<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11956
HEARTLAND TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1487580
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
547 West Jackson Boulevard, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/294-0497
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant, computed by reference to the last reported sales
price of the Registrant's common stock on the American Stock Exchange as of
March 25, 1999, was approximately $6,265,000 million. On that date there were
1,671,238 shares outstanding. For purposes of this computation, it is assumed
that non-affiliates of the Registrant are all holders other than directors and
officers of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from the Registrant's definitive proxy statement, which involves
the election of directors, to be filed with the Commission pursuant to
Regulation 14A, or if such proxy statement is not filed with the Commission on
or before 120 days after the end of the fiscal year covered by this Report, such
information will be included in an amendment to this Report filed no later than
the end of such 120-day period.
Exhibit index appears on Page 46.
<PAGE>
We caution you that certain statements in the Management's Discussion and
Analysis of Condition and Results of Operation section, and elsewhere in this
Form 10-K, 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 described in the Management's Discussion
and analysis of Condition and Results of Operations section, and elsewhere in
this Form 10-K. 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 or 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 these documents. The Company claims the protections of the
safe harbor for forward-looking statements contained in Section 21E of the
Securities Exchange Act of 1934.
PART I
Item 1. Business
Heartland Technology, Inc. (the "Company" or "HTI") has two lines of business.
It is engaged in electronic contract manufacturing through its subsidiaries,
P.G. Design Electronics, Inc. ("PG"), Zecal Corp. ("Zecal") and Solder Station-
One ("Solder"). The Company also holds general partner interests in partnerships
which are engaged in real estate sales, leasing and development.
History
- - -------
The Company was formerly known as Milwaukee Land Company ("MLC"). MLC was
organized as a corporation under the laws of the State of Iowa on September 14,
1881. It was a subsidiary or affiliate of the Chicago, Milwaukee, St. Paul and
Pacific Railroad Company (the "Railroad") and its predecessors. It was formed
for the purpose, among other things, of acquiring and managing land used in the
Railroad's operations.
In 1971, Chicago Milwaukee Corporation ("CMC") was formed as a holding company
for the Railroad. In 1977, the Railroad filed for protection under federal
bankruptcy laws. In 1985, the Railroad's Plan of Reorganization was confirmed by
the federal court and the Railroad was renamed CMC Real Estate Corporation
("CMCRE"). In March 1988, CMC, CMCRE and MLC registered with the Securities and
Exchange Commission (the "Commission") as closed-end, non-diversified management
investment companies under Section 8(a) of the Investment Company Act of 1940
(the "1940 Act"). CMCRE was liquidated into CMC on November 30, 1989, and MLC
became a wholly-owned subsidiary of CMC. In 1990, the real estate assets held by
MLC and certain other assets and liabilities were contributed by MLC and CMC to
two newly-organized partnerships - Heartland Partners, L.P., a publicly-traded
limited partnership of which HTI is the general partner and holds limited
partner interests ("Heartland"), and CMC Heartland Partners, a general
partnership in which HTI and Heartland are the general partners and HTI is the
managing general partner ("CMC Heartland"). In June 1993, MLC was reincorporated
in the State of Delaware pursuant to a merger transaction with a wholly-owned
subsidiary. On June 30, 1993, CMC distributed MLC's common stock to CMC's
stockholders, spinning off MLC as a separate publicly-held company. CMC has
since ceased operation and was dissolved on May 22, 1995.
In May 1997, MLC and PG Newco Corp. ("PG Newco"), a wholly-owned subsidiary of
MLC, purchased substantially all of the assets, and assumed certain liabilities
of, PG Design Electronics, Inc. ("PG Design"), a company engaged in the business
of contract design and manufacture of electronic assemblies for computer and
computer printer original equipment manufacturers ("OEMs"). PG Newco's name was
then changed to P.G. Design Electronics, Inc. ("PG").
On October 31, 1997, MLC changed its name to Heartland Technology, Inc. ("HTI").
Effective December 31, 1997, the Commission approved the deregistration of HTI
as an investment company.
On April 10, 1998, the Company acquired the stock of Solder, a provider of
speciality services to the printed circuit board industry.
Page 1 of 51
<PAGE>
On April 29, 1998, PG purchased the assets of Zecal which owns patented "Z-
Strate"(R) technology for plating copper circuits on a ceramic substrate.
Electronics Business
- - --------------------
The Company is engaged in the electronic contract manufacturing business through
its subsidiaries. On a contract basis, the Company designs, manufactures and
tests electronic assemblies, designs and tests Z-Strate(R) circuit boards, and
provides services to the printed circuit board industry. While the customer base
is diverse, the primary customers are OEMs in the computer and computer printer
industry. The Company works either on a turnkey or consignment basis. Turnkey
involves procurement of materials as well as product assembly, whereas the
customer provides the components for consignment orders.
The Company uses surface mount technology ("SMT") in the manufacture of
electronic assemblies. Electronic devices are soldered directly to the circuits
on the surface of a printed circuit board. The Company also produces printed
circuit boards on ceramic substrate using its proprietary Z-Strate(R) process,
and provides services to the printed circuit board industry. The Company's
primary customer purchases memory modules. A memory module is a printed circuit
board containing one or more memory chips and associated electronic devices and
circuitry. While the Company does produce standard memory modules of the type
used in typical desktop computers, it specializes in the design, production and
testing of "custom" memory modules for high-end workstations, servers and for
computer printers. The Company designs and manufactures for computer printer
OEMs a product which is used in retail stores to demonstrate the capabilities of
computer printers ("Printer PODs"). The Company has developed a product called
the "Portal(R)". Portal(R) is an interactive electronic information center used
for point of purchase applications; The Company has produced refinements to the
Z-Strate(R) process to improve the application for the circuit boards in the
wireless telecommunications market. Services provided to printed circuit board
manufacturers include hot air solder leveling, solder mask, and precious metal
plating.
