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 March 31, 2006
--------------------------------
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
Incorporation or Organization) Identification No.)
53 WEST JACKSON BLVD., SUITE 1150, CHICAGO, ILLINOIS 60604
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(Address of Principal Executive Offices) (Zip Code)
312/834-0592
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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 No X
------ ------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
[_] Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[_] Yes [X] No
----------------------
HEARTLAND PARTNERS, L.P.
MARCH 31, 2006
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION...........................................3
ITEM 1. FINANCIAL STATEMENTS......................................3
CONSOLIDATED BALANCE SHEETS.....................................3
CONSOLIDATED STATEMENTS OF OPERATIONS...........................4
CONSOLIDATED STATEMENTS OF CASH FLOWS...........................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.....................................................29
ITEM 4. CONTROLS AND PROCEDURES..................................29
PART II. OTHER INFORMATION..............................................30
ITEM 1. LEGAL PROCEEDINGS........................................30
ITEM 1A. RISK FACTORS.............................................30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS..........................................30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..........................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......30
ITEM 5 OTHER INFORMATION........................................30
ITEM 6. EXHIBITS.................................................31
SIGNATURES.....................................................32
EXHIBIT INDEX..................................................33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2006 2005
(unaudited)
--------- ---------
Assets:
Cash and cash equivalents $ 5,500 $ 1,160
Restricted cash 1,093 1,093
Accounts receivable (net of allowance of $354
at March 31, 2006 and December 31, 2005) 16 33
Prepaid and other assets 90 137
--------- ---------
Total 6,699 2,423
--------- ---------
Land 59 383
Land held for sale 947 1,569
--------- ---------
Net properties 1,006 1,952
--------- ---------
Total assets $ 7,705 $ 4,375
========= =========
Liabilities:
Accounts payable and accrued expenses $ 547 $ 1,011
Allowance for claims and liabilities 2,172 2,128
Unearned rents and deferred income 793 812
--------- ---------
Total liabilities 3,512 3,951
--------- ---------
Partners' capital:
General Partner 18 --
Class A Limited Partners - 2,142 units
authorized and issued and 2,092 outstanding at
March 31, 2006 and December 31, 2005 4,175 424
--------- ---------
Total partners' capital 4,193 424
--------- ---------
Total liabilities and partners' capital $ 7,705 $ 4,375
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per Unit data)
(Unaudited)
For the Three Months
Ended March 31,
----------------------
2006 2005
----------------------
INCOME:
Property sales $ 2,850 $ 4,203
Settlement of condemnation 3,250 --
------- -------
Total income 6,100 4,203
Less: Cost of property sales 1,121 3,952
------- -------
GROSS PROFIT 4,979 251
------- -------
OPERATING EXPENSES:
Selling expenses 260 287
General and administrative expenses 770 617
Bad debt expense -- 100
Real estate taxes 12 42
Depreciation -- 1
Environmental expenses and other charges 207 300
------- -------
TOTAL OPERATING EXPENSES 1,249 1,347
------- -------
OPERATING INCOME (LOSS) 3,730 (1,096)
OTHER INCOME AND (EXPENSES):
Interest income 4 6
Rental income 37 49
Other (expense) income (2) 57
Management fee to General Partner -- (103)
------- -------
TOTAL OTHER INCOME 39 9
------- -------
NET INCOME (LOSS) $ 3,769 $(1,087)
======= =======
Net income allocated to General Partner $ 38 $ --
======= =======
Net loss allocated to
Class B Limited Partner $ -- $(1,087)
======= =======
Net income allocated to
Class A Limited Partners $ 3,731 $ --
======= =======
Net income per Class A
Limited Partnership Unit $ 1.78 $ --
======= =======
Weighted average number of Class A Limited
Partnership Units outstanding 2,092 2,092
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
HEARTLAND PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the Three Months
Ended March 31,
-------------------
2006 2005
-------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,769 $(1,087)
Adjustments reconciling net income (loss) to net cash
provided by operating activities:
Depreciation -- 1
Bad debt expense -- 100
Net change in assets and liabilities:
Decrease in accounts receivable 17 267
Change in allowance for claims and liabilities 44 (563)
Decrease in land held for sale 946 3,569
(Decrease) increase in accounts payable and accrued
liabilities (464) 606
Net change in other assets and liabilities 28 53
------- -------
Net cash provided by operating activities 4,340 2,946
------- -------
Net increase in cash 4,340 2,946
Cash and cash equivalents at beginning of period 1,160 1,450
------- -------
Cash and cash equivalents at end of period $ 5,500 $ 4,396
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
Heartland Partners, L.P.
Notes to Consolidated Financial Statements for the
Three Months Ended March 31, 2006
(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 2005 Annual
Report on Form 10-K (the "2005 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the notes included in the
2005 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. Its partnership agreement provided
Heartland's existence would 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. On April 28, 2006, Heartland filed a petition to liquidate under
Chapter 11 of the federal bankruptcy laws.
Heartland is now attempting to dispose of its remaining real estate holdings.
