely that, as a whole, such claims and
liabilities will be less expensive to resolve than the amount of the low end of
such range. Also, as noted above, the Company does not include in the amount of
the reserve any estimated amounts for unknown claims and liabilities. This means
that as new claims arise, the amount of the reserve will generally need to be
increased. For example, as the Company incurs environmental remediation and
other costs for new environmental claims, the Company pays for, and records as
an operating expense, the amount of such costs and accrues an environmental
reserve if necessary. New environmental claims have arisen periodically, so the
amount of the Company's reserve for environmental claims and liabilities has not
historically declined, but rather has remained flat or increased over time. The
reserve has declined significantly in the current period, however, primarily due
to expenditures on the Lite Yard and contributions to the clean up of the Lite
Yard by Borax. The donation of a property in Deer Lodge, Montana to a local
government and updated and lower estimates for Bozeman, Montana environmental
costs also factored into the reduction of the reserve.
The Company is attempting to sell its remaining real estate holdings with a view
towards winding up the Company. Regardless of whether or not these sales occur,
the Company may adopt a plan of dissolution and liquidation in the near future.
The Company expects to develop a program for the next phase of wind up over the
next few months. As part of any dissolution and liquidation, the Company will
have to make a provision for all of its potential environmental liabilities,
including known liabilities and unknown liabilities that are likely to arise or
become known within at least ten years after the date of dissolution. In
connection with any future dissolution and liquidation of the Company, the
Company may determine it to be in the best interests of the Company and the
Unitholders to purchase environmental liability insurance or to pay a third
party to assume the Company's environmental liabilities if it appears that the
cost to do so will likely be less than the cost of maintaining the Company's
overhead to resolve and manage the environmental claims and remediation process
21
going forward. The Company has had preliminary discussions with environmental
claims management firms regarding the potential cost at which such firms would
agree to assume the Company's known and unknown environmental liabilities. The
Company has also had discussions with a third party to take over a more limited
portfolio of environmental liabilities (excluding the Montana liabilities and
the Lite Yard offsite liabilities) and provide environmental insurance. At this
time, however, the Company has not yet determined whether it would be more cost
effective to undertake such an arrangement or to manage for its own account the
environmental claims and remediation process going forward.
Factors and Properties Affecting the Amount of the Company's Environmental
Liabilities:
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 the
Milwaukee Road or certain of the Milwaukee Road'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 the Milwaukee Road's lessees.
From time to time contaminants are discovered on property the Company now owns.
Some of these may have resulted from the historical activities of the Milwaukee
Road. In other cases the property was leased to a tenant who released
contaminants onto the property. The Company's property may also be polluted by a
release or migration of contaminants onto the Company's property by unrelated
third parties. The Company has not investigated all of its properties and does
not know how many of them may be contaminated.
The Company's practice when it sells land is to sell the property "as is, where
is" without any representation or indemnification for environmental conditions.
The Company has one active site, however, Miles City, Montana, where the
Milwaukee Road and its successor may have issued certain limited indemnities to
the buyer for specified environmental concerns. There are other cases in which
the Company has had a claim arising out of alleged contamination on sold
property. In some, but not all, of these instances, the Company has been
successful in asserting that such liabilities were discharged in the bankruptcy
proceedings of the Milwaukee Road.
The Company may be responsible for certain liabilities that arise from the
historical operations of the Milwaukee Road that have nothing to do with the
ownership of property. The Company has been, for example, named as a
"potentially liable party" or had claims asserted by a private parties in
landfill-clean-up cases in which there is an allegation that the Milwaukee Road
generated or transported materials to the landfill. Additional claims may arise
in the future. In certain of these cases, the Company has asserted that such
liabilities were discharged in the bankruptcy proceedings of the Milwaukee Road.
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 the Milwaukee Road's reorganization
trustee prior to the consummation of its reorganization. The Company has denied
liability at certain of these sites based on the reorganization bar of the
Milwaukee Road. The Company's potential liability for the investigation and
remediation of these sites was discussed in detail at a meeting with the DEQ in
April 1997. While the DEQ has not formally changed its position, the DEQ has not
elected to file suit.
22
At two 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.