The products manufactured by the Company are complex, generally involve low
volume production runs and require the use of modern technology, production
techniques and equipment.
Customer Base. The majority of the Company's customers are located in the United
States; however, their products are shipped internationally. In 1998, NEC
accounted for approximately 52% and Hewlett Packard accounted for approximately
19% of the Company's business. The Company believes that it has strong
relationships with its major customers which have been established over the
years. However, the Company could lose one or all of these customers and the
loss of one or all of them could have a material adverse effect on the Company's
results. The Company does not have any long-term contractual relationships with
any of its customers.
PG and Zecal's marketing operations are supervised by their Vice Presidents of
Marketing. Marketing and sales are also performed by senior management and
technical personnel of the Company. The Company uses outside sales
representatives.
Strategy. The Company's strategy is to focus on high margin segments of the
electronics manufacturing business. The Company does accept lower margin
business in certain instances to develop or maintain relationships with
companies and to use its capacity. While the Company seeks to increase sales to
existing customers, it also plans to diversify products as well as the customers
and industries to which it sells. The Company is looking for opportunities for
growth by acquisition or joint venture as well as by expanding its existing
business. The Company aims to grow its business within its niche of technically
advanced design and manufacturing, which it believes is appropriate for its
strengths and long-term objectives. The Company has added manufacturing
capacity, is adding testing equipment and is working on the design and
prototyping of new products. To realize this strategy, the Company may require
the allocation of substantial resources, some or all of which may be unavailable
to the Company.
The Company invested approximately $5,701,000 for equipment in 1998. This amount
includes the $2,027,000 for fixed assets acquired in the Solder purchase on
April 10, 1998 and the $2,277,000 in fixed assets acquired in the Zecal purchase
on April 29, 1998.
Page 2 of 51
<PAGE>
Competition. There is significant competition in the electronics contract
manufacturing market. The Company believes that competition in the market
segments it serves is based on product and service quality, reliability and
timely delivery to customers. The Company's competitive advantage has been
maintained by its capacity to handle limited runs of a product on short notice,
and its ability to perform analysis and provide design advice while working
closely with the customer using the latest technologies. The electronics
contract manufacturing industry is comprised of a large number of companies. The
Company faces intense competition from established competitors and from similar
niche players who focus on low volume/high margin production. Certain
competitors have greater financial resources and manufacturing capacity than the
Company. The Company may also face competition from current and potential
customers, including OEMs themselves, who may decide to manufacture product
internally. However, the Company believes that rather than viewing electronic
subcontractors as a competitive threat, OEMs have become increasingly reliant
on, and want to align themselves with subcontractors. During periods of
recession in the electronics industry, the Company's competitive advantages in
the areas of quick-turnaround manufacturing and responsive customer service may
be of reduced importance to OEMs, who may become more price sensitive. Although
the Company generally does not pursue high-volume, price-sensitive business, it
may be at a competitive disadvantage with respect to price when compared to
manufacturers with lower cost structures.
Environmental Issues. Proper waste disposal is a consideration for the Company
because metals and chemicals are used in the manufacturing process. Water used
in the manufacturing process must be treated to remove metal particles and
chemical contaminants before it can be discharged into the municipal sanitary
sewer system. A manufacturing facility must operate under an effluent discharge
permit issued by the appropriate government authority and renewed periodically.
The Company is also subject to environmental laws relating to storage, use and
disposal of chemicals, solid waste and other hazardous materials.
The Company believes that it is currently in compliance with all applicable
environmental protection requirements in all material respects. The Company does
not anticipate any significant expenditures in maintaining its compliance.
However, there is no assurance that violations will not occur in the future as a
result of human error, equipment failure or other causes. The implications of
such potential failure include litigation, fines and other penalties such as the
revocation of the necessary permits. New or more stringent environmental laws
may be passed in the future which could cause the Company to have to expend
money for compliance and could increase its operating costs.
Proprietary Rights. The Company has patents for its Z-Strate(R) technology; but
does not have patents for its other products. The Company also has some non
patented trade secrets and contractual rights to certain designs or processes.
The Company has a number of trademarks, which include: Xceed; Xceed Technology;
Xceed Technology and Design; Color Fusion, Resolutionary, Z-Strate and Portal.
Other than the Z-Strate technology, patents and trademarks are of relatively
marginal importance to the Company, since original equipment customers typically
contract for the manufacture of products designed to their specifications.
Employees. The parent company has no employees and reimburses CMC Heartland for
salary costs for CMC Heartland employees allocated to the Company. The Company
has a total of approximately 225 employees at the three subsidiary companies.
Raw Materials. The raw materials required for electronics contract
manufacturing, including printed circuit boards, ceramic substrate, chemicals,
memory chips, electronic components such as resistors, diodes and capacitors,
and solder are generally readily available from outside suppliers, with lead
times ranging from a couple of days to fourteen weeks for some components.
Memory chips for the memory modules are typically provided by the contract
purchaser. The Company has at times experienced delays in its supply of memory
chips. The Company uses liquid crystal displays ("LCD") in the Portal. LCD
manufacturers are currently allocating LCD's among customers. The Company
purchases other components from a number of outside suppliers and is not
dependent on any particular supplier.
Cyclical Demand. The Company does not believe that its business is subject to
seasonal variations, but it may be subject to cyclical demand associated with
orders received. The Company is largely dependent on its ability to deliver
short runs and quick turnarounds, requiring the maintenance of sufficient
inventory to meet these demands. The Company does receive monthly forecasts from
its major customers of anticipated needs for long lead components, enabling it
to maintain continuous allotments and shipments of goods from suppliers as
required.
