<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 3)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 1-11956
HEARTLAND TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1487580
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
547 West Jackson Boulevard, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 294-0497
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant, computed by reference to the last reported sales
price of the Registrant's common stock on the American Stock Exchange as of
March 25, 1998 ($17 per share), was approximately $25.8 million. On that date
there were 1,671,238 shares outstanding. For purposes of this computation it is
assumed that non-affiliates of the Registrant are all holders other than
directors and executive officers of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
<PAGE>
EXPLANATORY NOTE
This Amendment No. 3 on Form 10-K/A to the Annual Report on Form 10-K of
Heartland Technology, Inc. (the "Company"), amends and restates in its entirety
Item 8 of Part II solely to correct the amount reported as restricted retained
earnings in footnote 7.
PART II
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Heartland Technology, Inc.
We have audited the accompanying consolidated balance sheet of Heartland
Technology, Inc. (formerly Milwaukee Land Company) and Subsidiary as of December
31, 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for the year then ended. We have also audited the
accompanying statement of assets and liabilities of Heartland Technology, Inc.
as of December 31, 1996, and the related statements of operations and changes in
net assets for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 1, the Company changed its basis of presentation as of
January 1, 1997, from the fair value accounting basis used by investment
companies to a historical cost basis used by operating companies. Accordingly,
the 1997 financial statements are not comparable to previous years.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Technology, Inc. and Subsidiary at December 31, 1997, and the assets
and liabilities at December 31, 1996, the consolidated results of its operations
and its cash flows for the year ended December 31, 1997, and the results of its
operations and the changes in its net assets for each of the two years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
February 16, 1998, except for Note 14,
as to which the date is March 13, 1998
2
<PAGE>
Heartland Technology, Inc.
Consolidated Balance Sheet
(Operating Company)
December 31, 1997
(Dollars in Thousands, except share amounts)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,232
Accounts receivable, net of allowance for doubtful
accounts of $73 2,311
Due from affiliate 450
Inventories, net 1,660
Prepaid Expenses 139
-------
Total current assets 7,792
-------
Property and equipment:
Machinery and equipment 5,262
Furniture and equipment 29
Leasehold improvements 320
-------
5,611
Less accumulated depreciation 623
-------
4,988
-------
Other assets:
Deferred compensation expense 2,562
Deferred tax asset, net 262
Goodwill, net of amortization of $121 6,058
Debt issuance cost, net of amortization of $32 135
Other 230
Investment in partnerships 8,152
-------
Total assets $30,179
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,249
Accrued expenses and other liabilities 1,189
Line of credit 147
Current portion of long-term debt 1,591
Allowance for claims and liabilities 1,279
-------
Total current liabilities 5,455
-------
Long-term debt, less current portion 2,165
Notes payable 3,000
Stockholders' equity
Common stock, $.30 par value per share, authorized 10,000,000
shares, 1,671,238 sharesissued and outstanding 501
Additional paid-in capital 10,773
Retained earnings 8,285
-------
Total stockholders' equity 19,559
-------
Total liabilities and stockholders' equity $30,179
=======
</TABLE>
See accompanying notes.
3
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Income
(Operating Company)
Year ended December 31, 1997
(Amounts in Thousands except for per share amounts)
<TABLE>
<CAPTION>
<S> <C>
Net Sales $15,093
Cost of Sales 9,684
-------
Gross margin 5,409
Other income:
Interest income 272
Management fee from affiliate 425
Income from investment in partnerships 587
Miscellaneous, net 28
-------
Total other income 1,312
Other expenses:
Selling, general and administrative 3,119
Interest expense 416
Special compensation 438
-------
Total other expenses 3,973
-------
Income before taxes 2,748
Income taxes 773
-------
Net income $ 1,975
=======
Net income per share - basic and diluted $ 1.18
=======
Weighted average number of common shares outstanding 1,671
=======
</TABLE>
See accompanying notes.
4
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Stockholders' Equity
(Operating Company)
For the year ended December 31, 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Stockholder's
Stock Capital Earnings Equity
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $501 $10,773 $6,310 $17,584
Net income - - 1,975 1,975
---- ------- ------ -------
Balance at December 31, 1997 $501 $10,773 $8,285 $19,559
==== ======= ====== =======
</TABLE>
See accompanying notes.