The Company is additionally undertaking to resolve and pay or make provisions
for its remaining liabilities, most of which are actual or contingent
environmental liabilities. Heartland is also a party to litigation involving 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.
As of March 31, 2006, CMC/Heartland Partners Holdings Corp., a Delaware
corporation and sole general partner of Heartland (the "General Partner" or
"Holdings"), was owned by Lawrence Adelson, Chief Executive Officer of CMC
Heartland Partners, Richard Brandstatter, the Company's former President, George
Lightbourn and Thomas F. Power, Jr.. CMC Heartland Partners, a Delaware general
partnership ("CMC"), is an operating general partnership owned 99.99% by
Heartland and 0.01% by Holdings. Until November 14, 2005 the general partner was
HTI Interests, LLC ("HTI"). The general partner interest of HTI was transferred
to Holdings in connection with the Chaper 11 liquidation of HTI and the
resulting settlement.
6
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(1) ("HDC") 1993 General Partner of CMC Heartland Partners I,
Limited Partnership
(1) Wholly owned by Heartland Partners, L.P.\.
Except as otherwise noted herein, references in this report to "Heartland" or
the "Company" include CMC and HDC.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Heartland
Partners, L.P.; CMC, its 99.99% owned operating partnership; and HDC, its
wholly-owned corporate subsidiary. All intercompany transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Land sales are recognized when the following conditions are met: persuasive
evidence of an agreement exists; risks of ownership have passed to the buyer;
the Company's price to the buyer is fixed and determinable; and collectibility
is reasonably assured.
Property
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property. No event occurred during the first three months
of 2006 that resulted in an impairment loss being recognized.
Unearned Rents
Any unearned rents held by the Company are recognized as income ratably over the
life of the lease.
7
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. 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.
3. Real Estate Sale Activities
Property sales for the first quarter of 2006 were $2,850,000. The Company closed
the $2,850,000 sale of a 1.75-acre parcel of land, and associated air rights, in
Chicago, IL to Jewel, a supermarket company.
In addition, on March 2, 2006, the Company received $3,250,000 in settlement of
its appeal of a condemnation award. CMC had conveyed its property in Menomonee
Valley located in Milwaukee, Wisconsin to the Redevelopment Authority of the
City of Milwaukee ("RACM") and received $3,550,000 in connection with a July
2003 condemnation proceeding. It retained the right to appeal the purchase price
and to seek additional consideration. In April 2004, the Company filed suit
against RACM in the Milwaukee County Circuit Court appealing the compensation
paid by RACM. The proceeds are treated as operating income in the Company's
financial statements.
Property sales during the three months ended March 31, 2005 totaled $4,203,000
which consisted of the sale of 1.25 acres of land in Chicago, IL (Kinzie Station
Phase II) for $4,200,000 and various minor land held for sale parcels for
$3,000.
At March 31, 2006, the Company had remaining property at Kinzie Station in
Chicago, Illinois, of approximately 1.25 acres, and approximately 130 acres of
land scattered over 8 states.
4. Related Party Transactions
Conflicts of Interest of General Partner and its Officers and Directors
The officers and directors of Holdings, and the officers of Heartland; including
Lawrence S. Adelson, President of Holdings and Chief Executive Officer of CMC
Heartland, 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 of Heartland
("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
8
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Heartland had a management agreement with HTI pursuant to which Heartland was
required to pay HTI an annual management fee in the amount of $413,000. The
management agreement terminated on June 27, 2005. The fee for the three months
ended March 31, 2005 was approximately $103,000.
5. Legal Proceedings and Contingencies
At March 31, 2006 and December 31, 2005, Heartland's allowance for claims and
liabilities was approximately $2,172,000 and $2,128,000, respectively. The
increase in the allowance resulted from an increase in the reserve for off site
contamination in the area of the Lite Yard site in Minneapolis, Minnesota which
was partially offset by payments made by Heartland and Borax for remediation of
contamination at the Lite Yard site.
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 (In the state court case, Jacobson claimed damages of
$1,000,000 in salary and $11,000,000 in incentive compensation. In the
bankruptcy proceeding, he has claimed damages of $14,600,000). 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 that 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. On June 15, 2006, Jacobson's claims against Lawrence
Adelson, Robert Davis and John Torell, III were dismissed. Jacobson has filed an
appeal of the dismissals.
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
9
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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. In January 2006 a settlement was reached with RACM agreeing to pay CMC an
additional $3,250,000. The settlement was received in March 2006.
Lite Yard
---------
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 ("Settlement Agreement"), 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. At
March 31, 2006 and December 31, 2005, the Company's aggregate allowance for
claims and liabilities for this site was $4,000 and $20,000, respectively. Of
this amount, $2,400 was billed, but not yet paid, in respect of work related to
the site through March 31, 2006.
At March 31, 2006, the Company has recorded a $2,400 receivable for the portion
of these amounts due from Borax under the Settlement Agreement.
The Lite Yard property was sold to a third party in August 2005. The sale did
not affect the Company's environmental responsibility. The company believes that
with the exception of amounts estimated to be less than $5,000 required to be
paid in connection with obtaining regulatory compliance confirmation, it has now
completed the environmental remediation of the Lite Yard.