Page 3 of 51
<PAGE>
Backlog. The Company has not historically tracked backlog orders because orders
are often received with short lead times and all orders are subject to
cancellation or postponement.
Operations. The Company believes that it made progress on a number of fronts in
1998. The Company believes that to achieve profitable growth as well as to
maintain existing business that it needed to improve its organizational
structure and personnel. To that end, the Company and its subsidiaries have
hired management, engineering, manufacturing, sales and finance personnel.
The Company acquired Zecal and Solder Station One during 1998 to further the
diversification of the Company's products, customers and markets.
The Company delivered the first Portal(R) units to customers in 1998.
PG Design is focused on diversification and new products. PG is actively seeking
new opportunities for custom memory module business from NEC and is seeking to
add additional semiconductor manufacturers as custom memory module customers. PG
has discussions ongoing with two large semiconductor manufacturers, although
these discussions may not lead to contracts.
PG believes it will be successful in 1999 in adding contract manufacturing
customers outside of the computer and computer printer industries. The Company
is, with an engineering firm, negotiating for the assembly of a video display
unit for automotive applications. The Company currently has received orders from
a consumer products company to assemble circuit boards.
PG added a new customer for its Printer PODs in 1999, and is experiencing
increased Printer POD orders from existing customers. PG is seeking additional
customers for its PODs.
PG's other significant electronic product is an interactive computer, named
"Portal(R)", which is designed and manufactured for the retail kiosk
marketplace. Possible applications are movie ticket sales, lottery or video
poker, airline electronic ticketing, internet kiosks, supermarket coupons
dispensers and similar devices. More than 150 beta installations have been
delivered in the first quarter of 1999 and PG is launching full production on
this product in the second quarter. Portal(R) has the potential to become a
significant revenue source for the company during 1999.
PG Design has strengthened its organization significantly by the addition of
design and process engineering, sales, program management, manufacturing and
financial personnel. The additions were required to support the major effort to
develop new products and services, and new markets for existing product and
services, as described later in this report. The Company's focus on new product
development and new markets for existing products and services as well as
acquisitions should reduce the Company's concentration with respect to customers
and the computer industry.
HTI has devoted a great deal of time and attention to the future of Zecal. The
Company continues to believe that Zecal can be profitable by pursuing its
historical markets of power supplies and control devices, in addition to the
emerging market for RF devices. There is also a large potential market for Z-
Strate(R) in automotive applications such as transmission controllers, fuel
injector controls and under hood electronic applications. A prototype
transmission control unit has been delivered to a big three auto manufacturer
and is currently under evaluation. Z-Strate(R) is also well suited for leading
edge "chip scale" packaging because Z-Strate(R)'s coefficient of expansion is
similar to that of the silicon in integrated circuits. The Company believes,
based on the advice of an outside consultant, discussions with potential
customers, and its own analysis, that Z-Strate(R) has significant advantages in
performance and cost over competitive technologies in radio frequency ("RF")
devices. RF devices are used, among other applications, in wireless
communication products, such as cellular phone handsets, cellular phone base
stations, pagers and cable television ("CATV") distribution systems.
Z-Strate(R) based devices, which feature very high quality (i.e. low electrical
resistance) copper connections on ceramic substrates, exhibit significantly
lower power losses than RF devices using thick film technologies. This
translates into a longer battery life for battery powered uses. In addition Z-
Strate(R) offers very "fine pitch" circuits, allowing the high circuit densities
and the small devices for product miniaturization. The Company believes that Z-
Strate(R) based devices can be produced at lower cost than certain competing
technologies.
There is a large market for RF devices. There were about 163 million cellular
phone handsets manufactured in 1998, and this market alone is projected to grow
at a significant rate. Zecal is developing components for use in cellular
telephone handsets and base stations. These components have been prototyped and
are currently being qualified by the customers for production. In the event that
Zecal receives orders for the cellular phone handset components, it will have to
make a significant capital investment to expand capacity.
Realization of these prospects is likely to require financing. The Company may
or may not be able to obtain the needed financing.
Real Estate Development
- - -----------------------
Through its investment in Heartland and CMC Heartland (the "Partnerships"), the
Company is engaged in the business of development and sale of real estate,
including the properties formerly owned by the Company. This real estate
development business consists of the leasing, development and sale of various
commercial, residential and recreational properties in Illinois, Georgia,
Wisconsin, Montana, Minnesota, North Carolina and Washington. The Company has a
1% general partnership interest in Heartland which entitles the Company to 1% of
Heartland's available cash for distribution and allocation of taxable income and
loss. The Company also has a .01% general partnership interest in CMC Heartland
which entitles the Company to .01% of CMC Heartland's available cash for
distribution and an allocation of taxable income and loss before distributions
and allocations are made by Heartland. The Company also owns the Class B limited
partnership interest in Heartland (the "Class B Interest"). In general, the
Class B Interest entitles the holder to .5% of Heartland's available cash for
distribution and allocation of taxable income and loss. In addition, items of
deduction, loss, credit and expense attributable to the satisfaction of Plan
Liabilities (described below) are specially allocated 99% to the holder of the
Class B Interest and 1% to the Company as the general partner until the
aggregate amount of all such items allocated to the Class B Interest equals the
aggregate capital contribution with respect to the Class B Interest. If the
aggregate amount of such items specially allocated to the holder of the Class B
Interest is less than the amounts contributed by such holder to Heartland, such
excess will be reflected in the capital account of the Class B Interest.
Additionally, pursuant to a management agreement between the Company and CMC
Heartland, CMC Heartland is required to pay to the Company an annual management
fee in the amount of approximately $425,000, through December 31, 1999.