5
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows
(Operating Company)
Year ended December 31, 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
<S> <C>
Operating activities:
Net income $ 1,975
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 776
Equity income in investment in partnerships (587)
Bad debt expense 73
Reserve for inventory obsolescence 475
Realized loss on sale of investments 110
Special compensation 438
Accretion amortization of (discount) premium on securities (79)
Changes in operating assets and liabilities:
Decrease in accounts receivables 661
Decrease in due from affiliate 25
Increase in inventories, net (61)
Increase in prepaid expenses and other assets (151)
Increase in deferred tax asset, net (262)
Decrease in accounts payable and accrued expenses (332)
Payment on claims and liabilities (30)
--------
Net cash provided by operating activities 3,031
Investing activities:
Purchases of property and equipment (966)
Net proceeds from sale of securities 9,505
Acquisition of company, net of cash acquired (11,896)
--------
Net cash used in investing activities (3,357)
Financing activities:
Line of credit, net (1,223)
Proceeds from issuance of long-term debt 4,675
Principal payments on long-term debt (919)
Debt issuance costs (167)
--------
Net cash provided by financing activities 2,366
--------
Increase in cash and cash equivalents 2,040
Cash and cash equivalents at beginning of year 1,192
--------
Cash and cash equivalents at end of year $ 3,232
========
</TABLE>
See accompanying notes.
6
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows (continued)
(Operating Company)
Year ended December 31, 1997
(Amount in Thousands)
<TABLE>
<CAPTION>
<S> <C>
Supplemental cash flow information:
Cash paid for interest $ 403
========
Cash paid for income taxes $ 1,000
========
Supplemental disclosure of noncash investing and financing activities:
Acquisition of company, net of cash acquired:
Operating assets acquired $ (9,825)
Goodwill acquired (6,179)
Deferred compensation (3,000)
Operating liabilities assumed 4,108
Notes payable issued 3,000
--------
Acquisition of company, net $(11,896)
========
</TABLE>
See accompanying notes.
7
<PAGE>
Heartland Technology, Inc.
Statement of Assets and Liabilities
(Investment Company)
December 31, 1996
(Amounts in Thousands, except per share amounts)
ASSETS
Investments at Value:
Nonaffiliates (cost $9,477) $ 9,535
Affiliates (cost $12,261) 7,589
-------
Total Investments 17,124
Cash 1,192
Receivables:
Management fees - affiliate $425
Accrued interest 169
Partnership distribution 41
Other 52
----
Total Receivables 687
Prepaid and deferred expenses and other assets 62
-------
Total assets 19,065
LIABILITIES
Directors and officers 12
Allowance for claims and liabilities 1,309
Other 160
-------
Total liabilities 1,481
-------
NET ASSETS (STOCKHOLDERS' EQUITY) $17,584
=======
COMMON SHARES OUTSTANDING 1,671
=======
NET ASSET VALUE PER COMMON SHARE $10.52
=======
See accompanying notes.
8
<PAGE>
Heartland Technology, Inc.
Statements of Operations
(Investment Company)
Years ended December 31, 1996 and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Investment Income:
Interest - Nonaffiliates $ 658 $ 705
Interest - Affiliates 107 -
Management fee from affiliate 425 425
Equity in Earnings - Partnership 7 -
Other 3 1
------- -------
Total Investment Income 1,200 1,131
Expenses:
Compensation and benefits 428 288
Director's fees and expenses 28 38
Professional fees 210 359
Advisory fees 20 21
Custodian fees 6 6
Taxes 20 47
Insurance 90 60
Facility expense allocation 37 40
General and administrative expenses 236 102
------- -------
Total Expenses 1,075 961
------- -------
Investment income before taxes 125 170
Provision for income taxes - 47
------- -------
Net Investment Income 125 123
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on sales of investments 57 (73)
Net change in unrealized appreciation (depreciation) on investments:
Nonaffiliates (31) 571
Affiliates (1,536) (6,245)
------- -------
Net change in unrealized depreciation on investments (1,567) (5,674)
------- -------
Net realized gain (loss) and unrealized depreciation on investments before taxes (1,510) (5,747)
Income tax benefit - (1,603)
------- -------
Net realized gain (loss) and unrealized depreciation on investments, net of tax (1,510) (4,144)
------- -------
Net decrease in net assets resulting from operations $(1,385) $(4,021)
======= =======
</TABLE>
See accompanying notes.
