<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
------------------------------------------
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
incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/294-0497
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 16, 1998, there were 1,671,238 shares of the registrant's common
stock outstanding.
Page 1 of 31
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(Amounts in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS September 30 December 31
1998 1997
-------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 282 $ 3,232
Accounts receivable, net................................ 4,180 2,311
Due from affiliate...................................... 356 450
Inventories, net........................................ 2,754 1,660
Prepaid expenses........................................ 276 139
------- -------
Total current assets............................... 7,848 7,792
------- -------
Property and equipment:
Machinery and equipment................................. 14,436 5,262
Furniture and equipment................................. 524 29
Leasehold improvements.................................. 1,192 320
------- -------
16,152 5,611
Less accumulated depreciation........................... 7,102 623
------- -------
9,050 4,988
------- -------
Other assets:
Deferred compensation expense........................... -- 2,562
Deferred tax asset, net................................. 1,269 262
Goodwill, net........................................... 11,452 6,058
Debt issuance cost, net................................. 129 135
Other................................................... 1,475 230
Investment in partnerships.............................. 8,059 8,152
------- -------
Total assets....................................... $39,282 $30,179
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................. $ 1,942 $ 1,249
Accrued expenses and other liabilities.................. 3,019 1,189
Line of credit.......................................... 3,059 147
Current portion of long-term debt....................... 2,604 1,591
Allowance for claims and liabilities.................... 1,279 1,279
------- -------
Total current liabilities.......................... 11,903 5,455
------- -------
Long-term debt, less current portion......................... 2,382 2,165
Notes payable................................................ 5,800 3,000
Stockholders' equity:
Common stock $.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding.............. 501 501
Additional paid-in capital.............................. 10,773 10,773
Retained earnings....................................... 7,923 8,285
------- -------
Total stockholders' equity......................... 19,197 19,559
------- -------
Total liabilities and stockholders' equity......... $39,282 $30,179
======= =======
</TABLE>
Page 2 of 31
<PAGE>
Condensed Consolidated Statements of Operations
For the Quarters and Nine Months Ended September 30, 1998 and September 30,
1997
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
--------------------- ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................ $9,756 $7,837 $21,773 $9,850
Cost of sales............................ 5,667 4,674 14,543 5,913
------ ------ ------- ------
Gross margin............................. 4,089 3,163 7,230 3,937
Other income (loss):
Management fee from affiliate......... 107 107 319 319
Miscellaneous, net.................... -- (16) (462) 272
------ ------ ------- ------
Total other income (loss)................ 107 91 (143) 591
Other expenses:
Selling, general and administrative... 3,376 930 6,959 1,897
Interest expense...................... 262 259 541 323
Special compensation.................. -- -- 188 --
------ ------ ------- ------
Total other expenses.............. 3,638 1,189 7,688 2,220
------ ------ ------- ------
Income (loss) before taxes............... 558 2,065 (601) 2,308
Income tax expense (benefit)............. 223 863 (240) 935
------ ------ ------- ------
Net income (loss)..................... $ 335 $1,202 $ (361) $1,373
------ ====== ======= ======
Net earnings per share-basic and diluted. $ .20 $ .72 $ (.22) $ .82
====== ====== ======= ======
Weighted average number of common shares
outstanding............................. 1,671 1,671 1,671 1,671
====== ====== ======= ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 3 of 31
<PAGE>
<TABLE>
<CAPTION>
Heartland Technology, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 1998 and September 30, 1997
(Amounts in thousands)
(Unaudited)
Nine Months Ended
Sept. 30 Sept. 30
1998 1997
----------------------
Operating activities:
<S> <C> <C>
Net (loss) income.................................................................. $ (361) $ 1,373
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 1,464 391
Equity loss in investment in partnerships..................................... 93 --
Unrealized loss on investments
Deferred income taxes......................................................... (59) (10)
Special compensation.......................................................... 188 --
Allowance for inventory obsolesence........................................... 460
Changes in operating assets and liabilities:
Increase/(decrease) in accounts receivable............................... (374) (798)
Increase/(decrease) in due from affiliate................................ (73) (14)
Increase/(decrease) in inventories, net.................................. (903) (423)
Increase/(decrease) in prepaid expenses and other assets................. 24 (78)
Increase/(decrease) in accounts payable and accrued expenses............. 637 357
Increase/(decrease) in accounts payable affiliate........................ 360 -
Increase/(decrease) in interest payable.................................. 118
Increase/(decrease) in income tax payable................................ (338) 254
------- --------
Net cash provided by operating activities..................................... 776 1,512
------- --------
Investing activities:
Purchases of property and equipment................................................ (1,407) (680)
Acquisition of subsidiary.......................................................... (7,559) (12,385)
Net proceeds from sale of security................................................. - 9,512
All other investing activities..................................................... 51
------- --------
Net cash used in investing activities............................................ (8,915) (3,553)
------- --------
Financing activities:
Line of credit, net................................................................ 2,225 (1,851)
Principal payments on long-term debt............................................... (1,432) (1,870)
Issuance of debt................................................................... 4,396 7,675
------- --------
Net cash provided by financing activities..................................... 5,189 3,954
------- --------
Increase/(decrease) in cash and cash equivalents................................... (2,950) 1,913
Cash and cash equivalents at December 31, 1997 and 1996............................ 3,232 1,192
------- --------
Cash and cash equivalents at September 30, 1998 and 1997........................... $ 282 $ 3,105
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 4 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements and related notes have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and on substantially the same basis as the annual
consolidated financial statements. The consolidated financial statements include
the accounts of Heartland Technology, Inc., its subsidiaries, P.G. Design
Electronics, Inc., Solder Station-One, Inc. and Zecal Corp., a subsidiary of
P.G. Design Electronics, Inc. All significant intercompany transactions and
accounts have been eliminated.
The consolidated financial statements include the accounts of P.G. Design
Electronics, Inc. from May 31, 1997, the accounts of Solder Station-One, Inc.
from April 9, 1998 and the accounts of Zecal Corp. from April 30, 1998.
In the opinion of management, the consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, operating results, and cash flows for
the period presented. Operating results for the quarter and nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. The interim statements should be
read in conjunction with the consolidated financial statements and notes
thereto, for the year ended December 31, 1997 as presented in the Company's
Annual Report on Form 10-K.
2. Organization
Heartland Technology, Inc. ("HTI" or the "Company") was a wholly-owned
subsidiary of Chicago Milwaukee Corporation ("CMC") or its affiliates prior to
June 30, 1993. The Company was formerly known as Milwaukee Land Company.
In 1990, the real estate assets and certain other assets and liabilities held by
CMC and HTI were contributed to two newly-organized partnerships - Heartland
Partners, L.P., a publicly-traded limited partnership of which HTI is the
general partner and also holds a limited partner interest ("Heartland") and CMC
Heartland Partners, a general partnership in which HTI and Heartland are the
general partners and HTI is the managing partner ("CMC Heartland"). On June 30,
1993 CMC distributed HTI common stock to CMC's shareholders, spinning off HTI as
a separate publicly-held company.
HTI's 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 $1,430,000 at September 30, 1998 is being amortized as CMC Heartland's assets
are sold. For the quarter and nine months ended September 30, 1998, the equity
adjustment was immaterial.