The Company, by reason of its serving as the general partner of the
Partnerships, is liable and responsible to third parties for such Partnerships'
liabilities to the extent the assets of such Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate businesses, in connection with the real estate
transfer, the Partnerships have assumed primary responsibility and liability for
the resolution and satisfaction of most of the liabilities for claims remaining
under the plan of reorganization of the predecessor of CMC Real Estate, certain
other contingent liabilities with respect to the properties transferred to CMC
Heartland arising after the consummation of such plan, and the costs and
expenses in resolving such plan and other contingent liabilities (collectively,
the "Plan Liabilities"). Included in the Plan Liabilities are known
environmental liabilities associated with certain of the properties transferred
to the Partnerships arising out of the activities of the Railroad or certain
lessees or other third parties. Further environmental obligations as yet unknown
in respect of these properties may become due and owing in the future. A
majority of the known environmental matters stem from the use of petroleum
products, such as motor oil and diesel fuel, in the operation of a railroad. The
Company and/or the Partnerships have been notified by government agencies of
potential liabilities in connection with certain of these real estate
properties. Descriptions of the known material environmental matters are
included in the reports filed by Heartland with the Commission pursuant to the
provisions of the Securities Exchange Act of 1934, as amended, (the "1934 Act").
Page 4 of 51
<PAGE>
On June 30, 1993, the Company assumed from CMC, its former parent corporation,
any obligations for which CMC was or might become liable (the "MLC Assumed
Liabilities") arising out of any matters existing on or occurring prior to June
30, 1993 other than (i) the Plan Liabilities, (ii) liabilities directly related
to CMC's business of investing and managing its investment securities, (iii) the
lawsuit then pending (and since resolved) against CMC relating to its preferred
stock, or (iv) any liabilities relating to federal, state, local or foreign
income or other tax matters.
Economic, and Other Conditions Generally. The real estate industry is highly
cyclical and is affected by changes in national, global and local economic
conditions and events, such as employment levels, availability of financing,
interest rates, consumer confidence and the demand for housing and other types
of construction. Real estate developers are subject to various risks, many of
which are outside the control of the developer, including real estate market
conditions, changing demographic conditions, adverse weather conditions and
natural disasters, such as hurricanes, tornados, delays in construction
schedules, cost overruns, changes in government regulations or requirements,
increases in real estate taxes and other local government fees and availability
and cost of land, materials and labor. The occurrence of any of the foregoing
could have a material adverse effect on the financial conditions of the
Partnerships, and in turn the Company.
Access to Financing. The real estate business is capital intensive and requires
expenditures for land and infrastructure development, housing construction and
working capital. Accordingly, the Partnerships anticipate incurring additional
indebtedness to fund their real estate development activities. As of December
31, 1998, the Partnerships' total consolidated indebtedness was $13,492,000.
There can be no assurance that the amounts available from internally generated
funds, cash on hand, the Partnerships' existing credit facilities and sale of
non-strategic assets will be sufficient to fund the Partnerships' anticipated
operations. They may be required to seek additional capital in the form of
equity or debt financing from a variety of potential sources, including
additional bank financing and sales of debt or equity securities. No assurance
can be given that such financing will be available or, if available, will be on
terms favorable to the Partnerships. If the Partnerships are not successful in
obtaining sufficient capital to fund the implementation of its business strategy
and other expenditures, development projects may be delayed or abandoned. Any
such delay or abandonment could result in a reduction in sales and would
adversely affect the Partnerships', and in turn the Company's, future results of
operations.
Period-to-Period Fluctuations. The Partnerships' real estate projects are long-
term in nature. Sales activity varies from period to period, and the ultimate
success of any development cannot always be determined from results in any
particular period or periods. Thus, the timing and amount of revenues arising
from capital expenditures are subject to considerable uncertainty. The inability
of the Partnerships to manage effectively their cash flows from operations would
have an adverse effect on their ability to service debt, and to meet working
capital requirements.
Item 2. Properties
HTI's corporate headquarters is at 547 West Jackson Boulevard, Suite 1510,
Chicago, Illinois. It shares approximately 9,000 square feet of leased office
space with Heartland. The lease provides for an annual base rent of $108,000
through the lease expiration date of December 31, 1999, and is subject to
operating expense and tax escalation.
PG's corporate and manufacturing headquarters are located at 48700 Structural
Drive, Chesterfield, Michigan. The building, which operates both as an office
and a plant, has approximately 32,000 square feet of floor space. This facility
is leased at a monthly rate of about $16,000 for a ten year term ending January
31, 2004, with an option to purchase the building and property at the end of the
term.
Solder's corporate and manufacturing headquarters are located at 2221 and 2231
West Cape Cod Way, Santa Ana, California. The buildings on this site occupy
approximately 21,200 square feet. These facilities are leased for a monthly rate
of approximately $24,000 in 1999. The lease expires January 1, 2002. The Company
has options to acquire buildings at the end of the lease term.
Zecal's corporate and manufacturing headquarters are located at 456 North
Sanford Road, Churchill, New York. The 31,500 square foot facility is being
leased for approximately $9,000 per month through February of 2000.
Page 5 of 51
<PAGE>
Item 3. Legal Proceedings
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. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders in the quarter ended
December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the American Stock Exchange under the
symbol "HTI". The high and low sales prices for each quarterly period of 1998
and 1997 are shown below.
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
First quarter 17-3/16 16-1/4
Second Quarter 17-3/8 12-1/4
Third Quarter 12-3/4 7-5/8
Fourth Quarter 8-3/8 5-3/8
1997
First Quarter 8-3/8 6-1/8
Second Quarter 10-1/4 7-3/4
Third Quarter 14-1/4 9-3/4
Fourth Quarter 17-1/2 13-3/4
</TABLE>
No dividends have been paid on the Company's common stock. See Item 7
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and Note 7 in Item 8 "Financial Statements and Supplementary Data"
to the notes to consolidated financial statements for restrictions on payments
and retained earnings. As of March 25, 1999, there were 591 holders of record of
the Company's common stock.