9
<PAGE>
Heartland Technology, Inc.
Statements of Changes in Net Assets
(Investment Company)
Years ended December 31, 1996 and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Operations:
Net investment income $ 125 $ 123
Net realized gain (loss) on sales of investments 57 (53)
Net change in unrealized depreciation on investments (1,567) (4,091)
------- -------
Net Decrease in Net Assets Resulting from Operations (1,385) (4,021)
Net Assets at Beginning of Year 18,969 22,990
------- -------
Net Assets at End of Year (including undistributed net
investment income of $10,334 at December 31, 1996 and
$10,207 at December 31, 1995) $17,584 $18,969
======= =======
See accompanying notes.
</TABLE>
10
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
1. Change in Operations and Basis of Presentation
Heartland Technology, Inc. (the "Company" or "HTI") (formerly known as Milwaukee
Land Company) filed an application on June 20, 1997, with the Securities and
Exchange Commission (the "Commission") to deregister as an investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). On December 31, 1997, the Commission issued an order acknowledging that
the Company had ceased to be an investment company.
The accompanying financial statements for the years ended December 31, 1996 and
1995 reflect the Company's prior status as a non-diversified closed-end
management investment company. As the basis of presentation has changed from the
fair value accounting basis used for investment companies to a historical cost
basis for operating companies as of January 1, 1997, in accordance with general
accepted accounting principles, the 1996 and 1995 financial statements are
presented separately. Certain reclassifications have been made to certain
components of stockholders' equity as of January 1, 1997.
2. Organization
HTI was organized as a corporation under the laws of the State of Iowa on
September 14, 1881. Prior to June 30, 1993, HTI was a wholly-owned subsidiary of
Chicago Milwaukee Corporation ("CMC") or its affiliates.
In 1990, the real estate assets held by HTI and certain other assets and
liabilities were contributed by HTI and CMC to two newly-organized partnerships-
Heartland Partners, L.P., a publicly-traded limited partnership of which HTI is
the general partner and also holds limited partner interests ("Heartland"), and
CMC Heartland Partners, a general partnership in which HTI and Heartland are the
general partners and HTI is the managing general partner ("CMC Heartland"). On
June 30, 1993, CMC distributed HTI's common stock to CMC's stockholders,
spinning off HTI as a separate publicly-held company. CMC has since ceased
operation and was dissolved on May 22, 1995.
Through its partnership interests in Heartland and CMC Heartland, the Company is
engaged in the business of development of real estate, including the properties
formerly owned by the Company. This real estate development business consists of
the leasing, development and sale of various commercial, residential and
recreational properties in Illinois, Georgia, Wisconsin, Montana, Minnesota and
Washington. The investment in Heartland and CMC Heartland (the "Partnerships")
is accounted for using the equity method since the Company has significant
influence over the Partnerships' operations. The difference in the cost of the
Company's investment in the Partnerships and the underlying equity in net assets
of $2,059,000 at January 1, 1997 is being amortized as CMC Heartland's assets
are sold. For the year ended December 31, 1997, $620,000 was amortized to
income. All significant intercompany balances and transactions have been
eliminated.
Since its spin-off from CMC in 1993, HTI had been engaged in a search to acquire
one or more operating businesses and had disclosed to its shareholders that
concentrating the assets of HTI in a few operating businesses would be in the
best interests of the Company's stockholders. All significant intercompany
balances and transactions have been eliminated.
In May 1997, HTI and PG Newco Corp ("PG Newco"), a wholly-owned subsidiary of
HTI, purchased substantially all of the assets, and assumed certain liabilities
of, PG Design Electronics, Inc. for $16,048,000. PG Design Electronics, Inc. was
engaged in the business of contract design and manufacture of electronics
assemblies for computer and computer
11
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
printer original equipment manufacturers ("OEMs"). PG Newco's name was then
changed to P.G. Design Electronics, Inc. ("PG Design").
