<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 36-1487580
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
312/294-0497
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(Registrant's telephone number, including area code)
----------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
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 August 14, 1998, there were 1,671,238 shares of the registrant's common
stock outstanding.
Page 1 of 16
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
Heartland Technology, Inc.
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Amounts in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30 December 31
1998 1997
-------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ -- $ 3,232
Accounts receivable, net................................................... 4,955 2,311
Due from affiliate......................................................... 212 450
Inventories, net........................................................... 3,515 1,660
Prepaid expenses........................................................... 251 139
-------- -----------
Total current assets 8,933 7,792
Property and equipment:
Machinery and equipment.................................................... 13,672 5,262
Furniture and fixtures..................................................... 457 29
Leasehold improvements..................................................... 1,189 320
-------- -----------
15,318 5,611
Less accumulated depreciation.............................................. 6,171 623
-------- -----------
9,147 4,988
-------- -----------
Other assets:
Deferred compensation expense.............................................. -- 2,562
Deferred tax asset, net.................................................... 690 262
Goodwill, net.............................................................. 11,522 6,058
Debt issuance cost, net.................................................... 135 135
Other...................................................................... 1,504 230
Investment in partnerships................................................. 8,098 8,152
-------- -----------
Total assets............................................................ $ 40,029 $ 30,179
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade.................................................... $ 3,500 $ 1,249
Accrued expenses and other liabilities..................................... 1,522 1,189
Line of credit............................................................. 2,664 147
Current portion of long-term debt.......................................... 3,200 1,591
Allowance for claims and liabilities....................................... 1,279 1,279
-------- -----------
Total current liabilities................................................ 12,165 5,455
-------- -----------
Long-term debt, less current portion.......................................... 6,001 2,165
Notes payable................................................................. 3,000 3,000
Stockholders' equity:
Common stock $0.30 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.......................................................... 7,589 8,285
-------- -----------
Total stockholders' equity............................................. 18,863 19,559
-------- -----------
Total liabilities and stockholders' equity............................. $ 40,029 $ 30,179
======== ===========
</TABLE>
See notes to Condensed Consolidated Financial Statements
Page 2 of 16
<PAGE>
Heartland Technology, Inc.
Condensed Consolidated Statements of Operations
For the Quarters and Six Months Ended June 30, 1998 and June 30, 1997
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................................. $6,775 $2,013 $12,017 $2,013
Cost of sales ......................................... 5,075 1,239 8,876 1,239
------ ------ ------- ------
Gross margins ......................................... 1,700 774 3,141 774
Other income (loss):
Management fee from affiliate ..................... 106 106 212 212
Miscellaneous, net ................................ (450) 332 (462) 288
------ ------ ------- ------
Total other income (loss) ............................. (344) 438 (250) 500
Other expenses:
Selling, general and administrative ............... 1,950 569 3,583 967
Interest expense .................................. 137 279 64
Special compensation .............................. -- 188
------ ------ ------- ------
Total other expenses .......................... 2,087 569 4,050 1,031
------ ------ ------- ------
Income or (loss) before taxes ......................... (731) 643 (1,159) 243
Income tax expense (benefit) .......................... (273) 190 (463) 72
------ ------ ------- ------
Net (loss) ........................................ $ (458) $ 453 $ (696) $ 171
====== ====== ======= ======
Basic earnings (loss) per share ....................... $(0.27) $ 0.27 $ (0.42) $ 0.10
====== ====== ======= ======
Diluted earnings (loss) per share ..................... $(0.27) $ N/A $ (0.42) $ N/A
====== ====== ======= ======
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 16
<PAGE>
Heartland Technology, Inc.
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 1998 and June 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net (loss) income................................................ $ (696) $ 171
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 908
Equity loss in investment in partnerships ................... 54 95
Unrealized loss on investments ..............................
Deferred income taxes ....................................... (67)
Special compensation ........................................ 188 24
Accretion amortization of (discount) premium on securities ..