Page 5 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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. PG Design Electronics, Inc. was engaged in the
business of contract design and manufacture of electronics assemblies for
computer printer original equipment manufacturers ("OEMs"). PG Newco's name was
then changed to P.G. Design Electronics, Inc. ("PG Design").
The purchase price included the issuance of notes totaling $3,000,000 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 were due in the event that the president at the time of
purchase of PG Design Electronics, Inc. voluntarily left the employment of PG
Design prior to the scheduled maturity of the notes. Because of the contingency
in the notes linking the payment of the notes and the continued employment of
Peter G. VanHeusden, $3,000,000 was recorded as deferred compensation of which
$1,500,000 was being amortized over 40 months and $1,500,000 was being amortized
over 60 months, on a straight line basis. The amortization of deferred
compensation amounted to $188,000 for the quarter ended March 31, 1998 and is
reported as special compensation on the consolidated statement of income.
The contingency related to the continued employment of Peter G. VanHeusden was
removed from the notes on March 30, 1998. The $2,374,000 amount of unamortized
deferred compensation was added to goodwill and is being amortized on a straight
line basis over 39 years and 1 month, the remaining period over which the
goodwill resulting from the purchase of PG Design Electronic, Inc. assets is
being amortized.
On April 10, 1998 the Company acquired the stock of Solder Station-One, Inc. for
$7,460,000 consisting of (a) cash of $5,185,000; (b) a $1,700,000 8% note
payable in semiannual installments beginning 18 months after the closing date,
with the first 3 installments of $400,000 each plus a final semiannual payment
of $500,000; (c) a $400,000 contingent note payable either one year from the
closing date, three years from the closing date, or not at all depending on
Solder Station-One, Inc. meeting certain operating income goals; and (d) a short
term non-interest bearing note for $175,000. Solder Station-One, Inc. provides
speciality services to the printed circuit board industry.
On April 29, 1998 Zecal Corp., a newly formed subsidiary of P.G. Design
Electronics, Inc. acquired certain assets and liabilities from a company which
owns patented technology for plating copper circuits on a ceramic substrate. The
purchase price consisted of $500,000 cash plus assumed liabilities and a
$1,100,000 four year note. The note has a one year moratorium on principal and
interest. The note bears interest at 8% starting in the second year. Accrued
interest and level principle amortizations are payable quarterly over the last
three years of the note.
3. Inventories
Page 6 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
The components of inventory consist of the following at September 30, 1998
(amounts in thousands):
<TABLE>
<S> <C>
Raw materials $4,258
Work-in-progress 134
Finished goods 288
------
Less: Allowance for obsolescence 1,926
------
Total $2,754
======
</TABLE>
4. Net Loss per Share
Net profit (loss) per share for the third quarter and first nine months of 1998
amounted to $.20 and $(.22) per share, respectively, based on 1,671,238 shares
outstanding.
5. Information on Unconsolidated Investee
The following is the summarized income statement information of Heartland
Partners, L.P. for the quarter and nine months ended September 30, 1998 in which
the Company has a general partnership interest and Class B limited partnership
interest: (In thousands)
<TABLE>
<CAPTION>
First
Third Nine
Quarter Months
1998 1998
-------- --------
<S> <C> <C>
Sales, Property Rental & Other Income $ 1,170 $ 3,954
Gross profit 402 1,083
Net loss (2,807) (6,229)
</TABLE>
Page 7 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
6. Debt
P.G. Design Electronics, Inc.
The debt that the Company incurred in connection with the acquisition of P.G.
Design Electronics, Inc. is described in the Company's 1997 Form 10-K, Annual
Report.
Solder Station-One, Inc.
The Company incurred the following debt in connection with the acquisition of
Solder Station-One, Inc.
The Company has a line of credit with LaSalle National Bank. ("LSNB") under
which it may borrow up to $1,500,000. Interest is based on a base rate plus 2%
(7.83% at September 30, 1998). Borrowings are collateralized by accounts
receivable and inventory. Borrowings under the line of credit at September 30,
1998 were $697,000. The line of credit matures on April 10, 2001.
The Company has term loans payable to LSNB in original principal amounts of
$1,200,000 and $900,000. The loans have level monthly principal payments.
Interest is paid monthly. The $1,200,000 loan is for a three year term and bears
interest at the prime rate plus 1.5% (9.0% at September 30, 1998). The $900,000
loan is for a five year term and bears interest at the prime rate plus 1% (8.5%
at September 30, 1998). LSNB has granted the Company a temporary waiver from
paying principal and interest on the $1,200,000 loan for the period of August
31, 1998 through November 30, 1998. The amounts deferred plus additional
interest are due no later than April 10, 2001. The outstanding balances on
these loans at September 30, 1998 were $1,067,000 and $825,000, respectively.
The Company has a $1,700,000 note payable to the sellers of Solder Station-One,
Inc. stock. The note bears 8% interest and is payable in three semiannual
$400,000 installments plus a final $500,000 installment. The first installment
is due on October 10, 1999. Interest is paid quarterly beginning June 30, 1998.
Beginning August 31, 1998 interest payments on this note have been deferred
until the Company's debt Service Ratio is greater than or equal to 1.35:1.0.
The Company has a contingent $400,000 note payable to the sellers of Solder
Station-One, Inc. stock. The note is payable April 10, 1999 if Solder Station-
One, Inc.'s calendar year 1998 operating income is greater than $1,508,999. The
note is payable on April 10, 2001, if it is not paid on April 10, 1999, and
Solder Station-One, Inc.'s operating income for the calendar years 1998, 1999
and 2000 is greater than $6,027,999. If neither of these condition are met, the
loan will not be paid.
The Company has a $175,000 original principal amount non-interest bearing note
in connection with the Solder Station-One, Inc. transaction. The note is paid
out of the collections of certain accounts receivable. The outstanding balance
on this note at September 30, 1998 was $6,971.
Page 8 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Zecal Corp.
The Company incurred the following debt in connection with the acquisition of
Zecal Corp.
The Company has a line of credit with General Electric Capital Corporation
("GECC").On September 28, 1998, the line was reduced from $4,000,000 to
$1,192,000, with a limitation placed on additional borrowings of a maximum of
$200,000 per month. Borrowings at September 30, 1998 amounted to $692,000.
Interest is based on a floating index rate plus 3.25% (8.77% at September 30,
1998). Borrowings are collateralized by accounts receivable and equipment. The
line of credit matures on April 29, 2001.
The Company has a note payable to the seller of Zecal Corp.'s assets in the
principal amount of $1,100,000. The note bears no interest until April 29, 1999
when interest begins to accrue at a rate of 8% per year. The principal is paid
in level quarterly payments beginning on July 30, 1999 until the final payment
on April 29, 2002. Interest is also paid quarterly. At September 30, 1998,
$1,100,000 was outstanding.
Consolidated
A summary of HTI's total debt at September 30, 1998 follows.(In thousands)
<TABLE>
<CAPTION>
Short Long
Term Term Total
------- ------- --------
<S> <C> <C> <C>
Short term note
payable $ 7 $ $ 7
Lines of credit 3,059 3,059
Term loans 2,597 2,382 4,979
Notes payable 5,800 5,800
------ ------ -------
Totals $5,663 $8,182 $13,845
====== ====== =======
</TABLE>
The Company's indebtedness includes $8,038,000 of senior debt ($4,904,000
payable to GECC, $2,574,000 payable to LSNB and $560,000 to other institutions)
and $5,807,000 of subordinated debt ($3,000,000 payable to the seller of PG
Design, $1,700,000 payable to the seller of Solder, $1,100,000 payable to the
seller of Zecal and an additional $7,000 connected with the Solder transaction).