The purchase price consisted of cash paid of $12,325,000, the issuance of notes
totaling $3,000,000 and acquisition related costs of $723,000. The notes payable
of $3,000,000 were issued to the seller, PG Design Electronics, Inc. The notes
are payable $1,500,000 in September 2000 and $1,500,000 in May 2002 and bear
interest at 8% per year; however, no amounts are due in the event the president
of PG Design Electronics, Inc. voluntarily leaves the employment of PG Design
prior to the scheduled maturity of the notes. The acquisition has been accounted
for as a purchase. For financial reporting purposes, of the $9,179,000 excess of
the purchase price over the fair value of net tangible assets acquired,
$6,179,000 has been recorded as goodwill and is being amortized on a straight
line basis over forty years and $3,000,000 has been recorded as deferred
compensation of which $1.5 million is being amortized over 3 years and $1.5
million is being amortized over 5 years, on a straight line basis. The
amortization of deferred compensation amounted to $438,000 for the year ended
December 31, 1997 and is reported as Special compensation in the Company's 1997
Consolidated Statement of Income.
PG Design designs and manufactures printed circuit board products for computer
applications on a contract basis. The company uses surface mount technology in
which electronic devices are soldered directly to the circuits on the surface of
the circuit board. PG Design's core products are memory modules. PG Design
specializes in the design, production and testing of "custom" memory modules for
high-end workstations. PG Design has also developed and manufactures a product
which is used in retail stores to demonstrate the capabilities of computer
printers.
The 1997 consolidated financial statements include the accounts of HTI and PG
Design. The results of operations and cash flows include the operations of PG
Design from May 31, 1997. All significant intercompany balances and transactions
have been eliminated.
Unaudited proforma results of operations for the Company for the calendar year
ended December 31, 1997, assuming the acquisition had occurred on January 1,
1997 are as follows:
Net sales $28,636,000
Net income $ 2,406,000
Basic earnings per share $ 1.44
Operating Company Statements (1997)
- -----------------------------------
3. Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits in banks and
investments with original maturities of three months or less when purchased. The
Company maintains cash balances with financial institutions which at times may
be in excess of the FDIC insurance limit.
12
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(b) Inventories
Inventories are stated at the lower of cost or market, on a first-in, first-out
basis (FIFO method).
(c) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the assets which range
from five to seven years for equipment and ten years for leasehold improvements.
Depreciation expense was $623,000 in 1997.
(d) Debt Issuance Costs
The cost to acquire debt is being amortized on a straight-line basis over the
term of the loan (3 years).
(e) Revenue Recognition
Security transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Interest income is recorded on the accrual basis and includes amortization of
premium and accretion of discount on securities owned.
For the manufacturing segment, revenue is recognized upon shipment.
(f) Use of Estimates
In the preparation of the Companys' financial statements in conformity with
general accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
(g) Fair Value of Financial Instruments
Management has considered fair value information relating to its financial
instruments at December 31, 1997. For cash and cash equivalents, the carrying
amounts approximate fair value. For variable rate debt that reprices frequently,
fair values approximate carrying values. For all remaining financial
instruments, carrying value approximates fair value due to the relatively short
maturity of these instruments.
(h) Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. The Company has no potentially dilutive securities as of
December 31, 1997.
13
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(i) Income Taxes
The Company accounts for income taxes in accordance with FASB Statement No. 109
"Accounting for Income Taxes". Under Statement 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
4. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: (Amounts in Thousands)
<S> <C>
Raw material $ 1,717
Work-in-process 201
Finished goods 217
-------------
2,135
Less: reserve for obsolescence 475
-------------
$ 1,660
=============
</TABLE>
5. Investment in Partnerships and Related Party Transactions
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and allocation
of taxable income and loss. The Company also has a .01% general partnership
interest in CMC Heartland which entitles the Company to .01% of CMC Heartland's
available cash for the distribution and an allocation of taxable income and loss
before distributions and allocations are made by Heartland. The Company also
owns the Class B limited partnership interest in Heartland (the "Class B
Interest"). In general, the Class B Interest entitles the holder to .5% of
Heartland's available cash for distribution and allocation of taxable income and
loss. In addition, items of deduction, loss, credit and expense attributable to
the satisfaction of Plan Liabilities (see Note 11) are specially allocated 99%
to the holder of the Class B Interest and 1% to the Company as the general
partner until the aggregate amount of all such items allocated to the Class B
Interest equals the aggregate capital contribution with respect to the Class B
Interest. If the aggregate amount of such items specially allocated to the
holder of the Class B Interest is less than the amounts contributed by such
holder to Heartland, such excess will be reflected in the capital account of the
Class B Interest.