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, 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 Settlement Agreement.
The Company offered USEPA $300,000 to settle the Company's obligations under the
Order and Letter. USEPA has not yet responded to the Company's offer. The
Company believes, based on USEPA publications and a newspaper article, that
USEPA has provided $1,500,000 to $2,200,000 for past and future remediation
activities in the residential neighborhood. This amount does not necessarily
10
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
represent the entire cost of the cleanup being under taken by USEPA. The entire
cost could be higher or lower. 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 $3,374,000 to $3,948,000. However, this estimate was
based on limited data available to the consultant. The Company has reserved
$1,370,000 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 the Company and Borax for the on-site remediation at the Lite Yard.
Borax filed suit in federal court in Minneapolis, Minnesota for seeking
contribution from CMC in connection with any liability arising out of arsenic in
the nearby residential area. CMC is opposing Borax's lawsuit and believes it has
good defenses. The matter is stayed as a result of the Company's Chapter 11
filing.
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 Chicago,
Milwaukee, St. Paul and Pacific Railroad ("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 provided a letter of credit to comply with the terms of such
order. After the Company's Chapter 11 filing, DEQ petitioned the state court to
order the letter of credit be replaced with cash. The Company, based on current
review of the site believes that the range of costs of investigation and
remediation, including the ongoing diesel fuel clean-up could be between
$296,000 and $1,840,000. At March 31, 2006, 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 $296,000.
Discovery is pending in Trinity's state court lawsuit and trial is set for
mid-September, 2006. The Company brought a motion asserting, against certain of
Trinity's claims, the bar against claims from the Milwaukee Road bankruptcy
reorganization. That motion was denied. The Company plans to raise the bar
defense against certain of DEQ's claims as well.
11
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 south
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.
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
12
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
voluntarily cooperating with the appropriate agency by investigating the extent
of any such contamination and performing the appropriate remediation, if any.
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 March 31, 2006, 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.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company,
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers, which 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.
6. Compensation and Benefits
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 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 $115,000 for the three months ended March 31, 2006.
The total compensation expense under the 2002 CMC Plan for the same period in
2005 was $74,000.
The 2002 CMC Plan also provides compensation in the form of 30,000 "phantom
units" which are the economic, but not tax, equivalent of Class A Units.
Approximately $54,000 was reserved in the first quarter of 2006 for the 2002 CMC
Plan phantom units. The amount is based on a ratable allocation of the Company's
net profit for the quarter among the Class A Units outstanding, the General
Partner interest and all phantom units. No payments were made with respect to
the phantom units, however.
Under Mr. Adelson's employment agreement he has 100,000 "phantom units" as well.
Approximately $178,000 was reserved for Mr. Adelson's phantom units in the
second quarter of 2006. The amount is based on a ratable allocation of the
Company's net profit for the quarter
13
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
among the Class A Units outstanding, the General Partner interest and all
phantom units. Mr. Adelson did not receive any payment with respect to the
phantom units.
In 2005 the Company entered into a separation and consulting agreement with Mr.
Harrison. Under the agreement, Mr. Harrison received $50,000 in addition to his
salary during the first quarter of 2006.
7. Liquidation of Heartland Partners, L.P.
The Company's management intends to sell to unrelated third parties the
remainder of its properties and dissolve the partnership.
GENERAL INFORMATION
On April 28, 2006 (the "Petition Date"), the Company and certain of its
affiliated entities (collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"), in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division (the "Bankruptcy Court"). The Debtors'
cases are being jointly administered under the caption "In re CMC Heartland
Partners, L. P., et al., at Case No. 06-B-04769."
The Debtors are operating as "debtors-in-possession" under the jurisdiction of
the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. In general, as debtors-in-possession, the Debtors are
authorized under Chapter 11 to administer their bankruptcy estates, but may not
engage in transactions outside the ordinary course of business without the prior
approval of the Bankruptcy Court.
Through their bankruptcy proceedings, the Debtors intend to liquidate all
outstanding claims against the Debtors, including any environmental claims, and
to provide for a fair and equitable distribution of estate property to all
creditors.
The Automatic Stay. Subject to certain exceptions under the Bankruptcy
Code, the Debtors' Chapter 11 filings served to automatically stay the
continuation of any judicial or administrative proceedings or other actions
against the Debtors or their property including any actions to recover on,
collect or secure a claim that arose prior to the Petition Date. Upon the
request of Trinity, the Bankruptcy Court modified the automatic stay in order
for Trinity to proceed to liquidate its claim in the Montana state court (see
Note 5-Legal Proceedings and Contingencies). In addition, the Debtors expect
that plaintiffs in the Jacobson and Borax lawsuits will seek to have the
automatic stay modified by the Bankruptcy Court in order to liquidate their
claims against the Debtors (see Note 5-Legal Proceedings and Contingencies). The
automatic stay has not been modified with respect to any of these creditors such
that they might be able to collect on any judgment and thus frustrate the
bankruptcy process and Debtors do not expect any such modification of the
automatic stay.