Page 9 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is engaged in 2 lines of business: (1) manufacturing and (2) real
estate. The manufacturing segment covers the Company's manufacture of electronic
assemblies on a contract basis primarily for the computer and computer printer
industry. The real estate business covers the company's investments in real
estate partnerships which consist of a .01% general partnership interest in CMC
Heartland Partners ("CMC Heartland"), a 1% general partner interest and a Class
B limited partnership interest in Heartland Partners, L.P. ("Heartland"). The
Class B interest, among other things, entitles the holder thereof to an
allocation of .5% of Heartland's available cash for distribution and allocation
of taxable income and loss.
Heartland's loss from the real estate segment for the third quarter of 1998
amounted to $42,000 compared to $0 for the third quarter of 1997. Loss from
investment in the Partnerships in the first nine months of 1998 amounted to
$93,000 compared to a loss of $38,000 for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, $3,059,000 was borrowed under the Company's lines of
credit with its lenders based on eligible collateral on September 30, 1998.
Additional borrowings of approximately $2,333,000 were available under the lines
of credit at September 30, 1998.
Borrowings under the lines of credit increased by $395,000. The borrowings along
with earnings were primarily used to reduce accounts payable and other debt.
During the third quarter of 1998 the Company invested $409,000 in capital
expenditures. Most of the expenditures were for equipment purposes, computer
software and hardware and leasehold improvements.
Principal payments on its term loans during the third quarter and first nine
months of 1998 are shown below: (amounts in thousands)
<TABLE>
<CAPTION>
Third First Nine
Quarter Months
1998 1998
------- ----------
<S> <C> <C>
PG Design $ 409 $1,224
Solder Station-One, Inc. 63 208
Zecal Corp. -- --
----- ------
Total $ 472 $1,432
===== ======
</TABLE>
Under the terms of the lines of credit and the term loans, the Company's
subsidiaries are required to maintain a minimum fixed charge ratio and minimum
tangible net worth, are prohibited from incurring
Page 10 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
additional indebtedness and making capital expenditures and are restricted from
making certain payments. The borrowings under the lines of credit are
collateralized by accounts receivable and inventory, and are cross-
collateralized with the term loans. The term loans are secured by machinery and
equipment and cross collateralized with the lines of credit. All borrowings are
guaranteed by HTI.
Cash flow for the first nine months of 1998 decreased by $2,950,000. The
Company believes that it will have sufficient funds available for operating
expenses, debt amortization and capital expenditures from cash flow expected to
be derived from operations and financing presently in place. Management expects
that it will be able to procure additional financing if required and that the
Company will require additional financing for further acquisitions.
RESULTS OF OPERATIONS
Net sales of electronics assemblies, computer printer products, circuitized
ceramic substrates and printed circuit board services totaled $9,756,000 in the
third quarter of 1998. Sales include revenues from Solder Station-One from
April 9, 1998, its date of acquisition, and Zecal Corp. from April 30, 1998, its
date of acquisition. Sales for the 1997 third quarter for the Company totaled
$7,837,000.
For the first nine months of 1998 sales totaled $21,773,000 compared to
$9,850,000 for the first nine months of 1997, which included only the sales of
PG Design.
The net profit (loss) for the third quarter and first nine months of 1998
totaled $335,000 and ($361,000) respectively. This compared to net after tax
profits in the third quarter and first nine months of 1997 of $1,202,000 and
$1,373,000 respectively.
The decrease in profitability in the third quarter and first nine months of 1998
as compared to the same periods of 1997, are primarily attributed to the decline
in sales to PG Design's principal customer, to the losses sustained by Zecal,
and to losses sustained by Solder Station-One due to a general decline in the
electronic manufacturing industry, as well the planned increases in sales,
general and adminstrative (SG&A) expenses at PG Design.
SG&A expenses for the third quarter of 1998 totaled $3,376,000, compared to
$930,000 for the third quarter of 1997. SG&A expenses of the newly acquired
companies, Solder Station and Zecal, totaled $1,574,000 for the quarter. SG&A
expenses for the first nine months of 1998, totaled $6,959,000 compared to
$1,897,000 in the same period of 1997. Third quarter and first nine months SG&A
expenses for 1997 excluded the expenses of the acquired companies except for PG
Design.
SG&A expenses at PG Design have increased as the company has strengthened its
organization significantly by the addition of engineering, sales, manufacturing
and financial personnel to support a major effort to develop new products and
services and new markets for existing product and services. PG Design sales
during the fourth quarter may reflect shipments of new products such as the
"Portal(R)" kiosk which is an electronic information center used for point of
purchase applications and shipments of existing products and services to new
customers. The Company's focus on new product development
Page 11 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
and new markets for existing products and services as well as acquisitions may
reduce the Company's concentration with respect to customers and the computer
industry.
Solder Station-One, Inc.'s results continue to be dependent on an improvement in
the overall electronic manufacturing industry. While Zecal Corp.'s results will
be dependent on the development of new customers for its patented technology, an
intensive marketing program is under way to develop new applications for
inquiries which have been received since the date of acquisition. The Company
is evaluating options to sustain Zecal's operations without unduly affecting the
Company's financial performance.
Account Receivable and Inventory levels increased by $1,869,000 and $1,094,000
respectively from December 31, 1997 levels. $1,077,360 of the Receivable
increase and $108,000 of the increase in Inventory was attributable to the
acquisition of Solder Station and Zecal. The increase in Accounts Receivable at
P G Design was attributable to increased sales in September compared to December
1997. Inventory levels at P G Design have increased to support the expected
increased sales levels in the fourth quarter of 1998 compared to the first
quarter of 1998.
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section and elsewhere
in this Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are not guarantees of future performance. They involve risks, uncertainties and
other important factors, including the risks discussed below. The Company's
actual future results, performance or achievement of results and the value of
your stock, may differ materially from any such results, performance,
achievement or value implied by these statements. We caution you not to put
undue reliance on any forward-looking statements. In addition, we do not have
any intention or obligation to update the forward-looking statements in this
document. The Company claims the protection of the safe harbor for forward-
looking statements contained in Section 21E of the Securities Exchange Act of
1934.
Electronics Business
The year to date losses are principally attributable to a decline in orders from
the Company's principal customer, as well as the planned increase in SG&A
expenses at PG Design. As a result of these factors, the Company's profit
after taxes for the first nine months of 1998, fell by $1,734,000 as compared
to the same period of 1997. If the current trends in the industry continue, or
if we are unable to adapt our business to meet industry needs, our financial
results will be materially affected.
Dependence on Customers. A large percentage (approximately 90%) of our sales
currently comes from a small number of large customers. We do not have long
term contracts with any of these large customers. We are taking steps to
diversify our products and reduce our customer concentration through the
addition of new customers and acquisitions. However, sales to a few large
customers will continue to account for a significant percentage of our revenues.