Page 6 of 51
<PAGE>
Item 6. Selected Financial Data.
Operating Company
- - -----------------
The selected financial data set forth below has been derived from our audited
consolidated financial statements and the notes thereto. The selected financial
information should be read in conjunction with the consolidated financial
statements and notes thereto contained elsewhere in this 10-K.
Calendar year 1998 includes results of Solder from April 10, 1998, and Zecal
from April 29, 1998.
(Amounts in Thousands Except for Per Share Amount)
<TABLE>
<CAPTION>
December 31
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 27,668 $ 15,093
Net income (loss) $ (2,137) $ 1,975
Net income (loss) per common share (1,671 shares issued and outstanding) $ (1.28) $ 1.18
Total assets $ 37,363 $ 30,179
Long-term obligations $ 8,132 $ 5,165
Stockholders' Equity $ 17,422 $ 19,559
</TABLE>
Item 7. Managements's Discussion and Analysis of Financial Conditions and
Results of Operations
Liquidity and Capital Resources
A significant portion of the $3,232,000 in cash and marketable securities on
hand at December 31, 1997, was used to consummate the acquisition of Solder on
April 10, 1998, and Zecal on April 29, 1998. As of December 31, 1998, $3,603,000
was borrowed under the Company's lines of credit with its lenders. Additional
borrowings of $1,296,000 were available under the lines of credit at December
31, 1998.
Solder 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% (7.33% at
December 31, 1998). Borrowings are collateralized by accounts receivable and
inventory. Borrowings under the line of credit at December 31, 1998 were
$679,000. The line of credit matures on April 30, 2001.
Page 7 of 51
<PAGE>
Solder 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% (8.5% at December 31, 1998). The $900,000
loan is for a five year term and bears interest at the prime rate plus 1% (8.0%
at December 31, 1998). LSNB granted Solder a temporary waiver from paying
principal and interest on the $1,200,000 loan for a period of August 31, 1998,
through November 30, 1998. The amounts deferred plus additional interests are
due no later than April 30, 2001. The outstanding balances on these loans at
December 31, 1998, were $1,007,000 and $765,000, respectively.
Solder has a $1,700,000 subordinated note payable to its former owners. The note
bears 8% interest. Principal 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. The debt
is subordinated to the LSBN debt, and as such, due to the waiver obtained from
LSBN, no interest payments were allowed to be made until the credit facility to
LSNB was back in compliance. The $112,000 in deferred interest has been added to
the loan balance and is due no later than October 10, 2001. Interest payments on
the note were resumed as of January 1999.
Solder has a contingent $400,000 note payable to its former owners. The note was
payable April 10, 1999, providing Solder's calendar year 1998 operating income
was greater than $1,508,999. Since Solder did not achieve this level of income,
the note is payable on April 10, 2001, providing Solder's cumulative operating
income for the calendar years 1998, 1999 and 2000 is greater than $6,027,999. If
cumulative operating income of $6,027,999 is not achieved, the note is not
required to be paid.
Solder has a $175,000 original principal amount non-interest bearing note in
connection with the Solder transaction. The note is paid out of the collections
of certain accounts receivable. The outstanding balance on this note at December
31, 1998 was $61,494.
Zecal has a line of credit with General Electric Capital Corporation ("GECC") in
the amount of $4,000,000 as of December 31, 1998. Borrowings at December 31,
1998, amounted to $751,000. Interest was based on a floating index rate plus
3.2590% (8.77% at December 31, 1998). Borrowings were collateralized by
accounts receivable and equipment.
Zecal has a note payable to the seller of Zecal's assets in the principal amount
of $1,100,000. The note bears 8% interest, beginning one year (April 29, 1999)
after issuance. Interest and principal payments of $91,667 are due quarterly
beginning July 30, 1999. At December 31, 1998, $1,100,000 was outstanding.
PG has a line of credit with General Electric Capital Corporation in the amount
of $7,000,000 with an interest rate of the 30 day dealer placed commercial paper
rate published in the Wall Street Journal plus 2.75% (7.65% at December 31,
1998). Borrowings on the line at December 31, 1998 were $2,173,000. In 1997,
term loans with an original principal amount of $4,675,000 and bearing interest
at a rate equal to one month LIBOR plus 3.62% (9.24% at December 31, 1998) were
obtained from General Electric Capital Corporation. The term loans are payable
in monthly installments through June 1, 2000. At December 31, 1998, the
principal amount outstanding was $2,142,000. At December 31, 1997, the principal
amount outstanding on the line of credit was $147,000, and the amount
outstanding on the term loans was $3,756,000. Under the terms of the line of
credit and term loans, PG was required to maintain a minimum fixed charge ratio
and minimum tangible net worth, was limited in incurring additional indebtedness
and in making capital expenditures, and was restricted from making certain
payments. Borrowings under the line of credit are collateralized by accounts
receivable and inventory and cross-collateralized with the term loans. The term
loans were secured by machinery and equipment and cross-collateralized with the
line of credit. All borrowings are guaranteed by the Company. On September 28,
1998, GECC placed a limitation on additional borrowings to a maximum of $200,000
per month until Zecal achieved certain profit levels.
On December 31, 1998, PG entered into an agreement with Norwest Business Credit,
Inc. to refinance the PG and Zecal borrowings. The new line of credit is
$10,500,000 and the term loan for Capital Equipment is $4,500,000, payable in 60
monthly installments of $75,000 plus accrued interest. The interest rate on the
loans is the Norwest Base Rate plus 0.25% (8.0% at December 31, 1998).
Page 8 of 51
<PAGE>
In connection with this refinancing, PG Design incurred approximately $353,000
of prepayment penalties from GECC. This amount will be recorded as an
extraordinary expense in the first quarter of 1999.