Appointment of Creditors Committee. The United States Trustee for the
Northern District of Illinois has not appointed an official committee of
unsecured creditors in the Debtors' cases.
14
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Magnitude of Potential Claims. The Debtors have filed with the Bankruptcy
Court schedules and statements of financial affairs setting forth, among other
things, the assets and liabilities of the Debtors, subject to the assumptions
filed in connection therewith. All of the schedules will be subject to further
amendment or modification. Differences between amounts scheduled by the Debtors
and claims by creditors will be investigated and resolved in connection with the
claims resolution process. To that end, the Bankruptcy Court has fixed July 31
as the last date for non-governmental creditors and interest holders to timely
file proofs of claim or interest and October 25, 2006 as the last day for
governmental units to timely file proofs of claim. Accordingly, the ultimate
number and amount of allowed claims is not presently known, nor can the ultimate
recovery with respect to allowed claims be presently ascertained.
Based on pending litigation, the Debtors have scheduled Trinity and DEQ with
with contingent, unliquidated, disputed, unsecured, non-priority claims related
to the Miles City Montana railyard. Borax and USEPA have been scheduled with
significant claims in connection with the clean up of arsenic and other
materials in a neighborhood in Minneapolis, Minnesota near the Company's former
Lite Yard property. Edwin Jacobson has been scheduled with a contingent,
unliquidated, disputed, unsecured, non-priority claim of $14,600,000 in
connection with the termination of his employment contract.
Costs of Liquidation. The Company has incurred and will continue to incur
significant costs associated with its Chapter 11 proceedings. The amount of
these costs, which are being expensed as incurred, are expected to materially
affect results of operations. The Company believes, however, that the
proceedings will produce the best outcome for the Company and its creditors.
Effect of Filing on Creditors and Unitholders. Under the priority scheme
established by the Bankruptcy Code, unless creditors agree otherwise,
pre-petition liabilities and post-petition liabilities must be satisfied in full
before unitholders are entitled to receive any distribution or retain any
property under a plan of reorganization. The ultimate recovery to creditors
and/or unitholders, if any, may not be determined until confirmation of a plan
or plans of liquidation and, in all likelihood, not until all of the Debtors'
assets are fully liquidated and all claims finally determined. No assurance can
be given as to what values, if any, will be ascribed in the Chapter 11
proceedings to each of these constituencies or what types or amounts of
distributions, if any, they may receive.
As discussed below, if the requirements of Section 1129(b) of the Bankruptcy
Code are met, a plan of liquidation can be confirmed notwithstanding its
rejection by the Unitholders and notwithstanding the fact that such Unitholders
do not receive or retain any property on account of their equity interests under
the plan. Because of such possibilities, the value of our liabilities and
securities, including our partnership units, is highly speculative. We urge that
appropriate caution be exercised with respect to existing and future investments
in any of the liabilities and/or securities of the Debtors.
Process for Plan of Liquidation. On August 8, 2006, Debtors filed a plan and
disclosure statement ("Liquidation Plan").
15
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to being voted on by holders of impaired claims and equity
interests, a plan of reorganization must satisfy certain requirements of the
Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in
order to become effective. A plan of plan of liquidation will be deemed accepted
by holders of claims against and equity interests in the Debtors if (1) at least
one-half in number and two-thirds in dollar amount of claims actually voting in
each impaired class of claims have voted to accept the plan and (2) at least
two-thirds in amount of equity interests actually voting in each impaired class
of equity interests has voted to accept the plan.
Under certain circumstances set forth in Section 1129(b) of the Bankruptcy
Code, the Bankruptcy Court may confirm a plan even if such plan has not been
accepted by all impaired classes of claims and equity interests. A class of
claims or equity interests that does not receive or retain any property under
the plan on account of such claims or interests is deemed to have voted to
reject the plan. The precise requirements and evidentiary showing for confirming
a plan notwithstanding its rejection by one or more impaired classes of claims
or equity interests depends upon a number of factors, including the status and
seniority of the claims or equity interests in the rejecting class (i.e.,
secured claims or unsecured claims, subordinated or senior claims, preferred or
Class A Units). Generally, with respect to equity interests, such as the Class A
Units , a plan may be "crammed down" even if the unitholders receive no recovery
if the proponent of the plan demonstrates that (1) no class junior to the Class
A Units is receiving or retaining property under the plan and (2) no class of
claims or interests senior to the Class A Units is being paid more than in full.
Liquidating Trust. Under the Liquidation Plan a liquidating trust ("Trust") will
be created. The assets of the Company will be transferred to the Trust. The
assets consist essentially of cash, the fiber optics agreement and approximately
130 acres of land scattered over 8 states. LePetomane XVIII, Inc. will be
appointed trustee of the Trust ("Trustee"). Class A Unitholders are treated in
the Liquidating Plan as having rejected the Liquidating Plan and will not,
therefore, vote on the Liquidating Plan. The Company has proposed a schedule for
approval of the Liquidating Plan pursuant to which it would be confirmed by
November 2006. It is subject, however, to a vote by certain creditor classes and
approval by the Bankruptcy Court. Approval could take longer and the Liquidating
Plan could be modified from the Company's proposal.