If we lose a major customer, or if a
Page 12 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
major customer reduces its purchases of our products and services, it will
materially affect our financial results and ongoing business. Also, economic
and other conditions may cause any of our customers to cancel, reduce or delay
orders. Changes in customer orders may adversely affect our business and
financial results.
Acquisition Integration. Our electronics business operations consist of the PG
Design, Solder Station-One, Inc. and Zecal Corp. businesses. The Company
acquired all of these businesses within the past three years. The businesses we
acquired all have different cultures, procedures and organizational structures.
We expect future acquisitions to have the same kinds of differences. We may
have difficulties managing growth as we integrate new operations, add customers
and expand. Failure to manage our growth, or to control expenses related to
growth, may materially affect our business and financial results. In addition,
if we are unable to integrate the operations of PG Design, Solder Station-One,
Inc. and Zecal Corp., or any future businesses we acquire, successfully, such
failure may adversely affect our business or financial results.
Leverage; Access to Financing. The Company is highly leveraged. We must
maintain certain minimum ratios, and are prohibited from taking certain actions,
under existing credit arrangements. In the second and third quarters of 1998 we
were unable to meet minimum ratios and other covenants required under existing
credit agreements. As a result, we have sought and received waivers from our
creditors for such covenants. Our high level of debt, or the restrictions
imposed by our debt, may adversely affect our financial results or our ability
to operate our business, including making future acquisitions. In addition, we
expect to need additional financing for future acquisitions. We may not be able
to find additional financing sufficient to make any or all of the acquisitions
we want to make. Even if we do obtain financing, the terms may be less favorable
than the terms of our current financing. Our inability to borrow more money, or
to borrow on terms as favorable as the terms we currently have, may adversely
affect our business and financial results. In addition, if we continue to
experience the currently existing market trends or negative operating results,
we may fail to comply with financial covenants under our credit agreements. We
may not be able to obtain waivers from our lenders for future non-compliance
with our credit agreements, and we may lose our existing financing as a result.
Any loss or reductions of our existing financing would adversely affect our
business and financial results.
Dependence on Key Employees and Management. PG Design has hired additional
engineering, manufacturing, sales and finance personnel, and has restructured
operations so that it does not rely significantly on any one individual.
However, the loss of key employees may adversely affect the short term business
or financial results.
Dependence on Computer Industry. The Company provides products and services
principally to the computer segment of the electronics manufacturing industry.
We focus on the high margin segments in the electronics manufacturing and
printed circuit board industries. A decline in demand for our products or
services will adversely affect our business or financial results. We are
developing new products and services as well as pursuing acquisitions, to
diversify our business beyond the computer segment of the electronics
manufacturing industry, to keep up with the pace of change of the computer
Page 13 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
industry and to grow and diversify our business. Failure to successfully
develop new products and services demanded by the industry may adversely affect
our business and financial results.
Proprietary Rights. PG Design has been informed by one of its major customers
that the customer has a patent relating to demonstration devices for computer
printers ("Printer PODs") and that the customer believes that some or all of the
Printer PODs manufactured by PG Design infringe the patent. PG Design is
reviewing the patent and the design of its Printer PODs and believes there is
uncertainty as to the extent and validity of the customer's claim of
infringement. Additionally, PG Design is exploring possible resolutions of this
issue, including obtaining a license to use the technology covered by the
customer's patent and/or redesigning the Printer POD to avoid the alleged
infringement. There can be no assurance that PG Design will be successful in
resolving this issue on a basis that is satisfactory both to PG Design and the
customer. The loss of the customer, the loss of the right to continue
manufacturing and marketing the Printer PODs and/or the award of damages for
infringement could have a material adverse effect on PG Design's results of
operations. In addition, the payment of any fees or royalties pursuant to any
license arrangement ultimately entered into with the customer could decrease the
profit margin realized by PG Design in respect of its Printer POD sales.
Similarly, such profit margin could be negatively impacted by the costs incurred
by PG Design in its attempts to redesign the Printer POD to avoid the alleged
infringement. See "Forward-Looking Statements--Dependence on Customers."
The Company believes that it is entitled to indemnification from the sellers of
PG Design for any losses the Company ultimately incurs as a result of the
asserted claim of infringement. While the Company intends to aggressively
pursue such indemnification, if necessary, there can be no assurance that the
Company will be successful in obtaining full or partial indemnification for all
or any of such losses.
Competition. Our industries are very competitive. Many customers are sensitive
to prices and also demand high quality products using the most advanced
technologies. If a competitor offers a product or service superior to ours, it
will adversely affect our ability to compete in the industry. Our competitors
may have superior resources, research and development and other capabilities.
Any advantage a competitor has over us may adversely affect our business and
financial results. Also, our customers could vertically integrate or otherwise
decide to compete with us.
Technological Change. Our customers compete in markets with rapidly changing
technology, evolving industry standards and continuously improving products and
services. These characteristics create short product life cycles. Our success
depends upon our customers' ability to develop and market new products
successfully in this changing environment. In addition, our success depends on
our ability to provide products and services that our customers need to develop
and market new products. If our efforts and strategies to create new products
and services and to enter new markets fail to keep up with constantly changing
technology, or if our customers fail to develop successful new products and
services, it may adversely affect our financial efforts.
Acquisition Strategy. We are actively seeking acquisitions in the electronics
manufacturing industry. We believe that strategic acquisitions will help grow
and diversify our business. In analyzing acquisitions, we carefully consider
the new markets, customers and competitors involved with our
Page 14 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
acquisition targets. We also review other factors that we believe are relevant
to an investment decision. Although our investment decisions are carefully
analyzed, factors affecting the success of acquired businesses may not develop
according to our plans and may adversely affect the Company's business or
financial results.
Fluctuations in Results. Our operations and financial results can fluctuate
significantly due to the level and timing of customer orders. Our results may
also vary due to product life cycle changes and acquisition activities. Future
performance and profitability are difficult to predict because of these
fluctuations. Variations in our results could result in our having insufficient
cash to pay our expected operating expenses, debt amortization payments, or
capital expenditures.
We are evaluating various options to achieve profitability at Zecal. We believe
that Zecal has promise as a business, and that potential justifies supporting
it, providing Zecal shows improvement.
Dependence on Debt Financing. The Company is dependent on existing sources of
debt financing. The cash outflows used in our recent investing activities,
require us to use borrowings available under existing lines of credit for day to
day cash requirements. If the current trends in the industry or significant
fluctuations in our operations and results continue, or if we are unable to
adapt our business to meet industry needs, we will continue to rely on our lines
of credit for our operating cash needs, in addition to any acquisitions we make.
If our lines of credit are insufficient to meet operating cash requirements, of
if our ability to borrow under the lines of credit becomes restricted in any
way, we will be unable to meet day to day cash needs for our business. Our
inability to meet day to day cash requirements for the business will adversely
affect our business or financial results.
Year 2000. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, we have determined that we will be required to
modify or replace significant portions of our software and certain hardware so
that those systems will properly recognize dates beyond December 31, 1999. We
believe that with modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 issue
could materially affect our operations.