The Company has a management agreement with CMC Heartland, pursuant to which CMC
Heartland is required to pay the Company an annual management fee in the amount
of $425,000. This management fee is included in Due from affiliate at December
31, 1997.
The Company paid CMC Heartland approximately $228,000 in 1997 for staff salary
and operating expense allocations, including HTI's portion of the office lease
expense.
14
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The condensed financial statements of Heartland as of December 31, 1997, and for
the year then ended, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Assets:
- -------
Cash and marketable securities $ 2,755
Receivables, net 254
Other assets 355
Net properties and investment in joint venture 23,474
-------
Total assets $26,838
=======
Liabilities:
- ------------
Accounts payable, accrued expenses and other liabilities $ 3,797
Allowed for claims and liabilities 2,169
Distribution payable 1,631
Loans payable 3,750
-------
Total liabilities 11,347
Partners Capital:
- -----------------
General partners 28
Class A partners 5,902
Class B partner 9,563
Unrealized holding loss (2)
-------
Total partners capital 15,491
-------
Total liability and partners capital $26,838
=======
</TABLE>
15
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C>
Revenues:
- ---------
Property sales $ 7,127
Less: cost of property sales 3,407
-------
Gross profit on property sales 3,720
Rental and other income 1,452
-------
Total net revenues 5,172
-------
Expenses:
- ---------
Selling, general and administrative 6,113
Real estate taxes 703
Management fee 425
Depreciation and amortization 94
-------
Total expenses 7,335
-------
Net income (loss) $(2,163)
=======
</TABLE>
6. Line of Credit
The Company has a line of credit with General Electric Capital Corporation
("GECC") under which it may borrow up to $7,000,000. Interest is based on a
floating index rate plus 2.75% (8.50% at December 31, 1997). Borrowings are
collateralized by accounts receivable and inventory and cross collateralized
with the equipment loan described in Note 7. Commitment fees of .375% are
charged based on the unused portion of the credit facility. Borrowings at
December 31, 1997 amounted to $147,000. The line of credit matures on May 29,
2000.
7. Long Term Debt
The Company has term loans payable to GECC in original principal amounts of
$4,000,000 and $674,500. The loans bear interest at one month LIBOR plus 3.62%
(9.34% at December 31, 1997) and requires monthly principal and interest
payments. The final balances are due June 1, 2000. The loans are secured by
machinery and equipment and cross collateralized with the line of credit
described in Note 6. The outstanding balances on these loans at December 31,
1997 totaled $3,756,000.
16
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Maturities of long term debt subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
1998 $ 1,591
1999 1,539
2000 626
--------------
$ 3,756
==============
</TABLE>
The revolving credit facility and term loan agreements contain covenants and
require the maintenance of various financial ratios. Under the terms of the line
of credit and term loans, PG Design is required to maintain a minimum fixed
charge ratio and minimum tangible net worth, is limited in incurring additional
indebtedness and making capital expenditures, and is restricted from making
certain payments. Retained earnings is restricted under the terms of the
agreements in the amount of $751,000 at December 31, 1997.
8. Leases
PG Design leases its office and plant facility under an operating lease at a
monthly rental of $13,000. The lease expires January 31, 2004 with an option to
purchase the building and property at the end of the term. In addition, the
Company is currently leasing office equipment under a non-cancelable lease
expiring in 2000.
The following is a schedule of future minimum rental payments required under the
above operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
1998 $ 169
1999 169
2000 163
2001 156
2002 156
Thereafter 169
--------------
$ 982
==============
</TABLE>
Rent expense for 1997 was $104,000.