Claims against the Company basically consist of the environmental claims and the
Jacobson claim, both of which are described above in Note 5 to the Notes to
Consolidated Financial Statements--Legal Proceedings and Contingencies, and
certain property tax claims. The value, if any, of the environmental claims,
particularly the Miles City and Lite Yard Offsite claims, and of the Jacobson
claim will be settled either through negotiated settlement or trial. After
claims have been liquidated, all allowed claims will be paid in full. If there
are assets remaining after payment of claims and costs and expenses, the assets
will be distributed to Class A Unitholders as reflected on the Company's books
as of the date of transfer to the Liquidating Trust.
LIABILITIES SUBJECT TO COMPROMISE
The following table summarizes the components of liabilities subject to
compromise included in our Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005:
16
HEARTLAND PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, DECEMBER 31,
(in thousands) 2006 2005
Allowance for claims and liabilities $2,172 $2,128
--------------------------------------------------------------------------------
$2,172 $2,128
================================================================================
Liabilities subject to compromise refers to pre-petition obligations, which may
be impacted by the Chapter 11 reorganization process. These amounts represent
our current estimate of known or potential pre-petition obligations to be
resolved in connection with our Chapter 11 proceedings.
Differences between liabilities we have estimated and the claims filed, or to be
filed, will be investigated and resolved in connection with the claims
resolution process. We will continue to evaluate these liabilities throughout
the Chapter 11 process and adjust amounts as necessary. Such adjustments may be
material. In light of the expected number of creditors, the claims resolution
process may take considerable time to complete. Accordingly, the ultimate number
and amount of allowed claims is not presently known.
8. Subsequent Events
On April 20, 2006, Lawrence Adelson, Richard Brandstatter, George Lightbourn,
and Thomas F. Power, Jr. sold their stock in Holdings to LePetomane XIX, Inc., a
company owned by Jay Steinberg for a total of $100. Richard Brandstatter, George
Lightbourn and Thomas F. Power, Jr. then resigned as directors of Holdings. On
May 2, 2006, LePetomane XIX sold its stock in Holdings to Mr. Adelson for $100.
On April 20, 2006, the board of directors authorized management to dissolve or
liquidate the Company. On April 28, 2006, the Company filed a petition to
liquidate under Chapter 11 of the Bankruptcy Code. The Company will be required
to use a liquidation basis of accounting prospectively in light of the filing.
In April 2006, the American Stock Exchange suspended trading of the Company's
Class A units. On June 13, 2006, the American Stock Exchange filed an
application with the SEC to delist the Class A units. The Company has not
opposed or appealed the application to delist the units.
On May 29, 2006, CMC closed the sale of Parcel B, a 1.25 acre parcel of land in
its Kinzie Station property in Chicago, Illinois for $2,850,000.
17
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 forecast 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.
Chapter 11 Proceedings
On April 28, 2006, the Company and certain of its affiliated entities
(collectively, the "Debtors") filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code, in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division (the "Bankruptcy Court"). The
Debtors' cases are being jointly administered under the caption "In re CMC
Heartland Partners, L. P., et al.," at Case No. 06-B-04769.
The Debtors are operating as "debtors-in-possession" under the jurisdiction of
the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. In general, as debtors-in-possession, the Debtors are
authorized under Chapter 11 to administer their bankruptcy estates, but may not
engage in transactions outside the ordinary course of business without the prior
approval of the Bankruptcy Court. Through their bankruptcy proceedings, the
Debtors intend to liquidate all outstanding claims against the Debtors,
including any environmental claims, and to provide for a fair and equitable
distribution of estate property to all creditors.
Risk Factors
Chapter 11 Bankruptcy
The Company filed for reorganization under Chapter 11 of the Bankruptcy Code on
April 28, 2006 and is subject to the risks and uncertainties associated with
Chapter 11 proceedings. Risks and uncertainties associated with the Company's
Chapter 11 proceedings include the following: (i) the actions and decisions of
the Company's creditors and other third parties with interests in the Company's
Chapter 11 proceedings may be inconsistent with those of Unitholders, (ii) the
ability of the Company to develop, prosecute, confirm and consummate a plan of
18
liquidation with respect to the Chapter 11 proceedings, (iii) the ability of the
Company to make distributions will depend on resolution of claims and
liabilities in the Chapter 11 proceedings, and (iv) the ultimate distribution,
if any, to Unitholders may not reflect the true value of the Units.
Because of the risks and uncertainties associated with the Company's Chapter 11
proceedings, the ultimate impact that events that occur during these proceedings
will have on the Company's business and financial condition cannot be accurately
predicted or quantified.
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. These risks
could adversely affect the Company's financial condition and ability to make
distributions to the Unitholders.
Owners 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.
Pending Litigation
The Jacobson litigation described above in Note 5 to the Notes to Consolidated
Financial Statements--Legal Proceedings and Contingencies 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.