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, remediation, testing and implementation. To date, we have fully
completed its assessment of all systems that could be significantly affected by
the Year 2000. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particularly the
general ledger, billing and inventory systems. That assessment also indicated
that software and hardware (embedded chips) used in production and manufacturing
systems (hereafter also referred to as operating
Page 15 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
equipment) also are at risk of being affected by Year 2000 problems. Affected
systems include automated assembly lines and related technologies used in
various aspects of the manufacturing process. However, based on a review of its
product line, we have determined that most of the products we have sold and will
continue to sell do not require remediation to be Year 2000 compliant.
Accordingly, we do not believe that the Year 2000 presents a material exposure
as it relates to the Company's products. In addition, we have gathered
information about the Year 2000 compliance status of our significant suppliers
and subcontractors and continue to monitor their compliance.
For its information technology exposures, to date the Company is substantially
complete on the remediation phase and we expect to complete software
reprogramming and replacement no later than December 31, 1998. Once software is
reprogrammed or replaced for a system, we will begin testing and implementation.
These phases run concurrently for different systems. We have begun the testing
and implementation of our remediated systems. Completion of the testing phase
for all significant systems is expected by December 31, 1998, with all
remediated systems fully tested and implemented by March 31, 1999, with 100%
completion targeted for June 30, 1999.
The remediation of operating equipment is significantly more difficult than the
remediation of the information technology systems because some of the
manufacturers of the equipment have not yet provided the necessary remediation
programming. Therefore, we are only 10% complete in the remediation phase of
our operating equipment. Testing of this equipment is also more difficult than
the testing of the information technology systems; as a result, the Company has
recently started with the testing of its remediated operating equipment. Once
testing is complete, the operating equipment will be ready for immediate use.
The Company expects to complete its remediation efforts by March 31, 1999.
Testing and implementation of affected equipment is expected to be completed by
June 30, 1999.
We have begun to query our significant suppliers and subcontractors that do not
share information systems with the Company (external agents). To date, we are
not aware of any external agent with a Year 2000 issue that would materially
impact our results of operations, liquidity, or capital resources. However, we
have no means of ensuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially affect our business or financial results. The
effect of non-compliance by external agents is not determinable.
We will utilize both internal and external resources to reprogram, or replace,
test, and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $125,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $50,000 ($20,000 expensed and $30,000 capitalized for
new systems and equipment), related to all phases of the Year 2000 project. Of
the total remaining project costs, approximately $10,000 is attributable to the
purchase of new software and operating equipment, which will be capitalized.
The remaining $65,000 relates to repair of hardware and software and will be
expensed as incurred.
Page 16 of 31
<PAGE>
Heartland Technology, Inc.
September 30, 1998
We believe that we have an effective program in place to resolve the Year 2000
issue in a timely manner. As noted above, we have not yet completed all
necessary phases of the Year 2000 program. If we do not complete any additional
phases, and if system malfunctions occur, the Company would be unable to take
customer orders, manufacture and ship products, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer system product failure, for example,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost reserve cannot be reasonably estimated at this
time.
We currently have no contingency plans in place if we do not complete all
phases of the Year 2000 program. We plan to evaluate the status of completion
in December 1998 and determine whether such a plan is necessary. If we are
unable to successfully implement any of the four phases of our Year 2000 plan
and we do not develop a contingency plan to address such problems, or if Year
2000 issues negatively affect our suppliers, our customers or the economy
generally, our business or financial results may be materially adversely
affected.
Real Estate Business
Economic, and Other Conditions Generally. Global, national and local conditions
and events affect the real estate industry. The industry is also highly
cyclical. Developers face many uncontrollable risks. The real estate market,
demographics, weather, government interference, unexpected increases in expenses
and availability and cost of land, materials and labor may adversely affect the
Partnerships' business or financial results. Any negative impact on the
Partnerships may materially affect our financial results.
Leverage. The Partnerships are highly leveraged. The Partnerships' line of
credit borrowings at September 30, 1998 were $10,134,000. Under credit
arrangements for existing indebtedness, the Partnerships must maintain certain
minimum ratios, and are prohibited from taking certain actions. The
restrictions imposed by the Partnerships' existing debt, may adversely affect
the Partnerships' financial results and ability to operate, which would have a
material affect on our financial results.
Access to Financing. The real estate business is capital intensive and requires
expenditures for land and infrastructure development, housing construction and
working capital. Funds currently available to the Partnerships may not be
sufficient to fund future needs. Accordingly, the Partnerships expect to borrow
additional money to fund their activities. The Partnerships may need additional
funding in the form of equity or debt financing. Additional funding may be
unavailable on terms favorable to the Partnerships, or at all. If the
Partnerships are not successful in funding the implementation of their business
strategy and other expenditures, they may delay or abandon development projects.
Delay or abandonment of development projects may adversely affect our business
or financial results.
Period-to-Period Fluctuations. The Partnerships' real estate projects are long-
term in nature. Sales activity varies from period to period. We cannot
determine the ultimate success of any development from short term results.
Short term results are unpredictable. The timing and amount of revenue varies
Page 17 of 31
<PAGE>
considerably from period to period. If the Partnerships fail to manage their
cash flows effectively, it may adversely affect our financial results.
Part II
Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
Matters submitted to a vote of security holders during the quarter ended
September 30, 1998, were previously disclosed in the Company's form 10Q for the
quarter ended June 30,1998.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
Exhibit No. Description
- - ------------- ------------------------------------------------------------------------------------
<S> <C>
10.1 Third Amendment dated July 13, 1998, between P.G. Design Electronics, Inc.
(formerly known as P G Newco Corp) and General Electric Capital Corporation, to
the Loan Security Agreement, dated May 29, 1997 (filed herewith)
10.2 Waiver of Payment under Term Credit Commitment, dated September 1, 1998, by
and among LaSalle National Bank, Solder Station-One and SS Acquisition
Corporation, to the Loan and Security Agreement dated April 10, 1998 (filed
herewith)
10.3 Fourth Amendment dated September 28, 1998, between P.G. Design Electronics, Inc.
(formerly known as P G Newco Corp) and General Electric Capital Corporation to
the Loan and Security Agreement dated May 29, 1997 (filed herewith)
10.4 First Amendment and Waiver, dated September 28, 1998, between Zecal Corp and
General Electric Capital Corporation to the Loan and Security Agreement dated April
29, 1998 (filed herewith)
27 Financial Data Schedule (filed herewith).
</TABLE>
- - --------------
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended
September 30, 1998.
Page 18 of 31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
Date: November 13, 1998 BY: /s/ Edwin Jacobson
-------------------------
Edwin Jacobson
President and Chief
Executive Officer
(Principal Executive
Officer)
Date: November 13, 1998 BY: /s/ Leon F. Fiorentino
--------------------------
Leon F. Fiorentino
Vice-President-Finance,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
Page 19 of 31
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- - ------------- -----------------------------------------------------------------------------------------------
<S> <C>
10.1 Third Amendment dated July 13, 1998, between P.G. Design Electronics, Inc. (formerly known as
P G Newco Corp) and General Electric Capital Corporation, to the Loan and Security Agreement,
dated May 29, 1997 (filed herewith)
10.2 Waiver of Payment under Term Credit Commitment, dated September 1, 1998, by and among
LaSalle National Bank, Solder Station-One and SS Acquisition Corporation, to the Loan and
Security Agreement dated April 10, 1998 (filed herewith)
10.3 Fourth Amendment dated September 28, 1998, between P.G. Design Electronics, Inc. (formerly
known as P G Newco Corp) and General Electric Capital Corporation to the Loan and Security
Agreement dated May 29, 1997 (filed herewith)
10.4 First Amendment and Waiver, dated September 28, 1998, between Zecal Corp and General Electric
Capital Corporation to the Loan and Security Agreement dated April 29, 1998 (filed herewith)
27 Financial Data Schedule (filed herewith).
</TABLE>
Page 20 of 31
<PAGE>
Exhibit 10.1
THIRD AMENDMENT
TO LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT is made effective as of this 13th day of July, 1998,
between P.G. DESIGN ELECTRONICS, INC. (formerly known as PG Newco Corp.), a
Delaware corporation ("Borrower") and GENERAL ELECTRIC CAPITAL CORPORATION, a
New York corporation ("Lender").