HTI has notes payable to the seller of PG in the principal amount of $3,000,000.
The notes are payable $1,500,000 in September 2000 and $1,500,000 in May 2002.
The notes bear interest at 8% per year, which is paid quarterly.
The Company's indebtedness includes $7,806,000 of senior debt ($5,066,000
payable to GECC; $2,451,000 payable to LSNB and $289,000 to other institutions)
and $5,973,000 of subordinated debt ($3,000,000 payable to the seller of PG
Design; $1,100,000 payable to the seller of Zecal, $1,812,000 payable to the
seller of Solder; and an additional $61,000 connected with the Solder
transaction). The Company also has $253,000 of capital lease obligations.
Cash flow from operations for 1998 decreased by $3,232,000. The Company believes
that it will have sufficient funds available for operating expenses, debt
service 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 or for the development of
new facilities required for additional business.
The Company requires additional funding in order to develop new products and to
realize existing opportunities. If the Company is unable to obtain such
financing on favorable terms, or not at all, it may have a material adverse
effect on the Company's results of operations and future prospects.
The Company is in violation of certain covenants included in long term debt
agreements, as of December 31, 1998 and is currently in negotiations with its
lenders to modify certain existing financial covenants, and increase the amount
of the credit facility. While the Company has no reason to believe that the
extension, modification of terms and increased capacity of the credit facility
will not be granted, there can be no assurance that the contemplated transaction
will be approved by the lenders.
Results of Operations
Net sales totaled $27,668,000 for 1998 and include revenues from Solder from
April 10, 1998, its date of acquisition, and Zecal from April 30, 1998, its date
of acquisition. Sales for 1997 totaled $15,093,000, which included only the
sales of PG from the time of its acquisition on May 30, 1997.
The net loss for 1998 totaled ($2,137,000) or ($1.28) per share compared to net
after tax profit in 1997 of $1,975,000 or $1.18 per share.
Selling, general and administrative (SG&A) expenses for 1998 totaled $8,124,000
compared to $2,998,000 for 1997. Included in 1998 is a full year of operations
for PG as well as the expense of the newly acquired companies. Zecal and Solder
whereas 1997 contains 7 months of operations for PG. The additional 5 months of
PG operations and the Zecal and Solder acquisitions account for $2,266,000 of
the increase. As discussed below, the Company hired additional personnel to
support existing business and future profitable growth.
Amortization expense increased from $559,000 in 1997 to $885,000 in 1998.
$210,000 of the increase relates to a change in estimate of the expected life of
the goodwill from 40 to 20 years. In addition, the Company acquired Solder
during 1998 which resulted in additional amortization of goodwill of $143,000.
Offsetting the above increases in 1998 was a reduction in the deferred
compensation amortization resulting from the elimination of a deferred
compensation arrangement relating to an acquisition.
Page 9 of 51
<PAGE>
Accounts Receivable and Inventory levels increased by $1,063,000 and $1,445,000
respectively from December 31, 1997 levels. The entire Accounts Receivable
increase and $119,000 of the increase in Inventory was attributable to the
acquisition of Solder and Zecal.
Because the Company's 1998 and 1997 financial statements now reflect its new
status as an operating company, comparisons between 1996 and prior years when
the Company was a closed-end, non-diversified management investment company are
not meaningful and are therefore not presented.
Other income decreased by $809,000. The decrease was primarily the result of a
loss of $11,000 for 1998 from the investment in the partnerships compared to a
gain of $587,000 in 1997, and to a reduction in interest income of $223,000. The
reduction in interest income is attributable to the Company purchasing Solder
and Zecal with the monies formerly invested in interest bearing securities.
Forward-Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section 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
- - --------------------
Dependence on Debt Financing. The Company is dependent on existing sources of
debt financing. The cash outflows used in the recent investing activities,
require that borrowings be available under existing lines of credit for day to
day cash requirements. If the current trends in the industry or significant
fluctuations in operations and results continue, or if the Company is unable to
adapt the business to meet industry needs, the Company will continue to rely on
lines of credit for its operating cash needs, or for any acquisitions. If the
lines of credit are insufficient to meet operating cash requirements, or if the
ability to borrow under the lines of credit becomes restricted in any way, the
Company will be unable to meet day to day cash needs for the business. The
inability to meet day to day cash requirements for the business will adversely
affect the Company's business or financial results.
Page 10 of 51
<PAGE>
Losses. The 1998 results are principally attributable to the following
factors: 1) expenses in connection with the acquisitions of Solder Station and
Zecal; 2) operating losses of Zecal; 3) hiring additional personnel for HTI and
PG Design; 4) a decline in orders from the Company's largest customer; and 5) a
change in amortization of goodwill. As a result of these factors, the Company
incurred a $2,137,000 loss after taxes for 1998.
Dependence on Customers. A large percentage (approximately 71%) of sales comes
from two customers. The Company does not have long term contracts with any of
these large customers. Steps are being taken to diversify the product lines and
to reduce 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 revenues. If the Company loses a major customer,
or if a major customer reduces its purchases of products and services, financial
results will be materially affected. Also, economic and other conditions may
cause customers to cancel, reduce or delay orders.
Acquisition Integration. The Company's electronics business operations consist
of the PG, Solder and Zecal. The Company acquired all of these businesses within
the past three years. The businesses acquired have different cultures,
procedures and organizational structures. The Company expects future
acquisitions to have the same kinds of differences. The Company may have
difficulties managing growth as it integrates new operations, adds customers and
expands. Failure to manage growth, or to control expenses related to growth, may
materially affect the business and financial results.