As set out above in Note 5 to the Notes to Consolidated Financial
Statements--Legal Proceedings and Contingencies, Borax has sued the Company for
contribution in connection with possible liability for arsenic found in a
residential neighborhood near the Lite Yard in Minneapolis, Minnesota. The
Company has opposed the Borax motion. The matter is currently stayed by the
Company's bankruptcy filing.
Additionally, as discussed above in Note 5 to the Notes to Consolidated
Financial Statements--Legal Proceedings and Contingencies, a state court in
Montana issued an order requiring the Company to escrow cash, post a bond, or
provide another guarantee, of $2,500,000 to cover possible remediation and
clean-up costs on land formerly owned by the Company, or its
predecessor-in-interest, in Miles City, Montana. The Company is considering an
appeal of this order and has posted a letter of credit to comply with the terms
19
of such order. Following the Company's Chapter 11 filing, the DEQ filed a motion
seeking to have the letter of credit replaced by a cash escrow. The Company is
opposing the DEQ motion.
Liquidation of Assets
The Company has filed a voluntary petition for reorganization under Chapter 11
of the Bankruptcy Code. 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 the Unitholders will receive any
liquidating distributions of cash or other property.
The Company is working to resolve its remaining liabilities which primarily
consist of environmental matters and Edwin Jacobson's claim against the Company.
The amount and timing of any future cash distributions will depend on generation
of cash from sales and claims and the resolution of liabilities. 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 costs of liquidation and meet existing and future
liabilities.
Risks Related to the Class A Units
The Class A units are not currently traded on a stock exchange and the American
Stock Exchange has filed with the SEC to delist the Company's units. The Company
has not opposed the delisting.
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.
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
20
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. 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.
SUMMARY OF SIGNIFICANT ACCOUNTING ESTIMATES
The Company's most significant accounting estimates relate to the net realizable
value of assets, potential environmental liabilities, and the Jacobson
litigation.
Net Realizable Value of Assets
For properties held for sale, and 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 first quarter
of 2006 giving rise to recognition of an impairment loss.
Potential 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 March 31,
2006, the reserve for environmental claims and liabilities was $2,172,000, 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 $8,794,000
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
21
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. However, because new environmental claims arise
periodically, 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.
In connection with the liquidation of the Company under Chapter 11, 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.
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 railroad 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 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.
22
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.
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
Lite Yard is a 5 acre site in Minneapolis, Minnesota, formerly owned by CMC,
that is impacted with arsenic and lead. On April 29, 2004, a Response Action
Plan for the site was approved by the Minnesota Department of Agriculture. The
Company filed suit against 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 the Settlement Agreement.
Pursuant to the Settlement Agreement, Borax has agreed to pay a portion of the
Company's past and future response costs at the site. At March 31, 2006 and
December 31, 2005, the Company's aggregate allowance for claims and liabilities
for this site was $4,000 and $20,000, respectively. Of this amount, $2,400 was
billed, but not yet paid, in respect to work related to the site through March
31, 2006.
At March 31, 2006, the Company has recorded a $2,400 receivable for the portion
of these amounts due from Borax under the Settlement Agreement.
The Company sold the Lite Yard to a third party in August 2005. The sale did not
affect the Company's environmental responsibility. The company believes that
with the exception of amounts estimated to be less than $5,000 required to be
paid in connection with obtaining regulatory compliance confirmation, it has now
completed the environmental remediation of the Lite Yard.
On September 3, 2004, 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, 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 is covered by the Settlement Agreement.
The Company offered USEPA $300,000 to settle the Company's obligations under the
Order and Letter. USEPA has not yet responded to the Company's offer. The
Company believes, based on USEPA publications and a newspaper article, that
USEPA has provided $1,500,000 to $2,200,000 for past and future remediation
activities in the residential neighborhood. This amount does not necessarily
23
represent the entire cost of the cleanup being undertaken by USEPA. The entire
cost could be higher or lower. 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 $3,374,000 to $3,948,000. However, this estimate was
based on limited data available to the consultant. The Company has reserved
$1,370,000 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.
Borax has filed suit in federal court in Minneapolis, Minnesota for seeking
contribution from CMC in connection with any liability arising out of arsenic in
the nearby residential area. CMC is opposing Borax's lawsuit and believes it has
good defenses. The matter is stayed as a result of the Company's Chapter 11
filing.
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 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 to comply with the
terms of such order. Following the Company's Chapter 11 filing, DEQ filed a
motion to replace the letter of credit with a cash escrow. The Company has
opposed the DEQ motion. The Company, based on current review of the site,
believes that the range of costs of investigation and remediation, including the
ongoing diesel fuel clean-up, could be between $296,000 and $1,740,000. The
Company filed a motion to bar certain of the Trinity claims based on the
bankruptcy bar in the Milwaukee Road reorganization case. The motion was denied.
The Company intends to file a similar motion with respect to certain of the DEQ
claims. At March 31, 2006, 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 $296,000.