Lite Yard
---------
Until August 8, 2005, CMC owned a 5 acre site in Minneapolis, Minnesota that is
impacted with arsenic and lead ("Lite Yard"). On April 29, 2004, a Response
Action Plan for the site was approved by the Minnesota Department of
Agriculture. The Company filed suit against US Borax Inc. ("Borax") on July 23,
2003, in the United States District Court for the District of Minnesota for
contribution. Borax, which discontinued operations in 1968, is a former operator
of a pesticide/herbicide facility on the property. This matter was settled
pursuant to a Confidential Settlement Agreement and Release dated September 27,
2004, between the Company and Borax. Pursuant to the settlement agreement, Borax
has agreed to pay a portion of the Company's past and future response costs at
the site. During the three months ended June 30, 2005, the Company received
$238,000 in payments from Borax reimbursing the Company for certain costs of the
Lite Yard remediation that the Company had paid before the Company and Borax
settled their dispute over responsibility for the costs of the Lite Yard
remediation. At June 30, 2005, the Company's aggregate allowance for claims and
liabilities for this site was $767,000. Of this amount, $622,000 was billed, but
not yet paid and is included in accounts payable, in respect to work related to
the site through June 30, 2005. The allowance for claims and liabilities for the
Lite Yard decreased at June 30, 2005 compared to December 31, 2004 due to
payments made by the Company and Borax for the remediation.
At June 30, 2005, the Company has recorded a $478,000 receivable for the portion
of these amounts due from Borax under the settlement agreement.
On September 3, 2004, the United States Environmental Protection Agency
("USEPA") issued an order ("Order") requiring the Company and Borax to remediate
arsenic in the soils of a nearby residential neighborhood on an emergency basis.
On January 24, 2005, the USEPA issued a general notice letter ("Letter") to the
Company and Borax requesting that the Company and Borax perform a remedial
investigation and feasibility study on the soils of the same nearby residential
neighborhood on a non-emergency basis for matters not covered by the Order.
Neither the Order nor the Letter are covered by the Confidential Settlement
Agreement and Release between the Company and Borax.
The Company offered the USEPA $300,000 to settle the Company's obligations under
the Order and Letter. The USEPA has not yet responded to the Company's offer.
The Company believes, based on USEPA publications, that the USEPA has provided
$1,500,000 for past and future remediation activities in the residential
neighborhood. This amount does not necessarily represent the entire cost of the
cleanup being undertaken by the USEPA. The entire cost could be higher or lower.
The USEPA could seek substantial penalties against the Company in addition to
remediation costs. The Company engaged an environmental engineering consultant
to review information available regarding the possible scope and cost of USEPA
activities. The consultant projected a range of possible costs of $2,927,000 to
$3,965,000. However, this estimate was based on limited data available to the
consultant. The Company has reserved $1,231,000 in connection with the Order and
Letter. This reserve amount takes into consideration the estimated range of
possible costs and the allocation of costs among PRPs for the on-site
remediation at the Lite Yard.
23
A former consultant for the Company at the Lite Yard, Exponent, Inc., filed suit
against the Company in Minnesota state court on January 27, 2005. The complaint
alleged that the Company owed Exponent $361,000 in unpaid consultant fees that
were previously recorded in accounts payable. CMC disputed the reasonableness of
Exponent's invoices. This dispute was settled on August 3, 2005, with CMC
agreeing to pay $140,000 and Borax agreeing to pay part of the unpaid fees. At
June 30, 2005, the Company had reduced its liability to $140,000 as a result of
the settlement agreement.
The Lite Yard was sold on August 8, 2005. The sale does not affect the Company's
obligation to complete the remediation.
Miles City Yard
---------------
By letter dated June 10, 2004, the DEQ demanded that the Company perform a
remedial investigation of a railyard in Miles City, Montana previously owned and
operated by the Milwaukee Road. The Company has, for many years, been conducting
a clean-up of a substantial diesel fuel release at this site. On September 7,
2004, Trinity Railcar Repair, Inc. ("Trinity") filed suit against the Company
and CMC in Custer County, Montana state court, for contribution under state
environmental law, for indemnification under sale agreements between the
Company's predecessors-in-interest and Trinity's alleged predecessors and for
injunctive relief prohibiting the Company from dissolving or making any
distributions to its Unitholders. On September 14, 2004, Trinity filed a motion
for a preliminary injunction to prohibit the Company from liquidating or making
distributions to its Unitholders. On January 10, 2005, the court held a hearing
at which the Company's engineering witness testified that the maximum cost of
investigation and remediation could be as much as $1,250,000. However, this
estimate was not based on any direct investigation of conditions at the site. On
March 24, 2005, the court ordered the Company to escrow cash, post a bond, or
provide another guarantee, of $2,500,000 to cover possible remediation and
clean-up costs for the site. The court did not make a determination as to the
requirement for any remediation, the costs of remediation or liability for any
costs. The Company is considering an appeal of this order and has posted a
letter of credit in the amount of $2,500,000 to comply with the terms of such
order. The letter of credit is currently secured with $2,500,000 of the
Company's cash. The Company expects to substitute one of its Kinzie Station
properties as partial collateral for the letter of credit. The Company, based on
current review of the site, believes that the range of costs of investigation
under the June 10, 2004, DEQ letter and completion of the ongoing diesel fuel
remediation, could be between $234,000 and $1,740,000. The Company's aggregate
allowance for claims and liabilities for this site (including costs of
investigation, remediation and legal fees relating to the litigation) is
$592,000 at June 30, 2005.