Recitals
Lender and Borrower are parties to that certain Loan and Security Agreement,
dated as of May 29, 1997 (as amended, the "Loan Agreement"), pursuant to which
Lender has agreed to make loans from time to time to Borrower in accordance with
the terms and conditions thereof. Borrower and Lender desire to amend the Loan
Agreement in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Borrower and Lender do hereby agree
that all capitalized terms used herein shall have the meanings ascribed thereto
in the Loan Agreement (except as otherwise expressly defined or limited herein)
and do hereby further agree as follows:
Statement of Terms
1. Amendment. Clause (d) of Schedule 1.6 of the Loan Agreement is amended and
restated to read as follows:
"(d) that is an obligation for which the total unpaid Accounts of the Account
Debtor exceed thirty-five percent (35%) (or with respect to NEC, eighty percent
(80%)) of the aggregate of all Accounts, to the extent of such excess;"
2. No Other Amendments. Except for the amendment expressly set forth and
referred to in Section 1 above, the Loan Agreement shall remain unchanged and in
full force and effect and this Third Amendment shall be limited precisely as
drafted and shall not be construed as an amendment, consent or a waiver of any
other terms or provisions of the Loan Agreement. Nothing in this Third
Amendment is intended, or shall be construed, to constitute a novation or an
accord and satisfaction of any of Borrower's indebtedness under or in connection
with the Loan Agreement or any other indebtedness to the Lender.
3. Representation and Warranties. To induce Lender to enter into this Third
Amendment, Borrower does hereby warrant, represent and covenant to Lender that:
(a) each representation or warranty of Borrower set forth in the Loan Agreement
is hereby restated and reaffirmed as true and correct on and as of the date
hereof as if such representation or warranty were made on and as of the date
hereof (except to the extent that any such representation or warranty expressly
relates to a prior specific date or period in which case it is true and correct
as of such prior date or period), and no Default or Event of Default has
occurred and is continuing as of this date under the Loan Agreement after giving
effect to this Third Amendment; and (b) Borrower has the power and authority and
is duly authorized to enter into, deliver and perform this Third Amendment and
this Third Amendment is the legal, valid and binding obligation of such Borrower
enforceable against it in accordance with its terms.
4. Conditions Precedent to Effectiveness of this Third Amendment. The
effectiveness of this Third Amendment is subject to the fulfillment of the
following conditions precedent:
Page 21 of 31
<PAGE>
(a) Lender shall have received one or more counterparts of this Third Amendment
duly executed and delivered by Borrower;
(b) Lender shall have received a $5,000 amendment fee from Borrower;
5. Counterparts. This Third Amendment may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which
when taken together shall constitute one and the same instrument.
6. GOVERNING LAW. THIS SECOND AMENDMENT AND CONSENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE
PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be
duly executed and delivered as of the day and year first set forth above.
P.G. DESIGN ELECTRONICS, INC.
By
Name: Leon F. Fiorentino
Title: Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By
Name: Steven E. Friedlander
Title: Duly Authorized Signatory
Page 22 of 31
<PAGE>
Exhibit 10.2
LASALLE NATIONAL BANK
135 South LaSalle Street
Chicago, Illinois 60603
September 1, 1998
Solder Station-One, Inc.
c/o Heartland Technology, Inc.
547 West Jackson Boulevard
Chicago, Illinois 60661
Attention: Lawrence S. Adelson
Re: Waiver of Payment under Term Credit Commitment ("Waiver")
---------------------------------------------------------
Dear Mr. Adelson:
Reference is hereby made to that certain Loan and Security Agreement dated
as of April 10, 1998 (the "Loan Agreement") by and among LaSalle National Bank,
a national banking association ("Bank"), Solder Station-One, Inc., a California
Corporation, and SS Acquisition Corporation, a California Corporation
(collectively the "Borrower"). Terms not otherwise defined herein shall have
the meanings assigned to them in the Loan Agreement.
Borrower has requested a temporary ninety (90) day waiver from paying the
Thirty-Three Thousand Three Hundred Thirty-Three Dollar ($33,333) monthly
principal and interest payment due to Bank under that certain Term Note dated as
of April 10, 1998 in the original principal amount of One Million Two Hundred
Thousand Dollars ($1,200,000) payable by Borrower to Bank (the "Term Note"),
beginning August 31, 1998 through November 30, 1998 ("Waiver Period"). This
letter serves as evidence of Bank's consent to the Waiver (for the limited
purposes set forth herein) from making payments due and owing under the Term
Note during the Waiver Period, subject to the following conditions:
1. No interest payments due and owing by Borrower to each of Odilon and
Enedina Cardenas pursuant to the terms of the Subordinated Notes shall be made
following the date hereof until such time as Borrower's Debt Service Coverage
Ratio is greater than or equal to 1.35:1.0 as of any measuring period as set
forth in the Loan Agreement;
2. Heartland Technology, Inc. will provide Bank with documentation
satisfactory to Bank confirming its prior investment of an additional Fifty
Thousand Dollars ($50,000) of equity in the Borrower which occurred on
August 28, 1998 (the "Additional Equity"); and
3. The Additional Equity and the waived amortization payments described
above shall be used by Borrower to (i) pay all past due payables of Borrower and
(ii) partially repay all amounts currently outstanding under the Term Credit
Commitment with any excess funds following payment of Borrower's past due
payables referenced in (i) above.
Page 23 of 31
<PAGE>
To the extent Borrower satisfies each of the above conditions, any failure
by Borrower to pay all amounts due and owing to Bank under the Term Note during
the Waiver Period shall not constitute an Event of Default under the Loan
Agreement. All amounts due and owing to Bank which are waived under the Term
Note during the Waiver Period shall (i) continue to accrue interest as set forth
in the Term Note from the date such payment was due until paid in full, and (ii)
be paid in full upon the Maturity Date of the Term Credit Commitment.
Any failure by Borrower or any other party to satisfy the terms and
conditions of this Waiver within the time periods set forth herein shall
constitute an Event of Default under the Loan Agreement and Bank shall be
entitled to all rights and remedies under the Loan Agreement.
The Waiver provided herein shall be specifically limited to the items set
forth above only and shall not suspend, waive or affect any other covenant or
condition contained in the Loan Agreement. Except as otherwise provided herein,
all terms and conditions of the Loan Agreement remain in full force and effect.