24
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 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 south 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.
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 March 31, 2006, 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.
In addition to the environmental matters set forth above, there may be other
properties (i) with environmental liabilities not yet known to the Company; (ii)
with potential environmental liabilities for which the Company has no reasonable
basis to estimate; (iii) or for which the Company believes it is not reasonably
25
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, which 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.
Edwin Jacobson, the former President and Chief Ececutive Officer of CMC, has
sued the Company claiming that it owes him additional salary and incentive
compensation based on the terms of his employment contract. In the court case he
has demanded $12,000,000 ($1,000,000 salary and $11,000,000 incentive
compensation) in damages. Jacobson filed a claim in the bankruptcy proceeding in
the amount of $14,600,000. 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 from Jacobson to the Company (this matter is
explained in greater detail in Note 5 to the Notes to Consolidated Financial
Statements-Legal Proceedings and Contingencies, above). 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 months ended March 31, 2006 and 2005 resulted in net
income of $3,769,000 and net loss of ($1,087,000) and income of $1.78 and $0.00
per Class A Unit, respectively. The loss for the three months ended March 31,
2005 was allocated to the Class B partnership interest in accordance with the
terms of the partnership agreement.
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Property Sales. Property sales increased $1,897,000 or 45% to $6,100,000 for the
three months ended March 31, 2006 from $4,203,000 for the three months ended
March 31, 2005. The Company closed the sale of a parcel of Kinzie Station land
to Jewel Stores for $2,850,000 and received $3,250,000 in settlement of the RACM
condemnation appeal in the first quarter of 2006. The Company sold a single
parcel of land in March 2005 comprising approximately 1.25 acres known as Kinzie
Station Phase II for $4,200,000.
Cost of Property Sales. Cost of property sales decreased $2,831,000, or 72% to
$1,121,000 for the three months ended March 31, 2006 from $3,952,000 for the
three months ended March 31, 2005. This decrease was the result of relatively
lower costs of property sales related to the Jewel sale compared to 2005's
Kinzie Station Phase II sale. There were substantial capitalized development
costs for Kinzie Station Phase II reflected in the first quarter 2005 results.
In addition, the RACM settlement had no related costs as they had been
recognized at the time of the initial taking of the property by eminent domain.
26
Gross Profit on Property Sales. Gross profit on property sales increased
$4,728,000, or 1,184% to $4,979,000 for the three months ended March 31, 2006
from $251,000 for the three months ended March 31, 2005. The Company had both
higher sales and lower costs of sales in the first quarter of 2006.
Selling Expenses. Selling expenses decreased $27,000, or 9% to $260,000 for the
three months ended March 31, 2006 from $287,000 for the three months ended March
31, 2005.
General and Administrative Expenses. General and administrative expenses
increased $153,000, or 25% to $770,000 for the three months ended March 31, 2006
from $617,000 for the three months ended March 31, 2005. The increase was
primarily due to the accrual of $232,000 for "phantom stock" rights held by
certain present and former officers of the Company. The reserve was calculated
by allocating the Company's net profit for the quarter ratably to the Class A
partners, the General Partner and the phantom units. No payment was made with
respect to the phantom units.
Real Estate Taxes. Real estate taxes decreased $30,000, or 71% to $12,000 for
the three months ended March 31, 2006 from $42,000 for the three months ended
March 31, 2005. The decrease was the result of the decrease in properties held
in 2006.
Environmental Expenses and Other Charges. Environmental expenses and other
charges decreased $93,000, or 31% to $207,000 for the three months ended March
31, 2006 from $300,000 for the three months ended March 31, 2005. This decrease
was primarily the result of the completion of the Lite Yard clean up.
Rental Income. Total rental income decreased $12,000, or 24% to $37,000 for the
three months ended March 31, 2006 from $49,000 for the three months ended March
31, 2005. This decrease was primarily the result of lower revenues from a
parking lease.
Management fee. Management fee expense decreased $103,000 or 100% to $0 for the
quarter ended March 31, 2006 from $103,000 for the first quarter 2005. This was
due to the expiration of the Management Agreement with HTI.
Net Income (loss). Net income increased by $4,856,000, or 447% to $3,769,000 for
three months ended March 31, 2006 from a net loss of ($1,087,000) for three
months ended March 31, 2005. This was the result of an increase in gross profit
on property sales in 2006 compared to 2005, and the $3,250,000 RACM settlement.
Liquidity and Capital Resources
The primary sources of cash for operating activities has been proceeds of
property sales, rental income and interest income. Cash was $6,593,000 at March
31, 2006 and $2,253,000 at December 31, 2005.
27
Net cash provided by operating activities was $4,340,000 and $2,946,000 for the
three months ended March 31, 2006 and 2005, respectively. Cash provided by
operating activities increased by $1,394,000 for the three months ended March
31, 2006 compared to the three months ended March 31, 2005, which is primarily
attributable to cash received from the sale of a parcel in Kinzie Station and
receipt of the RACM Settlement.
No distributions were made during the first quarter of 2006. As of March 31,
2006, the Unitholders' capital account balance was $4,175,000 and the General
Partner's capital account balance was $18,000.