On August 16, 2005, the DEQ filed a motion in Montana district court to
intervene in the litigation Trinity has brought against the Company to allocate
liability at the Miles City, Montana facility. The motion seeks leave to file a
complaint asking, among other things, that both Trinity and CMC be held jointly
and severally liable for remediation of the facility.
Bozeman
-------
In 2001, the Company sold a 14 acre property to the City of Bozeman, Montana
that was known to be contaminated with asbestos ore. As part of the sale, the
City of Bozeman released the Company from all environmental liability. The City
of Bozeman performed a clean-up of the north half of the property. In September
2003, the Company received a letter from the DEQ requesting an investigation of
possible asbestos ore on the south half of the property sold to the City of
Bozeman and a neighboring property. By letter dated November 3, 2004, the
Company was notified by the DEQ that the City of Bozeman, Montana had initiated
a proceeding under the Montana Controlled Allocation of Liability Act ("CALA")
with regard to the sold property. In the administrative proceeding, DEQ will
allocate environmental liability among potentially liable parties. The Company
has projected that the total cost of the remediation already performed by the
24
City of Bozeman plus additional remediation which may be required for the north
half of the property is approximately within a range from $912,000 to $920,000.
Additional studies by the City of Bozeman on the south half of the property
indicate that no further remediation will be required for the south half of the
property. The estimated range of costs for the neighboring property is $111,000
to $176,000. The Company believes it has valid defenses to any CALA allocated
liability for the clean-up of the north half of the property and could assert a
claim against the City of Bozeman for liabilities for any clean-up of the south
half of the property. The Company has reserved an aggregate of $126,000 for all
claims and liabilities associated with this property and the neighboring
property. This reserve amount reflects the ranges of costs for both on-site and
off-site remediation and the Company's limited liability to the City of Bozeman
under the terms of the sale of the property to the City of Bozeman. The reserve
decreased based on information from the City of Bozeman following their
additional investigation of the property in the six months ended June 30, 2005.
Other
-----
The Canadian Pacific Railroad, formerly known as the Soo Line Railroad Company,
has asserted that the Company is liable for, among other things, the remediation
of releases of petroleum or other regulated materials at six different sites
located in Iowa, Minnesota and Wisconsin that Canadian Pacific acquired from the
Company. The Company has denied liability based on the underlying sale
agreement. The environmental claims are all currently being handled by Canadian
Pacific, and the Company understands that Canadian Pacific has paid settlements
on certain of these claims. Because Canadian Pacific has been handling these
matters exclusively, the Company has made no determination as to the merits of
the claims and is unable to determine their materiality.
In November 1995, the Company settled a claim with respect to the so-called
"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. At June 30, 2005, Heartland's allowance for
claims and liabilities for this site is $191,000. By letter dated April 6, 2005,
the lead PRP at this site offered to settle the Company's future obligations for
approximately $266,000. Additionally, the lead PRP at this site previously made
a demand for monitoring costs of $53,000 incurred through March of 2004. The
Company has not paid any amounts to the PRP in respect of monitoring costs for
this site to date.
On June 20, 2005, the Company transferred title to a property at Deer Lodge,
Montana to a local government which agreed to take over responsibility for and
release the Company from liability for environmental conditions related to the
property. The Company has reduced its reserve by $119,000 to $0 at June 30, 2005
for this site.
In addition to the environmental matters set forth above, there may be other
properties with environmental liabilities not yet known to the Company, with
potential environmental liabilities for which the Company has no reasonable
basis to estimate, or for which the Company believes it is not reasonably likely
to ultimately bear responsibility for 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 insurers that issued policies to the Milwaukee
Road 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.