Borrower hereby agrees to pay all legal fees, costs and expenses incurred
by Bank in connection with the negotiation, preparation and consummation of this
Waiver, including, but not limited to, payment of a waiver fee in the amount of
$2,000 to Bank.
Very truly yours,
LASALLE NATIONAL BANK
By:
---------------------------
Name:
-------------------------
Title:
------------------------
ACCEPTED AND AGREED to ACKNOWLEDGED AND AGREED to
this ___ day of September, 1998. this ___ day of September, 1998.
SOLDER STATION-ONE, INC.
------------------------------------
Odilon Cardenas
By:
----------------------------
Name:
-------------------------- -------------------------------------
Title: Enedina Cardenas
-------------------------
Page 24 of 31
<PAGE>
Exhibit 10.3
FOURTH AMENDMENT AND WAIVER TO
THE LOAN AND SECURITY AGREEMENT
THIS AMENDMENT AND WAIVER is made effective as of this 28th day of
September, 1998, between P.G. DESIGN ELECTRONICS, INC. (formerly known as PG
Newco Corp.), a Delaware corporation ("Borrower"), and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation ("Lender").
Recitals
Lender and Borrower are parties to that certain Loan and Security
Agreement dated as of May 29, 1997 (as amended, the "Loan Agreement'), pursuant
to which Lender has agreed to make loans from time to time to Borrower in
accordance with the terms and conditions thereof. Borrower has requested that
Lender waive certain Events of Default described below, and Borrower and Lender
desire to amend the Loan Agreement, in each case in accordance with the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Borrower and Lender do
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Loan Agreement (except as otherwise expressly defined or
limited herein) and do hereby further agree as follows:
Statement of Terms
1. Waiver. Lender hereby waives the Events of Default existing on
the date hereof arising solely from (i) Borrower's failure to have a Fixed
Charge Coverage Ratio of at least 1.20 for the four Fiscal Quarter period ended
June 30, 1998, and (ii) Borrower's failure to have a Tangible Net Worth of at
least $4,237,000 as of June 30, 1998. The foregoing waiver shall not constitute
a waiver of any other Event of Default that may now or hereafter exist
(including, without limitation, a waiver of any Event of Default arising as a
result of a breach of the Fixed Charge Coverage Ratio or Tangible Net Worth
covenant for any period ending or date after June 30, 1998).
2. Amendments.
(a) Section 5(d) of the Loan Agreement is amended and restated to
read as follows:
"(d) enter into any lending, borrowing or other commercial transaction with
any of its employees, directors, Affiliates (including Zecal Corp.), any
other Credit Party or MLC (including upstreaming and downstreaming of cash
and intercompany advances) other than the MLC Loan and the advances to Zecal,
Inc. that were permitted by the Consent dated March 11, 1998 by Lender in
favor of Borrower which are being assumed by Zecal Corp. (provided such
advances do not exceed $619,000 and were made prior to September 28, 1998);
provided, that Borrower may pay a $40,000 management fee to Heartland
Technology, Inc. each month and Borrower may make additional advances to
Zecal Corp. after September 28, 1998 in an aggregate amount not exceeding
$500,000 so long as at the time of each such payment and advance (i) no
Page 25 of 31
<PAGE>
Default or Event of Default has occurred and is continuing or would arise
after giving effect to such payment or advance, (ii) the amount of advances
to Zecal Corp. made in any month does not exceed $200,000, and (iii) after
giving effect to such payment and/or advance, as applicable, Borrower would
be permitted by the terms this Agreement to borrow an additional $500,000
of Revolving Credit Advances."
(b) Paragraph 1 of Schedule G to the Loan Agreement is hereby amended
by deleting "1.20" and replacing it with "1.10".
(c) Paragraph 2 of Schedule G to the Loan Agreement is hereby amended
to change the required Minimum Tangible Net Worth as of the end of each Fiscal
Quarter commencing with the Fiscal Quarter ending September 30, 1998 to the
amount set forth below opposite such Fiscal Quarter:
<TABLE>
<CAPTION>
As of the Fiscal Minimum Tangible
Quarter Ending Net Worth
<S> <C>
September 30, 1998 $4,750,000
December 31, 1998 $5,600,000
March 31, 1999 $6,050,000
June 30, 1999 $6,650,000
September 30, 1999 $7,475,000
December 31, 1999 $8,400,000
March 31, 2000 $8,750,000
</TABLE>
(d) Paragraph 3 of Schedule G to the Loan Agreement is hereby amended
by deleting the phrase "in excess of $1,000,000 for the Fiscal Year 1997 and in
excess of $500,000 for any Fiscal Year thereafter" and replacing it with "in any
Fiscal Year in excess of $1,000,000".
(e) Section 3 of the Loan Agreement is amended by adding the
following Section 3.31 at the end of Section 3:
3.31 Zecal Projections. By October 31, 1998 Borrower will
deliver to Lender downside projections for Zecal Corp. together with a
plan of action for Zecal Corp.'s operations, in each case satisfactory
to Lender.
3. No Other Waivers or Amendments. Except for the amendments and
waivers expressly set forth and referred to in Sections 1 and 2 above, the Loan
Agreement shall remain unchanged and in full force and effect and this Amendment
and Waiver shall be limited to precisely as drafted and shall not be construed
as an amendment or a waiver of any other terms or provisions of the Loan
Agreement. Nothing in this Amendment and Waiver is intended, or shall be
construed, to constitute a novation or an accord and satisfaction of any of
Borrower's indebtedness under or in connection with the Loan Agreement or any
other indebtedness to Lender.
4. Representations and Warranties. To induce Lender to enter into
this Amendment and Waiver, Borrower does hereby warrant, represent and covenant
to Lender that: (a) each representation or warranty of Borrower set forth in the
Loan Agreement is hereby restated and reaffirmed as true and correct on and as
of the date hereof as if such representation or warranty were made on and as of
the date hereof (except to the extent that any such representation or warranty
expressly relates to a prior specific date or period in which case it is true
and correct as of such prior date or period), and no Default or Event of Default
has occurred and is continuing as of this date under the Loan Agreement after
giving effect to this Amendment and Waiver; and (b) Borrower has
Page 26 of 31
<PAGE>
the power and authority and is duly authorized to enter into, deliver and
perform this Amendment and Waiver and this Amendment and Waiver is the legal,
valid and binding obligation of such Borrower enforceable against it in
accordance with its terms.
5. Conditions Precedent to this Amendment and Waiver.
The effectiveness of this Amendment and Waiver is subject to the fulfillment of
the following conditions precedent:
(a) Lender shall have receive one or more counterparts of this
Amendment and Waiver duly executed and delivered by Borrower;
(b) Zecal Corp. shall have consented to the execution, delivery and
performance of this Amendment and Waiver and all of the transactions
contemplated hereby by signing one or more counterparts of this Amendment and
Waiver in the appropriate space indicated below and returning same to Lender;
(c) Borrower shall have delivered to Lender an Officer's Certificate
attaching the resolutions of the Board of Directors of Borrower authorizing
Borrower to execute this Amendment and Waiver and certifying that no other
consents, licenses or approvals are required in connection with Borrower's
execution of this Amendment and Waiver;
(d) Borrower shall have paid to Lender an amendment fee of $1,500;
and
(e) Lender shall have received one or more counterparts of the First
Amendment and Waiver to the Loan and Security Agreement dated as of April 29,
1998 between Zecal Corp. and Lender.