Proceeds from property sales were $6,100,000 and $4,203,000 for the three months
ended March 31, 2006 and 2005, respectively. During the remainder of 2006, the
Company expects proceeds from property sales to consist primarily of the sale of
the remaining Kinzie Station North acreage for $2,850,000. The Company may also
receive proceeds from the sale of fiber optics easements across or along 83
miles of rail right of way running from downtown Chicago, Illinois, west to
Elgin, Illinois and northwest to Fox Lake, Illinois.
The cost of property sales for the three months ended March 31, 2006 and 2005
was $1,121,000, or 18% of sales proceeds and $3,592,000 or 94% of sales
proceeds, respectively. The Company expects the percentage cost of property
sales to be about 40% for the sale of the last Kinzie Station parcel.
On July 30, 2003, the Company conveyed 142 acres of property in Milwaukee,
Wisconsin to 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 parties reached a settlement of the appeal in January 2006 and the
Company received $3,250,000 in March 2006.
The company believes that with the exception of amounts estimated to be less
than $5,000 required to be paid in connection with obtaining regulatory
compliance confirmation, it has now completed the environmental remediation of
the Lite Yard.
Economic and Other Conditions
The real estate industry is highly cyclical and is affected by changes in local,
national, and global economic conditions and events, such as employment levels,
availability of financing, interest rates, consumer confidence and the demand
for housing and other types of construction. 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, increases in real estate taxes and other
local government fees and availability and cost of land. The occurrence of any
of the foregoing could have a material adverse effect on the financial condition
and results of operations of Heartland.
Interest Rate Sensitivity
28
As of March 31, 2006, the Company did not have any 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," 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
believes that the Company's controls and procedures 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,
in fact, recorded, processed, summarized and reported. The Company did not
timely file its Form 10Q for the first quarter of 2006.
Changes in Internal Control over Financial Reporting
Following the April 20, 2006, resignation of the Company's independent
directors, the Company does not have any independent directors and has an audit
committee comprised of a single, non-independent director.
29
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At March 31, 2006, Heartland's allowance for claims and liabilities was
approximately $2,172,000.
There have been no legal proceedings instituted against the Company during the
three months ended March 31, 2006. Material developments in the legal
proceedings disclosed in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 since the filing thereof on March 31, 2006 include
the RACM Settlement in January 2006. These legal proceedings are discussed above
in Note 5 to the Notes to Consolidated Financial Statements--Legal Proceedings
and Contingencies". In April 2006 the Company filed for liquidation under
Chapter 11 of the federal bankruptcy laws.
ITEM 1A. RISK FACTORS
The Company filed for reorganization under Chapter 11 of the Bankruptcy Code on
April 28, 2006 and is subject to the risks and uncertainties associated with
Chapter 11 proceedings. Risks and uncertainties associated with the Company's
Chapter 11 proceedings include the following: (i) the actions and decisions of
the Company's creditors and other third parties with interests in the Company's
Chapter 11 proceedings may be inconsistent with those of Unitholders, (ii) the
ability of the Company to develop, prosecute, confirm and consummate a plan of
liquidation with respect to the Chapter 11 proceedings, (iii) the ability of the
Company to make distributions will depend on resolution of claims and
liabilities in the Chapter 11 proceedings, and (iv) the ultimate distribution,
if any, to Unitholders may not reflect the true value of the Units.
Because of the risks and uncertainties associated with the Company's Chapter 11
proceedings, the ultimate impact that events that occur during these proceedings
will have on the Company's business and financial condition cannot be accurately
predicted or quantified.
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.
30
ITEM 6. EXHIBITS
Exhibit No. Description
10.1 Amendment No. 1 to Employment Agreement, dated January 26, 2006,
between CMC Heartland Partners and Lawrence S. Adelson. (Incorporated
herein by reference from the Company's Form 8-K filed with the
Commission on January 26, 2006.)
10.2 Amendment Number 2 to the Amended and Restated Agreement of Limited
Partnership of Heartland Partners, L.P., dated March 7, 2006, by
CMC/Heartland Partners Holdings, Inc., the General Partner.
(Incorporated herein by reference from the Company's Form 8-K filed
with the Commission on March 13, 2006.)
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.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
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, 2006 By /s/ Lawrence S. Adelson
-----------------------------
Lawrence S. Adelson
Chief Executive Officer
32
EXHIBIT INDEX
Exhibit No. Description
10.1 Amendment No. 1 to Employment Agreement, dated January 26, 2006,
between CMC Heartland Partners and Lawrence S. Adelson. (Incorporated
herein by reference from the Company's Form 8-K filed with the
Commission on January 26, 2006.)
10.2 Amendment Number 2 to the Amended and Restated Agreement of Limited
Partnership of Heartland Partners, L.P., dated March 7, 2006, by
CMC/Heartland Partners Holdings, Inc., the General Partner.
(Incorporated herein by reference from the Company's Form 8-K filed
with the Commission on March 13, 2006.)
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.