25
Treatment of Certain Loans from HTI to Heartland
------------------------------------------------
As of June 30, 2005, HTI owed Heartland an aggregate of $9,734,000 of which
$8,464,000 relates to promissory notes issued in 2000 and 2001 (the "2000
Notes") and $1,270,000 relates to the Company's purchase of certain notes from
PG Oldco, Inc., a creditor of HTI ("PG Oldco Notes"). The 2000 Notes and the PG
Oldco Notes are collateralized by a security interest in the Class B Interest
(the "Collateral"). Heartland has recorded an allowance for doubtful accounts of
approximately $7,334,000 on the 2000 Notes and PG Oldco Notes receivable balance
of $9,734,000 at June 30, 2005. An additional allowance for doubtful accounts of
$100,000 was recorded for the six months ended June 30, 2005 due to continued
operating costs above amounts estimated in prior periods. On June 15, 2005, HTI
filed for bankruptcy protection in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division. HTI has filed a plan of
liquidation under Chapter 11 of the federal bankruptcy laws, and the plan has
been accepted by requisite creditors entitled to vote on the plan. The
confirmation hearing has been scheduled for August 23, 2005. The plan includes a
settlement agreement under which, among other things, HTI will transfer all of
its rights to the Class B Interests to Heartland. Because of the anticipated
settlement, Heartland has determined that the amount due from affiliate should
reflect the value of the Class B Interest based on the estimated amount of
potential future cash distributions distributable in respect of the Class B
Interest upon a liquidation of Heartland (assuming that the Class B Interest is
not cancelled and remains outstanding). If the Class B Interest is acquired by
Heartland, the receivable amount in respect of the 2000 Notes and the PG Oldco
Notes reflected in the "Due from Affiliate" account will be reduced to zero, and
the Class B Interest and the Class B Interest's capital account balance will be
cancelled. If cancelled, the Class B Interest will no longer be entitled to
receive any distributions of cash or other property from Heartland. Although
Heartland's management believes it is unlikely, there can be no assurance that
the settlement agreement contained in the bankruptcy plan will be approved by
the bankruptcy court. Currently, Heartland is unable to foreclose on the Class B
Interest due to the automatic stay of the bankruptcy court. If the Class B
Interest is not cancelled, it will be entitled to receive distributions in
accordance with the terms of the partnership agreement. Additionally, if
approved, the HTI bankruptcy plan also requires Heartland to pay HTI $669,000.
Of this amount, Heartland has paid $75,000 as an offset against management fees
payable by Heartland during the six months ended June 30, 2005.
Jacobson Litigation
-------------------
Edwin Jacobson, the former President and C.E.O. of CMC, has sued the Company
claiming that it owes him additional salary and incentive compensation based on
the terms of his employment contract. He has demanded $12,000,000 ($1,000,000
salary and $11,000,000 incentive compensation) in damages. The Company has
denied Mr. Jacobson's claims and has countersued to recover past payments made
to him and to collect $332,000 in principal and interest under a note Jacobson
made to the Company. The Company offered to settle the lawsuits in exchange for
forgiving Jacobson's debt to the Company. When it made the offer, the Company
established an allowance against the Note Receivable of $316,000. CMC has made
no other provision for this potential liability.
Results of Operations
Operations for the three and six months ended June 30, 2005 resulted in net
income of $613,000 and a net loss of ($474,000), respectively. The net income
and loss was allocated entirely to the Class B Limited Partner in accordance
with the Company's partnership agreement. Operations for the three and six
months ended June 30, 2004 resulted in a net loss of ($1,357,000) and
($420,000), respectively. After allocations to the Class B Limited Partner and
General Partner, there was a net loss of ($0.42) per Class A Unit for the three
months ended June 30, 2004.
26
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
Property Sales. Property sales decreased $579,000, or 77%, to $170,000 for the
three months ended June 30, 2005 from $749,000 for the three months ended June
30, 2004. Second quarter 2005 sales included the Company's remaining acreage in
Rockford, IL. During the second quarter of 2004, the Company sold part of its
Rockford, IL property, a seven acre site in Fife, WA and a large portfolio of
scattered land parcels.
Cost of Property Sales. Cost of property sales decreased $407,000 or 99%, to
$6,000 for the three months ended June 30, 2005 from $413,000 for the three
months ended June 30, 2004. The decrease was primarily the result of a
significant cost of sales recognized in connection with a sale of scattered land
parcels in the second quarter of 2004, and a carrying value of only $1,000 for
the Rockford, IL property during the three months ended June 30, 2005. The
Company's costs of sales can vary widely from period to period. The Company
typically sells small numbers of properties. Some of the properties have high
book values relative to sale price. This is usually because of expenditures for
planning, engineering, zoning, marketing and the like incurred during the time
the Company was developing properties as well as selling them. Other properties
have low cost bases.
Gross Profit on Property Sales. Gross profit on property sales decreased
$172,000, or 51%, to $164,000 for the three months ended June 30, 2005 from
$336,000 for the three months ended June 30, 2004. This increase was primarily
the result of lower sales activity in 2005.
Selling Expenses. Selling expenses decreased $56,000, or 40%, to $85,000 for the
three months ended June 30, 2005 from $141,000 for the three months ended June
30, 2004. This decrease was primarily the result of elimination of the Company's
internal sales function and lower consulting and commission costs associated
with the 2005 sales.