Changes in operating assets and liabilities:
Decrease in accounts receivable ......................... (1,355)
Decrease in due from affiliate .......................... 287 536
Increase in inventories, net ............................ (1,684)
Increase in prepaid expenses and other assets ........... (23)
Decrease in accounts payable and accrued expenses ....... 1,680 (128)
------- --------
Net cash (used in) provided by operating activities ......... (708) 596
------- --------
Investing activities:
Purchases of property and equipment ............................. (933) (148)
Acquisition of subsidiary ....................................... (7,559) (12,143)
Net proceeds from sale of security .............................. -- 9,505
All other investing activities .................................. (159)
------- --------
Net cash used in investing activities ....................... (8,651) (2,786)
------- --------
Financing activities:
Line of credit, net ............................................. 2,611 (1,612)
Principal payments on long-term debt ............................ (2,340) (1,506)
Issuance of debt ................................................ 5,856 7,675
------- --------
Net cash provided by financing activities ................... 6,127 4,557
------- --------
(Decrease) increase in cash and cash equivalents ................ (3,232) 2,367
Cash and cash equivalents at December 31, 1997 and 1996 ......... 3,232 1192
------- --------
Cash and cash equivalents at June 30, 1998 and 1997 ............. $ -- $ 3,559
======= ========
</TABLE>
See notes to Condensed Consolidated Financial Statements Page 4 of 16
<PAGE>
Heartland Technology, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
Notes to condensed consolidated financial statements
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 six months ended
June 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 $1,437,161 at June 30, 1998 is being amortized as CMC Heartland's assets are
sold. For the quarter and six months ended June 30, 1998, the equity adjustment
was immaterial.
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 the consolidated statement of income.
Page 5 of 16
<PAGE>
Heartland Technology, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
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 will be amortized on a straight
line basis over 39 years and 1 month, the remaining period that goodwill
resulting from the purchase of PG Design Electronic, Inc. assets is being
amortized over.
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 8% four year note with a one year moratorium on interest and
principal, with quarterly level principal amortization over the last three years
of the note.
3. Inventories
The components of inventory consist of the following at June 30, 1998:
Raw materials $4,684,255
Work-in-progress 355,184
Finished goods 222,250
----------
Less: Allowance for obsolescence 1,747,002
----------
Total $3,514,684
==========
4. Net Loss per Share
Net loss per share for the second quarter and first six months of 1998 amounted
to $.27 and $.42 per share, respectively, based on 1,671,238 shares outstanding.
Page 6 of 16
<PAGE>
Heartland Technology, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
5. Information on Unconsolidated Investees
The following is summarized income statement information of Heartland Partners,
L.P. for the quarter and six months ended June 30, 1998 in which the Company has
a general partnership interest and Class B limited partnership interest: (In
thousands)
Second First Six
Quarter Months
1998 1998
--------- ----------
Sales $ 987 $ 2,252
Gross profit 298 129
Net loss (1,571) (3,422)
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%
(7.64% at June 30, 1998). Borrowings are collateralized by accounts receivable
and inventory. Borrowings under the line of credit at June 30, 1998 were
$754,401.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% (10% at June 30, 1998). The $900,000 loan
is for a five year term and bears interest at the prime rate plus 1% (9.5% at
June 30, 1998). The outstanding balances on these loans at June 30, 1998 were
$1,100,000 and 855,000, 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 with the first
installment due on October 10, 1999. Interest is paid quarterly beginning June
30, 1998.
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 note bears 8% interest. Interest accrues and is paid quarterly
in 1998.
The Company has a $175,000 original principal amount non-interest bearing note
in connection with the 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 June 30, 1998 was $93,904.
Page 7 of 16
<PAGE>
Heartland Technology, Inc.
Notes to Condensed Consolidated Financial Statements
June 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") under which it may borrow up to $4,000,000. Interest is based on a
floating index rate plus 3.25% (8.75% at June 30, 1998). Borrowings are
collateralized by accounts receivable and equipment. Borrowings at June 30, 1998
amounted to $414,481. 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 June 30, 1998, $1,100,000
was outstanding.
Consolidated
- ------------
A summary of HTI's total debt at June 30, 1998 follows.(In thousands)
<TABLE>
<CAPTION>
Short Long
Term Term Total
------- ------- --------
<S> <C> <C> <C>
Short term note payable $ 94 $ $ 94
Lines of credit 3,418 3,418
Term loans 2,171 2,725 4,896
Notes payable 5,800 5,800
------- ------- --------
Totals $ 5,683 $ 8,525 $ 14,208
======= ======= ========
</TABLE>
The Company's indebtedness includes $8,314,000 of senior debt ($5,605,000
payable to GECC and $2,709,000 payable to LSNB) and $5,894,000 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
$94,000 connected with the Solder transaction).
Page 8 of 16
<PAGE>
Heartland Technology, Inc.
June 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 for the second quarter of 1998 amounted to $26,000 compared to
$20,000 for the second quarter of 1997. Loss from investment in the Partnerships
in the first six months of 1998 amounted to $54,000 compared to a loss $38,000
for the first six months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1998, accounts payable included $274,000 of outstanding checks which
have not cleared under the Company's revolving lines of credit. At June 30,
1998, $3,418,000 was borrowed under the Company's lines of credit with its
lenders based on eligible collateral on June 30, 1998. Additional borrowings of
approximately $1,439,000 were available under the lines of credit at June 30,
1998.