17
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
9. Income Taxes
Income tax expense (benefit) attributable to income from continuing operations
differs from the amounts computed by applying the U.S. federal income tax rate
of 35 percent to pretax income from operations as a result of the following:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
Computed "expected" tax expense $ 962
Change in valuation allowance (217)
Other, net 28
-----
Total $ 773
=====
</TABLE>
The deferred tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
reported for income tax purposes at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
Deferred tax assets:
Basis differences in investment in partnerships $ 480
AMT credit carryforward 919
Inventory reserves 165
Reserve for discontinued operations 110
Reserve for claims, liabilities and reorganization 130
Compensation and benefits 259
Other, net 57
Total deferred tax assets 2,120
Less valuation allowance (1,639)
-------
Net deferred tax assets 481
Deferred tax liabilities:
Excess depreciation over book (149)
Excess tax goodwill amortization over book (70)
-------
Total deferred tax liabilities (219)
-------
Deferred tax asset, net $ 262
=======
</TABLE>
18
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
For the year ended December 31, 1997, the Company's provision for income taxes
is $773,000 which consists of $1,035,000 current tax expense offset by a
$262,000 deferred tax benefit. Included in the Company's deferred tax assets are
AMT carryforwards of approximately $919,000 which have no expiration date.
10. Major Customers
A significant part of the Company's manufacturing business is dependent on a few
customers. During the year ended December 31, 1997 three customers, namely NEC,
Hewlett Packard and Canon, accounted for approximately 97% of net sales
including approximately 17% shipped to locations in foreign countries. The loss
of any one of these customers could have a material adverse effect on the
Company.
11. Contingent Liabilities (Operating Company and Investment Company)
The Company, by reason of its serving as the general partner of the
Partnerships, is liable and responsible to third parties for such Partnerships'
liabilities to the extent the assets of such Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate businesses, in connection with the real estate
transfer the Partnerships have assumed primary responsibility and liability for
the resolution and satisfaction of most of the liabilities for claims remaining
under the plan of reorganization of the predecessor of CMC Real Estate
Corporation ("CMCRE"), certain other contingent liabilities with respect to the
properties transferred to CMC Heartland arising after the consummation of such
plan, and the costs and expenses in resolving such plan and other contingent
liabilities (collectively, the "Plan Liabilities"). Included in the Plan
Liabilities are known environmental liabilities associated with certain of the
properties transferred to the Partnerships arising out of the activities of the
Railroad or certain lessees or other third parties. Further environmental
obligations as yet unknown in respect of these properties may become due and
owing in the future. A majority of the known environmental matters stem from the
use of petroleum products, such as motor oil and diesel fuel, in the operation
of a railroad. The Company and/or the Partnerships have been notified by
government agencies of potential liabilities in connection with certain of these
real estate properties. Descriptions of the known material environmental matters
are included in the reports filed by Heartland with the Commission pursuant to
the provisions of the Securities Exchange Act of 1934, as amended (the "1934
Act").
On June 30, 1993, the Company assumed from CMC, its former parent corporation,
any obligations for which CMC was or might become liable (the "MLC Assumed
Liabilities") arising out of any matters existing on or occurring prior to June
30, 1993 other than (i) the Plan Liabilities, (ii) liabilities directly related
to CMC's business of investing and managing its investment securities, (iii) the
lawsuit then pending (and since resolved) against CMC relating to its preferred
stock, or (iv) any liabilities relating to federal, state, local or foreign
income or other tax matters.
In the opinion of management, reasonably possible losses from these matters
should not be material to the Company's results of operations or financial
condition.
12. Allowance for Claims and Liabilities
The Company assumed certain share redemption liabilities from CMCRE, then a
majority owned subsidiary of CMC. Preferred shares are redeemable at $100 per
share and common shares at $153.43. At December 31, 1997, 2,409 preferred shares
and 4,661 common shares are still outstanding for a liability of approximately
$956,000. The liability is being reduced as the minority shareholders submit
their shares for redemption.
19
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1997, 1996 and 1995
The Company has a $323,000 liability related to workers' compensation claims
incurred while operating under Milwaukee Land Company. This liability is being
reduced as payments are being made to the insurance provider.