General and Administrative Expenses. General and administrative expenses
decreased $293,000, or 33%, to $582,000 for the three months ended June 30, 2005
from $875,000 for the three months ended June 30, 2004. This was primarily due
to lower overhead costs resulting from fewer employees in 2005.
Depreciation. Depreciation decreased $12,000, or 92%, to $1,000 for the three
months ended June 30, 2005 from $13,000 for the three months ended June 30,
2004. This was the result of the sale of office furniture and equipment during
2004.
Bad Debt Expense. Bad debt expense decreased $45,000, or 100%, to $0 for the
three months ended June 30, 2005 from $45,000 for the three months ended June
30, 2004. The Company wrote off $45,000 owed by NC One, LLC related to the sale
of the Longleaf Community on December 31, 2003 as uncollectible in the three
months ended June 30, 2004 but had no bad debts in the three months ended June
30, 2005.
Real Estate Taxes. Real estate taxes increased $13,000, or 37%, to ($22,000) for
the three months ended June 30, 2005 from ($35,000) for the three months ended
June 30, 2004. A sale of scattered land parcels in June 2004 in which the
purchaser assumed liability for all outstanding property taxes, resulted in
negative real estate tax expense in 2004. Sales of land for which there were
accrued real estate taxes in the second quarter of 2005 resulted in negative
real estate tax expense during the current period.
27
Environmental Expenses and Other Charges. Environmental expenses and other
charges decreased $1,299,000, or 217%, to ($699,000) for the three months ended
June 30, 2005 from $600,000 for the three months ended June 30, 2004. During the
three months ended June 30, 2005, the Company received reimbursement from Borax
for $238,000 related to past costs that the Company had spent at the Lite Yard
and settled a disputed bill from Exponent, an environmental engineering firm
that did consulting work in connection with the Lite Yard, which resulted in a
reduction of $221,000 from the previously recorded liability. In addition, the
Company reduced its reserve for the Bozeman, Montana site by $197,000 based on
additional studies conducted by the City of Bozeman. In the three months ended
June 30, 2004, the Company increased its environmental reserve for Lite Yard
on-site and off-site costs by $653,000.
Interest Income. Interest income increased $12,000, or 240%, to $17,000 for the
three months ended June 30, 2005 from $5,000 for the three months ended June 30,
2004. The increase was due to increased cash on hand.
Interest Expense. Interest expense decreased $6,000, or 100%, to $0 for the
three months ended June 30, 2005 from $6,000 for the three months ended June 30,
2004. This decrease was primarily the result of no outstanding debt during the
three months ended June 30, 2005.
Rental Income and earned rental lease income. Total rental income and earned
rental lease decreased $16,000, or 32%, to $34,000 for the three months ended
June 30, 2005 from $50,000 for the three months ended June 30, 2004.
Other Income. Other income increased $9,000, to $9,000 for the three months
ended June 30, 2005 from $0 for the three months ended June 30, 2004. The $
9,000 of other income included small non-recurring items not accounted for
elsewhere.
Gain on Sale of Buildings and Improvements. Gain on sale of buildings and
improvements increased by $430,000 to $430,000 for the three months ended June
30, 2005 from $0 for the three months ended June 30, 2004. The Company sold its
4,000 square foot office space in Chicago, Illinois in 2005 for net proceeds of
$549,000 resulting in a net gain of $430,000 in 2005 and had no sales of
buildings and improvements during the three months ended June 30, 2004.
Management fee. The management fee decreased $9,000, or 9%, to $94,000 for the
three months ended June 30, 2005 from $103,000 for the three months ended June
30, 2004. This was the due to the fact that the management agreement terminated
on June 27, 2005. The Company expects to enter into a new management agreement
with HTII, its General Partner, but does not anticipate paying a management fee.
Net Income. Net income increased $1,970,000, or 145%, to $613,000 for the three
months ended June 30, 2005 from a net loss of ($1,357,000) for the three months
ended June 30, 2004. This was primarily the result of changes in environmental
expense and increased gain on sales of buildings and improvements.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Property Sales. Property sales increased $509,000, or 13%, to $4,373,000 for the
six months ended June 30, 2005 from $3,864,000 for the six months ended June 30,
2004. This increase was primarily the result of the $4,200,000 sale of Kinzie
Station Phase II in 2005. Closings during the six months ended June 30, 2004
included approximately 2 acres of industrial land in Kinzie Station, Chicago,
Illinois; 6 acres of land at Petit Point in Milwaukee, Wisconsin, approximately
11,777 acres of land scattered over 12 states; and other land parcels.