Leverage; Access to Financing. The Company is highly leveraged, must maintain
certain minimum ratios, and is prohibited from taking certain actions, under
existing credit arrangements. In the second, third and fourth quarters of 1998,
the Company was unable to meet minimum ratios and other covenants required under
existing credit agreements. As a result, the Company sought and received waivers
from its creditors for such covenants. The high level of debt, or the
restrictions imposed by the debt, may adversely effect financial results or the
Company's ability to operate its business, including making future acquisitions.
Any future acquisition is expected to require additional financing. The Company
may not be able to find additional financing sufficient to make any or all of
the desired acquisitions. Even if financing is obtained, the terms may be less
favorable than the current financing terms. The inability to borrow additional
money, or to borrow on terms as favorable as the current terms may adversely
effect the business and financial results. In addition, if the Company continues
to experience the current market trends or negative operating results, it may
fail to comply with financial covenants under the existing credit agreements.
The Company may not be able to obtain waivers from its lenders for future non-
compliance with the credit agreements, and may lose the existing
Page 11 of 51
<PAGE>
financing as a result. Any loss or reductions of the existing financing would
adversely affect the business and financial results.
Dependence on Key Employees and Management. The Company has hired additional
management, 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.
The focus is on the high margin segments in the electronics manufacturing and
printed circuit board industries. A decline in demand for these products or
services will adversely affect the business or financial results. New products
and services are being developed and the Company is pursuing acquisitions, to
diversify business beyond the computer segment of the electronics manufacturing
industry, to keep up with the pace of change in the computer industry and to
grow and diversify the business. Failure to successfully develop new products
and services demanded by the industry may adversely affect the business and
financial results.
Proprietary Rights. PG 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 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 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
will be successful in resolving this issue on a basis that is satisfactory both
to PG 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'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 in respect of its Printer POD sales. Similarly,
such profit margin could be negatively impacted by the costs incurred by PG 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 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.
Zecal has patented technology for the plating of copper circuits on a ceramic
substrate and has non patented trade secrets relating to Z-Strate(R) and devices
manufactured with Z-Strate(R) as well. The Z-Strate(R) patents are licensed to
another company, Zecal does not receive any payments from this license.
Competition. The electronic manufacturing business is very competitive. Many
customers are sensitive to prices and also demand high quality products using
the most advanced technologies. If a competitor offers a superior product or
service, it will adversely affect the Company's ability to compete in the
industry. Competitors may have superior resources, research and development and
other capabilities. Any advantage a competitor has may adversely affect the
Company's business and financial results. Also, customers could vertically
integrate or otherwise decide to compete with the Company. Zecal's Z-Strate(R)
patents are licensed to a competitor.
New Products and Technological Change. The Company's customers compete in
markets with rapidly changing technology, evolving industry standards and
continuously improving products and services. These characteristics create short
product life cycles. The Company's success depends upon its customers' ability
to develop and market new products successfully in this changing environment. In
addition, the Company's success depends on its ability to provide products and
services that customers need to develop and market new products. If efforts and
strategies to create and sell new products and services and to enter new markets
fail to keep up with constantly changing technology, or if customers fail to
develop successful new products and services, it may adversely affect the
Company's financial efforts.
Page 12 of 51
<PAGE>
Acquisition Strategy. The Company is actively seeking acquisitions in the
electronics manufacturing industry. The Company believes that strategic
acquisitions will help grow and diversify the business. In analyzing
acquisitions, careful consideration is given to the new markets, customers and
competitors and any other factors that are believed to be relevant to the
investment decision. Although investment decisions are carefully analyzed,
factors effecting the success of acquired businesses may not develop according
to plans which may adversely affect the Company's business or financial results.
Fluctuations in Results. The Company's operations and financial results can
fluctuate significantly due to the level and timing of customer orders. The
Company's 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 results could result in the
Company having insufficient cash to pay for expected operating expenses, debt
amortization payments, or capital expenditures.
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 effect our financial results.
Leverage. The Partnerships are highly leveraged. The Partnerships' borrowings at
December 31, 1998 were $13,492,000. 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 effect 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. The ultimate
success of any development cannot be determined from short term results. Short
term results 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.
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.
Page 13 of 51
<PAGE>
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, remediation, testing and implementation. To date, we have fully
completed our 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. Based on a review of our 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 June 30, 1999. 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 January 31, 1999, with all remediated
systems fully tested and implemented by June 30, 1999, with 100% completion
targeted for September 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 June 30, 1999.
Testing and implementation of affected equipment is expected to be completed by
September 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 the Company's business or its 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.
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 June
1999 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
Page 14 of 51
<PAGE>
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.
Item 7 A: Quantitative and Qualitative Disclosures about Market Risk
- - --------------------------------------------------------------------
The Company's earnings are affected by changes in interest rates because
portions of the Company's outstanding indebtedness are at variable rates.
The Company has approximately $2,142,000 of long term debt at a variable rates
based on the one month LIBOR rate. For every 1% change in the LIBOR rate, the
Company's annual interest expense would change by approximately $21,000, based
on the outstanding indebtedness as of December 31, 1998.
The Company has approximately $2,122,000 of long term debt at variable rates
based on the prime interest rate. For every 1% change in the prime rate, the
Company's annual interest rate would change by approximately $21,000 based on
the outstanding indebtedness as of December 31, 1998.
The Company has $5,912,000 of long term debt at a fixed rate of 8%. The Company
is subject to interest rate risk on this fixed rate debt because market rates
may decrease, which would be unfavorable to the Company.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
Page 15 of 51
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Heartland Technology, Inc.