Borrowings under the lines of credit increased by $2,384,000 during the second
quarter as a result of increased borrowings by PG Design Electronics, Inc. ("PG
Design") and additional borrowings resulting from the acquisition of Solder
Station-One, Inc. and Zecal Corp.
During the second quarter of 1998 the Company invested $781,000 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 second quarter and first six
months of 1998 are shown below: (amounts in thousands)
<TABLE>
<CAPTION>
Second First Six
Quarter Months
1998 1998
------- ---------
<S> <C> <C>
PG Design $ 409 $ 815
Solder Station-One, Inc. 145 145
Zecal Corp. - -
----- -----
Total $ 554 $ 960
===== =====
</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 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 six months of 1998 decreased by $3,232,000. 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.
Page 9 of 16
<PAGE>
Heartland Technology, Inc.
June 30, 1998
The Company believes that it will have modified or replaced portions of its
software and hardware so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter. The Company presently believes
that the year 2000 issue will not propose significant operational problems for
its computer systems.
RESULTS OF OPERATIONS
Net sales of electronics assemblies, computer printer products, circuitized
ceramic substrates and printed circuit board services totaled $6,775,000 in the
second 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 second quarter for the Company totaled
$2,013,000, including sales of PG Design from May 31 through June 30, 1997.
Pro forma sales for the second quarter of 1997, including revenues of the
acquired companies, totaled $10,220,000 compared to second quarter 1998 pro
forma sales of $7,127,000 representing a decrease of 30%.
For the first six months of 1998 sales totaled $12,017,000 compared to
$2,013,000 for the first six months of 1997, which included only the sales of PG
Design for the month of June, 1997 following its acquisition.
Pro forma sales for the six months, including sales of the acquired companies,
totaled $14,632,000 compared to $20,576,000 for the similar period of 1997
representing a decrease of 29%.
The net after tax losses for the second quarter and first six months of 1998
totaled $458,000 and $696,000 respectively. This compared to net after tax
profits in the second quarter and first six months of 1997 of $453,000 and
$171,000 respectively.
The decrease in sales and losses incurred in the second quarter and first six
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.
Sales, general and administrative expenses for the second quarter of 1998
totaled $1,950,000, compared to $569,000 for the first quarter of 1997. For the
first six months of 1998, S G & A expenses totaled $3,583,000 compared to
$967,000 in the same period of 1997. Second quarter and first six months sales,
general and administrative expenses of 1997 excluded the expenses of the
acquired companies except for PG Design for the month of June 1997, following
the date of its acquisition.
PG Design 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 "Kiosk" which is an electronic information center used
for point of purchase applications and shipments of existing products and
services to new OEM customers. Sales during the third quarter are expected to
increase. The Company's focus on new product development 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.
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,
Page 10 of 16
<PAGE>
Heartland Technology, Inc.
June 30, 1998
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
Recent Losses. The losses are principally attributable to a decline in orders
from the Company's principal customer. As a result of these factors, the
Company's profit after taxes for the second quarter of 1998, on a pro forma
basis fell by $914,000 as compared to the second quarter 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 86%) 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 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 recently. 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. 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.
Dependence on Key Employees and Management. PG Design hired additional
engineering, manufacturing, sales and finance personnel, and are restructuring
operations so that we will not rely significantly on any one individual in the
future. We also entered into agreements with key individuals to retain their
services and minimize negative effects arising from the departure of any of
these individuals. However, the loss of key individuals may adversely affect our
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. In addition,
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
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.
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
Page 11 of 16
<PAGE>
Heartland Technology, Inc.
June 30, 1998
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 results.
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 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.
Dependence on Debt Financing. The Company is dependent on existing sources of
debt financing. Our recent losses, coupled with 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
acquistions we make. If our lines of credit are insufficient to meet operating
cash requirements, or 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 materially adversely affect our business or financial results.
Year 2000. We use numerous computer systems in our operations and
administration. We believe that the significant portions of our systems do not
need to be modified or replaced in order to avoid problems related to computer
malfunctions resulting from the year 2000. However, if any of our systems, or
our customers' or suppliers' systems encounter problems from the year 2000
because they are not corrected or replaced, or if we need to pay more than we
expect to correct or replace any of our systems, it will adversely affect our
operations or financial results.
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' total
consolidated indebtedness was $7,531,000 at June 30, 1998. 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
Page 12 of 16
<PAGE>
Heartland Technology, Inc.