28
Cost of Property Sales. Cost of property sales increased $2,801,000, or 242%, to
$3,958,000 for the six months ended June 30, 2005 from $1,157,000 for the six
months ended June 30, 2004. This increase was primarily the result of the costs
of sale recognized in connection with the sale of Kinzie Station Phase II. These
included incentive payments to certain current and former officers and payments
due to METRA Rail. However, the most significant factor was the total cost basis
of Kinzie Station II of $3,565,000. These costs did not affect net proceeds
received on the sale because they were primarily costs from previous planning,
design and marketing of the property. The Company's costs of sales can vary
widely from period to period. The Company typically sells small numbers of
properties. Some of the properties have high book values relative to sale price.
This is usually because of expenditures for planning, engineering, zoning,
marketing and the like incurred during the time the Company was developing
properties as well as selling them. Other properties have low cost bases.
Gross Profit on Property Sales. Gross profit on property sales decreased
$2,292,000, or 85%, to $415,000 for the six months ended June 30, 2005 from
$2,707,000 for the six months ended June 30, 2004. This decrease was primarily
the result of the high cost of sales for Kinzie Station Phase II which was sold
in 2005.
Selling Expenses. Selling expenses decreased $110,000, or 23%, to $372,000 for
the six months ended June 30, 2005 from $482,000 for the six months ended June
30, 2004. This decrease was primarily the result of elimination of the Company's
internal sales function and lower commission and consulting costs associated
with the 2005 sales.
General and Administrative Expenses. General and administrative expenses
decreased $502,000, or 30%, to $1,199,000 for the six months ended June 30, 2005
from $1,701,000 for the six months ended June 30, 2004. This was primarily due
to lower overhead resulting from fewer employees in 2005.
Depreciation. Depreciation decreased $23,000, or 92%, to $2,000 for the six
months ended June 30, 2005 from $25,000 during the six months ended June 30,
2004. This was the result of the sale of office furniture and equipment during
2004.
Bad Debt Expense. Bad debt expense increased $55,000, or 122%, to $100,000 for
the six months ended June 30, 2005 from $45,000 for the six months ended June
30, 2004. During the six months ended June 30, 2005, the Company wrote off an
additional $100,000 in connection with the HTI Notes. See "Treatment of Certain
Loans from HTI to Heartland" for more information. During the six months ended
June 30, 2004, the Company determined that the $45,000 owed by NC One, LLC
related to the sale of the Longleaf Community on December 31, 2003 was
uncollectible.
Real Estate Taxes. Real estate taxes decreased $16,000, or 44%, to $20,000 for
the six months ended June 30, 2005 from $36,000 for the six months ended June
30, 2004. The decrease resulted from owning fewer properties in 2005 compared to
2004.
Environmental Expenses and Other Charges. Environmental expenses and other
charges decreased $1,485,000 or 137%, to ($399,000) for the six months ended
June 30, 2005 from $1,086,000 for the six months ended June 30, 2004. During the
six months ended June 30, 2005, the Company received reimbursement from Borax
for $238,000 related to past costs that the Company had spent at the Lite Yard
and settled a disputed bill from Exponent, an environmental engineering firm
that did consulting work in connection with the Lite Yard, which resulted in a
reduction of $222,000 from the previously recorded liability. In addition, the
Company reduced its reserve for the Bozeman, Montana site by $205,000 for the
six months ended June 30, 2005. The reserved amount for Bozeman, Montana was
reduced based on additional studies conducted by the City of Bozeman. In the six
months ended June 30, 2004, the Company had added $653,000 to its environmental
reserve for Lite Yard on-site and off-site costs.
29
Interest Income. Interest income increased $13,000, or 130%, to $23,000 for the
six months ended June 30, 2005 from $10,000 for the six months ended June 30,
2004. The increase was due to increased cash following the closing of the Kinzie
Station II sale in 2005.
Interest Expense. Interest expense decreased $23,000, or 100%, to $0 for the six
months ended June 30, 2005 from $23,000 for the six months ended June 30, 2004.
This decrease was primarily the result of no outstanding debt during the six
months ended June 30, 2005. However, the Company paid a fee in March 2004 to
LaSalle National Bank related to the line of credit agreement.
Rental Income and earned rental lease income. Total rental income and earned
rental lease income decreased $364,000, or 81%, to $83,000 for the six months
ended June 30, 2005 from $447,000 for the six months ended June 30, 2004. This
decrease was the result of the Company recognizing $360,000 of deferred rental
income as rental income in January 2004 related to the sale of the Petit Point
property located near Milwaukee, Wisconsin to an unrelated third party. The
Company had received prepaid rent from a lease on this property that it was able
to retain as a condition of the closing.