6. Counterparts. This Amendment and Waiver may be executed in
multiple counterparts, each of which shall be deemed to be an original and all
of which when taken together shall constitute one and the same instrument.
7. GOVERNING LAW. THIS AMENDMENT AND WAIVER SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE
PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be duly executed and delivered as of the day and year first set forth
above.
Page 27 of 31
<PAGE>
P.G. DESIGN ELECTRONICS, INC.
By...................................
Name: Leon F. Fiorentino
Title: Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By...................................
Name: Steve Friedlander
Title: Duly Authorized Signatory
CONSENTED TO:
ZECAL CORP.
By...................................
Its..................................
Page 28 of 31
<PAGE>
Exhibit 10.4
FIRST AMENDMENT AND WAIVER
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT AND WAIVER is made effective as of this 28th day of September,
1998, between ZECAL CORP., a Delaware corporation ("Borrower") and GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender").
Recitals
Lender and Borrower are parties to that certain Loan and Security Agreement,
dated as of April 29, 1998 (the "Loan Agreement"), pursuant to which Lender has
agreed to make loans from time to time to Borrower in accordance with the terms
and conditions thereof. Borrower and Lender desire to amend the Loan Agreement
in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Borrower and Lender do hereby agree
that all capitalized terms used herein shall have the meanings ascribed thereto
in the Loan Agreement (except as otherwise expressly defined or limited herein)
and do hereby further agree as follows:
Statement of Terms
1. Waiver. Lender hereby waives the Event of Default existing on the date
hereof arising solely from Borrower's failure to have a Fixed Charge Coverage
Ratio of at least 0.90 for the period from May 1, 1998 through June 30, 1998.
The foregoing waiver shall not constitute a waiver of any other Event of Default
that may now or hereafter exist.
2. Amendment.
(a) The second to last sentence of Section 1.13 of the Loan Agreement is
amended and restated to read as follows:
Without limiting the foregoing, Lender shall establish a reserve in the amount
of $500,000.
(b) Section 5(c)(iv) of the Loan Agreement is amended to read as follows:
(iv) Indebtedness of up to $1,119,000 to P.G. Design to the extent such
Indebtedness is subordinated to the Obligations in a manner satisfactory to
Lender (provided that except for the $619,000 Indebtedness that was incurred or
outstanding on the Closing Date, Indebtedness to P.G. Design may not be incurred
in amounts greater than $200,000 in the aggregate in any one month).
(c) Paragraph 1 of Schedule G to the Loan Agreement is amended and restated
to read as follows:
1. EBITDA. Borrower shall not have EBITDA of (a) less than negative
$500,000 for the period commencing September 1, 1998 and ending December 31,
1998, or (b) less than zero for any Fiscal Quarter ending after December 31,
1998.
As used in this Agreement (including this Schedule G), the following terms shall
have the following meanings:
"EBITDA" shall mean, for any period, the Net Income (Loss) of Borrower and its
Subsidiaries on a consolidated basis for such period, plus interest expense, tax
expense, amortization expense, depreciation expense and extraordinary losses and
minus extraordinary gains, in each case, of Borrower and its Subsidiaries on a
consolidated basis for such period determined in accordance with GAAP to the
extent included in the determination of such Net Income (Loss).
"Net Income (Loss)" shall mean with respect to any Person and for any period,
the aggregate net income (or loss) after taxes of such Person for such period,
determined in accordance with GAAP.
(d) Paragraph 2 of Schedule G is deleted.
(e) Paragraph 3 of Schedule G to the Loan Agreement is amended and restated
to read as follows:
Page 29 of 31
<PAGE>
3. Capital Expenditures. Borrower and its Subsidiaries on a consolidated
basis shall not make aggregate Capital Expenditures in excess of $100,000 in any
Fiscal Year.
(f) Section 3 of the Loan Agreement is amended by adding the following
Section 3.31 at the end of Section 3:
3.27 Borrower's Projections. By October 31, 1998 Borrower will deliver to
Lender downside projections for Borrower together with a plan of action for
Borrower's operations, in each case satisfactory to Lender.
3. No Other Amendments or Waiver. Except for the amendments and waivers
expressly set forth and referred to in Section 1 and Section 2 above, the Loan
Agreement shall remain unchanged and in full force and effect and this Amendment
and Waiver shall be limited precisely as drafted and shall not be construed as
an amendment, consent or a waiver of any other terms or provisions of the Loan
Agreement. Nothing in this Amendment and Waiver is intended, or shall be
construed, to constitute a novation or an accord and satisfaction of any of
Borrower's indebtedness under or in connection with the Loan Agreement or any
other indebtedness to the Lender.
4. Representation and Warranties. To induce Lender to enter into this
Amendment and Waiver, Borrower does hereby warrant, represent and covenant to
Lender that: (a) each representation or warranty of Borrower set forth in the
Loan Agreement is hereby restated and reaffirmed as true and correct on and as
of the date hereof as if such representation or warranty were made on and as of
the date hereof (except to the extent that any such representation or warranty
expressly relates to a prior specific date or period in which case it is true
and correct as of such prior date or period), and no Default or Event of Default
has occurred and is continuing as of this date under the Loan Agreement after
giving effect to this Amendment and Waiver; and (b) Borrower has the power and
authority and is duly authorized to enter into, deliver and perform this
Amendment and Waiver and this Amendment and Waiver is the legal, valid and
binding obligation of such Borrower enforceable against it in accordance with
its terms.
5. Conditions Precedent to Effectiveness of this Amendment and Waiver. The
effectiveness of this Amendment and Waiver is subject to the fulfillment of the
following conditions precedent:
(a) Lender shall have received one or more counterparts of this Amendment and
Waiver duly executed and delivered by Borrower;
(b) Lender shall have received a $1,500 amendment fee from Borrower;
(c) Lender shall have received one or more counterparts of the Fourth
Amendment and Waiver to the Loan and Security Agreement dated as of May 29, 1997
duly executed and delivered by P.G. Design Electronics, Inc.;
(d) P.G. Design Electronics, Inc. shall have consented to the execution,
delivery and performance of this Amendment and Waiver and all of the
transactions contemplated hereby by signing one or more counterparts of this
Amendment and Waiver in the appropriate space indicated below and returning same
to Lender;
(e) Lender shall have received from Borrower an Officer's Certificate
attaching the resolutions of the Board of Directors of Borrower authorizing
Borrower to execute this Amendment and Waiver and certifying that no other
consents, licenses or approvals are required in connection with Borrower's
execution of this Amendment and Waiver;
6. Counterparts. This Amendment and Waiver may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which
when taken together shall constitute one and the same instrument.
7. GOVERNING LAW. THIS AMENDMENT AND WAIVER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE
PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS.
Page 30 of 31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to
be duly executed and delivered as of the day and year first set forth above.
ZECAL CORP.
By..................................
Name: Leon F. Fiorentino
Title: Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By..................................
Name: Steven E. Friedlander
Title: Duly Authorized Signatory
CONSENTED TO:
P.G. DESIGN ELECTRONICS, INC.
By..................................
Its.................................
Page 31 of 31
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<PAGE>
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<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 282 3,232
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0 0
0 0
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<INTEREST-EXPENSE> 541 323
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