13. Industry Segments
The Company currently is engaged in two lines of business: (1) manufacturing and
(2) real estate. The manufacturing business segment covers the Company's
manufacture of electronics assemblies on a contract basis primarily for the
computer and computer printer industries. The real estate business segment
covers the Company's investment in real estate partnerships (see Note 5 of Notes
to the Consolidated Financial Statements). As of and for the year ended December
31, 1997, certain information relating to the Company's business segments are
set forth in the table below:
<TABLE>
<CAPTION>
Income (loss) Depreciation
before 1997 and
Identifiable Sales and ----------- Amortization Capital
Business Segment Assets Other Income Taxes Expense Expenditures
---------------- ------ ------------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Manufacturing(1) $21,297,000 $15,093,000 $ 2,885,000 $776,000 $966,000
Real estate 8,602,000 1,012,000 1,012,000 - -
Corporate 280,000 300,000 (1,149,000) - -
----------- ----------- ----------- -------- --------
Total Company $30,179,000 $16,405,000 $ 2,748,000 $776,000 $966,000
=========== =========== =========== ======== ========
</TABLE>
(1) Represents PG Design from May 31, 1997 through December 31, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. Accordingly, the Company plans to adopt SFAS
No. 131 with the fiscal year ending December 31, 1998. SFAS No. 131 does not
have any impact on the financial results or financial condition of the Company,
but will result in certain changes in required disclosures of segment
information.
14. Potential Acquisitions
In September 1997, the Company signed a letter of intent to acquire a company,
which provides specialty services to the printed circuit board industry, for
approximately $7,250,000. Closing is contingent on the execution of final
agreements and financing.
On March 13, 1998, the Company and PG Design signed a letter of intent for PG
Design to acquire the assets of a company which owns patented technology for
plating copper circuits on a ceramic substrate. This technology may provide for
circuit densification and thermal dissipation. The price is approximately $1.6
million. As part of its due diligence, PG Design and the seller agreed that PG
Design would operate the plant for a limited time. PG Design is operating the
plant to determine whether cost, operating, marketing and financial projections
are realistic. PG Design is to receive all revenues from products shipped by
this company after January 31, 1998. On or before March 13, 1998, PG Design paid
$449,600 for the costs of this due diligence operation. PG Design is paying
stipulated amounts until the transaction is closed or terminated. Closing of
this acquisition is subject to negotiation of a final contract.
20
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1997, 1996 and 1995
15. Subsequent Events
(a) Non-qualified Stock Option and Stock Appreciation Rights
On May 27, 1997, HTI stockholders approved the 1997 Incentive and Capital
Accumulation Plan (the "Plan"). Pursuant to the Plan, on January 2, 1998, the
compensation committee of the Board of Directors of the Company granted (i) non-
qualified stock options for 50,000 shares of common stock and stock appreciation
rights ("SAR") with respect to 25,000 shares of common stock to Peter G.
VanHeusden; (ii) non-qualified stock options for 50,000 shares of common stock
and SARs with respect to 25,000 shares of common stock to Edwin Jacobson; and
(iii) SARs with respect to 25,000 shares of common stock to Frank L. Reed. The
benefits granted to Edwin Jacobson will vest on May 30, 1998. The benefits
granted to Peter G. VanHeusden and Frank L. Reed will vest on May 30, 2002. The
exercise price of the non-qualified stock options and the SARs is $16.625 per
share.
(b) 401(k) Plan
On February 1, 1998, PG Design established a 401(k) savings plan covering
substantially all of its employees. PG Design may make contributions up to a
maximum of 2% of the employees compensation and participants fully vest in
employer contributions after 5 years. Employees are permitted to make
contributions into the plan after one year of employment.
Investment Company Statements (1996 and 1995)
- ---------------------------------------------
16. Summary of Significant Accounting Policies
(a) Security valuation
Investments are stated at value. Securities traded on securities exchanges or on
the Nasdaq National Market are valued at the last sales price on the principal
exchange or market on which they are traded or listed or, if there has been no
sale that day, at the mean of closing bid and asked prices. Fixed-income
securities are valued at the most recent bid quotation. Short-term securities
are valued at amortized cost, which approximates market value. Other securities
for which prices are not readily available are valued at a fair value as
determined by the Board of Directors for reporting purposes under the 1940 Act.