Other Income. Other income increased $46,000, or 230%, to $66,000 for the first
six months of 2005 from $20,000 for the six months ended June 30, 2004. This was
the result of a fiber optics easement sale in the first quarter of 2005. Fiber
optics sales are sporadic and cause other income to vary when these sales are
closed.
Gain on sale of Buildings and Improvements. Gain on Sale of Buildings and
Improvements increased by $430,000 to $430,000 for the six months ended June 30,
2005 from $0 for the six months ended June 30, 2004. The Company sold its 4,000
square foot office space in Chicago, Illinois in 2005 for gross proceeds of
$549,000 resulting in a net gain of $430,000 in 2005 and had no sales of
buildings and improvements during the six months ended June 30, 2004.
Management fee. The management fee decreased $9,000, or 4%, to $197,000 for the
six months ended June 30, 2005 from $206,000 for the six months ended June 30,
2004. This was the due to the fact that the management agreement terminated on
June 27, 2005. The Company expects to enter into a new management agreement with
HTII, its General Partner, but does not anticipate paying a management fee.
Net Loss. Net loss increased $54,000, or 13%, to a net loss of ($474,000) for
the six months ended June 30, 2005 from net loss of ($420,000) for the six
months ended June 30, 2004. This was the result of lower gross profit on
property sales partially offset by lower operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for operating activities has been derived primarily from proceeds of
property sales, rental income and interest income offset by the payment of
environmental and other operating expenses. Cash was $1,329,000 at June 30,
2005, and $1,450,000 at December 31, 2004.
Net cash provided by (used in) operating activities was $1,830,000 and
$(397,000) for the six months ended June 30, 2005 and 2004, respectively. Cash
provided by operating activities in 2005 compared to cash used in operating
activities in 2004 increased by $2,227,000 which is primarily attributable to
net proceeds from the sale of Kinzie Station II, offset by payments made on the
Lite Yard project.
30
Cash flow from investing activities increased $549,000 to $549,000 in the first
half of 2005 from $0 in the six months ended June 30, 2004. This represents the
proceeds from the sale of the Company's Chicago, Illinois office space in 2005.
Cash flow from financing activities decreased $2,500,000 to ($2,500,000) for the
six months ended June 30, 2005 from $0 for the six months ended June 30, 2004.
This was the result of the collateral required for the letter of credit obtained
in connection with the Miles City Yard litigation.
No distributions were made during the six months ended June 30, 2005. As of June
30, 2005, the Class A Unitholders' capital account balance was $0, the Class B
Interest's capital account balance was $4,662,000, and the General Partner's
capital account balance was $0.
Proceeds from land sales and sales of buildings and improvements were $4,922,000
and $3,864,000 for the six months ended June 30, 2005 and 2004, respectively.
For the remainder of 2005 and 2006, the Company expects proceeds from property
sales to consist primarily of the sale of the remaining Kinzie Station North
acreage, remaining sites in Wisconsin and Minnesota, and 143 acres of scattered
land parcels and easements located in 9 states. On August 8, 2005, CMC closed
the sale of its property in Minnesota for $490,000.
The cost of property sales for the six months ended June 30, 2005 and 2004 was
$3,958,000, or 91% of sales proceeds, and $1,157,000, or 30% of sales proceeds,
respectively. The Company's cost of sales varies largely based on the book
values of properties sold. The Company's costs of sales can vary widely from
period to period. The Company typically sells small numbers of properties. Some
of the properties have high book values relative to sale price. This is usually
because of expenditures for planning, engineering, zoning, marketing and the
like incurred during the time the Company was developing properties as well as
selling them. Other properties have low cost bases.
Real Estate Sale Activities
At June 30, 2005 the Company had remaining property of approximately 4 acres at
Kinzie Station in Chicago, Illinois, a 5-acre property in Minneapolis, MN ("Lite
Yard"), a 20-acre property in Glendale, Wisconsin, and approximately 143 acres
of land and easements scattered over 9 states. On August 8, 2005, CMC closed the
sale of the Lite Yard for $490,000. The Company owns the right to market
easements for fiber optics lines on a 70 mile rail system in the Chicago area.
The Company receives 2/3 of the revenues from such easements.
Kinzie Station
Kinzie Station is a master-planned mixed use community on property owned by CMC
in Chicago's West Loop neighborhood. The Company's remaining residential site is
under contract for $2,850,000, contingent on the "vacation" of certain city
streets by the City of Chicago. The buyer is seeking to acquire by "vacation"
city streets and alleyways that run between the properties the buyer is
purchasing from the Company. The buyer has an agreement in principal with the
city to compensate the city for the vacation by donating other properties and
easements to the city. Additionally, the Company has an agreement, subject to
certain contingencies, to sell the other site for development of a grocery store
for $2,850,000. The Company expects these sales to close in 2005.