June 30, 1998
are unpredictable. The timing and amount of revenue varies 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.
The Annual Meeting of Stockholders was held on August 3, 1998.
At the Annual Meeting Ezra K. Zilkha was elected to be a director of the Company
to hold office until the 2001 Annual Meeting of Stockholders. Votes cast for Mr.
Zilkha were 1,561,832, votes withheld were 7,815 and non-votes were 101,591.
Directors whose terms of office continued after the meeting were Alan Andreini,
Robert S. Davis, Edwin Jacobson and John R. Torell, III.
An amendment of the Company's Certificate of Incorporation which modifies the
existing indemnification obligations of the Company was approved with 1,559,009
votes for, 8,861 votes against, 1,777 abstentions and 101,591 non-votes.
The appointment of Ernst & Young LLP as the Company's independent accountants
for the fiscal year 1998 was ratified with 1,569,372 votes for, 144 votes
against, 131 abstentions and 101,591 non-votes.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
Exhibit No. Description
- ----------- ----------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of April 10, 1998, by and among
Solder Station-One, Inc. Odilon Cardenas, Enedina Cardenas, Heartland Technology,
and SS Acquisition Corporation (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated April 24, 1998 (the "Registrant's
Form 8-K" dated April 1998)). +
2.2 Acquisition Agreement, dated as of April 29, 1998, by and between Zecal, Inc., as
seller, and Zecal Corp., as buyer (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated May 13, 1998 (the "Registrant's Form
8-K" dated May 1998)). +
10.1 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $1,700,000, and payable to
Odilon Cardenas and Enedina Cardenas (incorporated by reference to Exhibit 99.1 to
the Registrant's Form 8-K dated April 1998).
10.2 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $400,000, and payable to Odilon
Cardenas and Enedina Cardenas (incorporated by reference to Exhibit 99.2 to the
Registrant's Form 8-K dated April 1998).
10.3 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $175,000, and payable to
Corporate Finance Associates (incorporated by reference to Exhibit 99.3 to the
Registrant's Form 8-K dated April 1998).
</TABLE>
Page 13 of 16
<PAGE>
Heartland Technology, Inc.
June 30, 1998
<TABLE>
<CAPTION>
<C> <S>
10.4 Continuing Guaranty, dated as of April 10, 1998, by Heartland Technology,
Inc. in favor of Odilon Cardenas and Enedina Cardenas (incorporated by
reference to Exhibit 99.4 to the Registrant's Form 8-K dated April 1998).
10.5 Loan and Security Agreement, dated as of April 10, 1998, by and between Solder
Station-One, Inc., SS Acquisition Corporation, and LaSalle National Bank
(incorporated by reference to Exhibit 99.5 to the Registrant's Form 8-K dated
April 1998).
10.6 Guaranty, dated as of April 10, 1998, from Heartland Technology, Inc. to LaSalle
National Bank (incorporated by reference to Exhibit 99.6 to the Registrant's Form 8-K
dated April 1998).
10.7 Promissory Note, dated April 29, 1998, of Zecal Corp., in the principal amount of
$1,100,000, and payable to Zecal, Inc. (incorporated by reference to Exhibit 99.1 to
the Registrant's Form 8-K dated May 1998).
10.8 Guaranty, dated April 29, 1998, by Heartland Technology, Inc. in favor of Zecal, Inc.
(incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K dated
May 1998).
10.9 Loan and Security Agreement, dated as of April 29, 1998, by and between Zecal
Corp., any other Credit Party executing the agreement, and General Electric Capital
Corporation Inc. (incorporated by reference to Exhibit 99.3 to the Registrant's Form
8-K dated May 1998).
10.10 Second Amendment and Consent, dated April 29, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp.) and General Electric Capital
Corporation, to the Loan and Security Agreement, dated May 29, 1997 (incorporated
by reference to Exhibit 99.4 to the Registrant's form 8-K dated May 1998).
27 Financial Data Schedule (filed herewith).
</TABLE>
- ------------------
+ Certain schedules and similar attachments have been omitted. The
Registrant agrees to furnish supplementally a copy of any omitted
schedule or attachment to the Commission upon request.
(b) Reports on Form 8-K:
Form 8-K filed April 24, 1998 (Items 2 and 7)
Form 8-K/A filed June 24, 1998 (Item 7, including financial
statements of Solder Station-One, Inc.)