The Company's investment in the Class B Interest of Heartland is not publicly
traded, and accordingly there are no available market quotations. On December 7,
1995, the Board of Directors of the Company changed the methodology for valuing
the Class B Interest. In making its determination of a fair value for the Class
B Interest, the Board of Directors of the Company considers an imputed value
based on the market value of the publicly traded Class A limited partnership
interest in Heartland (the "Units") and the operating results of Heartland. The
Board of Directors of the Company determined that operating losses of Heartland
could cause anomalous results in the application of the valuation method of
imputing value based on the market value of the publicly traded Units. Under the
new methodology, the percentage change in the market value of the publicly
traded Units from June 30, 1990, is applied to the initial cost of the Class B
Interest (approximately $9.6 million) to the date of valuation.
21
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1997, 1996 and 1995
Due to the inherent uncertainty of valuation, the recorded value of the Class B
Interest and the general partnership interests in Heartland and CMC Heartland on
the Company's financial statements may differ from values that would have been
used had a ready market existed for these interests, and the difference could be
material.
The change in methodology adopted by the Board resulted in a decrease in the
value of the Class B Interest of $6.2 million in 1995 and reduced unrealized
gains $4.5 million, net of tax. The effect on the net asset value of the Company
at December 31, 1995 is a decrease of $2.69 per share.
(b) Investment transactions and investment income
Security transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Interest income is recorded on the accrual basis and includes amortization of
premium and accretion of discount on securities owned.
(c) Use of Estimates
Management is required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
17. Net Assets
Net assets at December 31, 1996 consisted of the following items (dollars in
thousands, except share amounts):
Common stock - $0.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding $ 501
Paid in capital 10,773
Undistributed net investment income 10,333
Undistributed net realized gains on investment transactions 590
Net unrealized depreciation on investments (4,613)
-------
Net Assets $17,584
=======
Certain reclassifications have been made within the components of net assets as
of December 31, 1995 to conform to the 1996 presentation.
18. Investment Services
During 1996 and 1995 the Company paid advisory fees for investment advisory
services under an agreement with OFFITBANK, a nonaffiliated investment advisor.
For the services rendered by OFFITBANK under the agreement, the Company paid
OFFITBANK an annual investment advisory fee equal to .20 of 1% per annum of the
value of the portfolio under management. The agreement provided that the
advisory fee was payable quarterly in arrears based on the average month-end
value of the portfolio during such quarter.
22
<PAGE>
19. Federal Income Taxes
As of December 31, 1996, the Company has deferred tax assets consisting of tax
NOL carry forwards of approximately $146,000, AMT credit carry forwards of
approximately $919,000 and tax unrealized investment losses of approximately
$1,113,000. For financial reporting purposes, a valuation allowance had been
provided to offset the deferred tax assets.
Based on cost of investments for federal income tax purposes of $19,774,000 on
December 31, 1996, net unrealized depreciation was $2,649,000, consisting of
gross unrealized appreciation of $78,000 and gross unrealized depreciation of
$2,727,000.
20. Interests in Partnerships and Related Transactions
The Company's interests in Heartland and CMC Heartland, including the Class B
Interest in Heartland, were included in investments at a value of $7,589,000 at
December 31, 1996.
See Note 5 for additional information relating to Interests in Partnerships.
The Company has a management agreement with CMC Heartland, pursuant to which CMC
Heartland is required to pay to the Company and annual management fee in the
amount of $425,000. On December 31, 1996, the Company received $1,181,000
related to previously accrued management fees including $107,000 for interest
related to past due amounts. The 1996 accrued management fee in the amount of
$425,000 was paid on February 14, 1997.
For the year ended December 31, 1996 and 1995, the Company paid CMC Heartland
approximately $141,000 and $109,000 respectively for staff salary and operating
expense allocations.
21. Investment Transactions
Investment transactions for the year ended December 31, 1996 (excluding money
market investments) are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
Purchases $ 3,505
Proceeds from sales and maturities $ 4,921
</TABLE>
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
By: Leon F. Fiorentino
-------------------------------------------
Leon F. Fiorentino
Vice President-Finance, Treasurer and Secretary
Date: June 23, 1998
24