31
Menomonee Valley
The Company owned 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 had proposed a
mixed use development to include retail and entertainment uses complementary to
the baseball park as a recreational destination. The City of Milwaukee had
stated that it believed industrial development would be more appropriate for the
site, and the Redevelopment Authority of the City of Milwaukee ("RACM")
announced it would seek to acquire the Company's property through eminent domain
if necessary.
On July 30, 2003, the Company received $3,550,000 in cash and a release for all
environmental matters related to the property from RACM, and the Company
conveyed title to the property to RACM. The Company reserved the right to bring
suit for additional consideration. The Company exercised such right in April
2004 by filing suit in the Milwaukee County Circuit Court against RACM appealing
the condemnation award. The Company has obtained an outside appraisal in
connection with the litigation valuing the property at $15 million. RACM has had
two appraisals done. One values the property at $3.7 million; the other
concludes that the property had a negative value of ($925,000). Any additional
compensation received in the future will be recognized as income in the period
received. Court ordered, non-binding mediation has been scheduled for October 7,
2005. If a settlement is not reached, this matter will probably go to trial in
the second quarter of 2006.
Interest Rate Sensitivity
The Company's total consolidated indebtedness at June 30, 2005 was zero. As of
June 30, 2005, the Company did not have any other financial instruments for
which there was 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," "Access to Financing," "Economic and Other Conditions Generally"
and "Interest Rate Sensitivity." The Company is not subject to significant
foreign currency exchange rate risk, commodity price risk or other relevant
market price risks.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer has evaluated the Company's disclosure
controls and procedures as of the end of the period covered by this report and
has concluded that, except with respect to the matters discussed below, these
controls and procedures are effective as of the end of the period covered by
this report and are adequate to ensure that the information required to be
disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. As previously disclosed on Forms 12b-25
filed with the Securities and Exchange Commission, the Company has experienced
delays in the completion of its financial statements for the year ended December
31, 2004 and the accompanying annual report on Form 10-K and its financial
statements for the three months ended March 31, 2005 and the three and six
months ended June 30, 2005 and the accompanying quarterly reports on Form 10-Q
due, in part, to the resignation of its chief financial officer and the
resulting transition of the provision of accounting services by an independent
contractor. The Company is working diligently with such independent contractor
to streamline the processes involved in the preparation of its financial
statements in order to complete them within the time periods required by the
Securities and Exchange Commission's rules and forms.
32
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during the first six months of 2005 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
33
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 15, 2005, the litigation by Maples against the Company's subsidiary
was dismissed. The Company had not previously recorded a loss contingency for
this matter.
On March 24, 2005, in connection with the Miles City Yard litigation, the court
ordered the Company to escrow cash, post a bond, or provide another guarantee,
of $2,500,000 to cover possible remediation and clean-up costs for the site. The
Company is considering an appeal of this order and has posted a letter of credit
in the amount of $2,500,000 to comply with the terms of such order. On August
16, 2005, the DEQ filed a motion in Montana district court to intervene in the
litigation Trinity has brought against the Company to allocate liability at the
Miles City, Montana facility. The motion seeks leave to file a complaint asking,
among other things, that both Trinity and CMC be held jointly and severally
liable for remediation of the facility.
At June 30, 2005, Heartland's allowance for claims and liabilities was
approximately $2,455,000.
During the six months ended June 30, 2005, there have been no material
developments in the legal proceedings disclosed in the Company's Annual Report
on Form 10-K for the fiscal year ending December 31, 2004 since the filing
thereof on April 28, 2005. These legal proceedings are additionally discussed
above in Footnote 6--Legal Proceedings and Contingencies to the unaudited
consolidated financial statements of the Company for the six month period ended
June 30, 2005.
On August 3, 2005, the Company resolved a lawsuit with Exponent, Inc., a former
consultant with the Company at the Lite Yard. The complaint alleged that the
Company owed Exponent $361,000 in unpaid consultant fees. CMC disputed the
reasonableness of Exponent's invoices. This matter was settled on August 3, 2005
with CMC agreeing to pay $140,000 and US Borax, Inc. agreeing to pay part of the
unpaid fees.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
34
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------------------------------------------------------------
31.1* Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
*Attached hereto.
35
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 22, 2005
By: /s/ Lawrence S. Adelson
--------------------------------
Lawrence S. Adelson
Manager of HTI Interests, LLC,
General Partner
36
EXHIBIT INDEX
Exhibit No. Description
----------- -----------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
37