Form 8-K filed May 13, 1998 (Items 2 and 7)
Page 14 of 16
<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: August 14, 1998 BY: /s/ Edwin Jacobson
-------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 BY: /s/ Leon F. Fiorentino
-------------------------
Leon F. Fiorentino
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and Accounting Officer)
Page 15 of 16
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
Exhibit No. Description
- ----------- -------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization, dated as of April 10, 1998,
by and among Solder Station-One, Inc. Odilon Cardenas, Enedina
Cardenas, Heartland Technology, and SS Acquisition Corporation
(incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated April 24, 1998 (the "Registrant's
Form 8-K" dated April 1998)).
2.2 Acquisition Agreement, dated as of April 29, 1998, by and between
Zecal, Inc., as seller, and Zecal Corp., as buyer (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form
8-K dated May 13, 1998 (the "Registrant's Form 8-K" dated May
1998)).
Financial Data Schedule
10.1 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc.
and SS Acquisition Corporation, in the principal amount of
$1,700,000, and payable to Odilon Cardenas and Enedina Cardenas
(incorporated by reference to Exhibit 99.1 to the Registrant's Form
8-K dated April 1998).
10.2 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc.
and SS Acquisition Corporation, in the principal amount of
$400,000, and payable to Odilon Cardenas and Enedina Cardenas
(incorporated by reference to Exhibit 99.2 to the Registrant's Form
8-K dated April 1998).
10.3 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc.
and SS Acquisition Corporation, in the principal amount of
$175,000, and payable to Corporate Finance Associates (incorporated
by reference to Exhibit 99.3 to the Registrant's Form 8-K dated
April 1998).
10.4 Continuing Guaranty, dated as of April 10, 1998, by Heartland
Technology, Inc. in favor of Odilon Cardenas and Enedina Cardenas
(incorporated by reference to Exhibit 99.4 to the Registrant's Form
8-K dated April 1998).
10.5 Loan and Security Agreement, dated as of April 10, 1998, by and
between Solder Station-One, Inc., SS Acquisition Corporation, and
LaSalle National Bank (incorporated by reference to Exhibit 99.5 to
the Registrant's Form 8-K dated April 1998).
10.6 Guaranty, dated as of April 10, 1998, from Heartland Technology,
Inc. to LaSalle National Bank (incorporated by reference to Exhibit
99.6 to the Registrant's Form 8-K dated April 1998).
10.7 Promissory Note, dated April 29, 1998, of Zecal Corp., in the
principal amount of $1,100,000, and payable to Zecal, Inc.
(incorporated by reference to Exhibit 99.1 to the Registrant's Form
8-K dated May 1998).
10.8 Guaranty, dated April 29, 1998, by Heartland Technology, Inc. in
favor of Zecal, Inc. (incorporated by reference to Exhibit 99.2 to
the Registrant's Form 8-K dated May 1998).
10.9 Loan and Security Agreement, dated as of April 29, 1998, by and
between Zecal Corp., any other Credit Party executing the
agreement, and General Electric Capital Corporation Inc.
(incorporated by reference to Exhibit 99.3 to the Registrant's Form
8-K dated May 1998).
10.10 Second Amendment and Consent, dated April 29, 1998, between P.G.
Design Electronics, Inc. (formerly known as PG Newco Corp.) and
General Electric Capital Corporation, to the Loan and Security
Agreement, dated May 29, 1997 (incorporated by reference to Exhibit
99.4 to the Registrant's form 8-K dated May 1998).
27 Financial Data Schedule (filed herewith).
- ------------------------------------------------
+ Certain schedules and similar attachments have been omitted. The Registrant
agrees to furnish supplementally a copy of any omitted schedule or
attachment to the Commission upon request.
Page 16 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
financial statements contained in the body of the accompanying Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 0 3,232
<SECURITIES> 0 0
<RECEIVABLES> 4,955 2,384
<ALLOWANCES> 0 (73)
<INVENTORY> 3,515 1,660
<CURRENT-ASSETS> 8,933 7,792
<PP&E> 15,318 5,611
<DEPRECIATION> (6,171) (623)
<TOTAL-ASSETS> 40,029 30,179
<CURRENT-LIABILITIES> 12,165 5,455
<BONDS> 9,001 5,165
0 0
0 0
<COMMON> 501 501
<OTHER-SE> 18,362 19,058
<TOTAL-LIABILITY-AND-EQUITY> 40,029 30,179
<SALES> 12,017 2,013
<TOTAL-REVENUES> 12,017 2,013
<CGS> 8,876 1,239
<TOTAL-COSTS> 8,876 1,239
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 279 64
<INCOME-PRETAX> (1,159) 243
<INCOME-TAX> (463) 72
<INCOME-CONTINUING> (696) 171
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (696) 171
<EPS-PRIMARY> (.42) .10
<EPS-DILUTED> (.42) .10
</TABLE>