We have audited the accompanying consolidated balance sheets of Heartland
Technology, Inc. as of December 31, 1998 and 1997, the related consolidated
statements of operations for each of the three years in the period ended
December 31, 1998, and the consolidated statements of stockholder's equity and
cash flows for each of the two years in the period ended December 31, 1998. We
also audited the accompanying statements of changes in net assets for the year
ended December 31, 1996. Our audit also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 1, the Company changed its basis of presentation as of
January 1, 1997, from the fair value accounting basis used by investment
companies to a historical cost basis used by operating companies. Accordingly,
the 1998 and 1997 financial statements are not comparable to the financial
statements for 1996.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Technology, Inc. as of December 31, 1998 and 1997, the consolidated
results of its operations for each of the three years in the period ended
December 31, 1998, its consolidated statement of cash flows for each of the two
years in the period ended December 31, 1998, and its changes in net assets for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
Chicago, Illinois
March 9, 1999, except for Notes 6 and 7,
as to which the date is March 31, 1999.
Page 16 of 51
<PAGE>
Heartland Technology, Inc.
Consolidated Balance Sheets
(Operating Company)
(Dollars in Thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 3,232
Accounts receivable, net reserves of $173 in 1998 and $73 in 1997 3,374 2,311
Due from affiliate 286 450
Inventories, net 3,105 1,660
Prepaid Expenses 310 139
Refundable taxes 794 --
------------ ------------
Total current assets 7,869 7,792
------------ ------------
Property and equipment:
Machinery and equipment 9,719 5,262
Furniture and fixtures 473 29
Leasehold improvements 985 320
------------ ------------
11,177 5,611
Less accumulated depreciation 2,328 623
------------ ------------
8,849 4,988
------------ ------------
Other assets:
Deferred compensation expense -- 2,562
Deferred income taxes -- 262
Goodwill, net of accumulated amortization of $778 in 1998 and $121
in 1997 12,069 6,058
Deferred debt issuance costs net of accumulated amortization of $72
in 1998 and $32 in 1997 248 135
Other 187 230
Investment in partnerships 8,141 8,152
------------ ------------
Total assets $ 37,363 $ 30,179
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,603 $ 147
Accounts payable, trade 2,837 1,249
Accrued expenses and other liabilities 1,393 1,189
Current portion of long-term debt 2,236 1,591
Current portion of capital lease obligations 61 --
Allowance for claims and liabilities 1,281 1,279
Payable to affiliates 398 --
------------ ------------
Total current liabilities 11,809 5,455
------------ ------------
Long-term debt, less current portion 7,940 5,165
Capital lease obligation, less current portion 192 --
Stockholders' equity:
Common stock, $.30 par value per share, authorized 10,000,000 shares, 501 501
1,671,238 shares issued and outstanding
Additional paid-in capital 10,773 10,773
Retained earnings 6,148 8,285
------------ ------------
Total stockholders' equity 17,422 19,559
------------ ------------
Total liabilities and stockholders' equity $ 37,363 $ 30,179
============ ============
</TABLE>
See accompanying notes.
Page 17 of 51
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Operations
(Operating Company)
(Amounts in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
------------ ----------
<S> <C> <C>
Net sales $ 27,668 $ 15,093
Cost of sales 20,861 9,684
------------ ----------
Gross margin 6,807 5,409
Other income:
Interest income 49 272
Management fee from affiliate 425 425
Income (loss) from investment in partnerships (11) 587
Miscellaneous, net 40 28
------------ ----------
Total other income 503 1,312
Other expenses:
Selling, general and administrative 8,124 2,998
Interest expense 1,018 416
Special compensation amortization 188 438
Amortization expense 697 121
------------ ----------
Total other expenses 10,027 3,973
------------ ----------
Income (loss) before income taxes (2,717) 2,748
Income tax expense (benefit) (580) 773
------------ ----------
Net income (loss) $(2,137) $ 1,975
============ ==========
Net income (loss) per share - basic and diluted $ (1.28) $ 1.18
============ ==========
Weighted average number of common shares outstanding 1,671 1,671
============ ==========
</TABLE>
See accompanying notes.
Page 18 of 51
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Stockholders' Equity
(Operating Company)
Years ended December 31, 1998 and 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 501 $ 10,773 $ 6,310 $ 17,584
Net income 1,975 1,975
------ --------- -------- ---------
Balance at December 31, 1997 $ 501 $ 10,773 $ 8,285 $ 19,559
Net loss (2,137) (2,137)
------ --------- -------- ---------
Balance at December 31, 1998 $ 501 $ 10,773 $ 6,148 $ 17,422
====== ========= ======== =========
</TABLE>
See accompanying notes.
Page 19 of 51
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Cash Flows
(Operating Company)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Operating activities:
Years ended December 31,
1998 1997
------------ -------------
<S> <C> <C>
Net income (loss) $ (2,137) $ 1,975
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 2,528 776
Special compensation amortization 188 438
Equity in loss (income) from investments in Partnerships 11 (587)
Bad debt expense 85 73
Deferred income taxes 262 (262)
Reserve for inventory obsolescence 453 475
Realized loss on sale of investments -- 110
Accretion discount on securities -- (79)
Changes in operating assets and liabilities:
Accounts receivable 438 661
Due from affiliate 164 25
Inventories, net (1,684) (61)
Prepaid expenses and other assets (12) (151)
Refundable taxes (794) --
Accounts payable and accrued expenses 552 (332)
Increase in due to affiliate 398
Payment on claims and liabilities -- (30)
---------- ----------
Net cash provided by operating activities 452 3,031
Investing activities:
Purchases of property and equipment (1,397) (966)
Net proceeds from sale of securities -- 9,505
Acquisitions of businesses, net of cash acquired (6,049) (11,896)
---------- ----------
Net cash used in investing activities (7,446) (3,357)
Financing activities:
Net borrowings (payments) under line of credit 3,456 (1,223)
Proceeds from issuance of long-term debt 2,387 4,675
Payments on capital leases 237 --
Principal payments on long-term debt (2,165) (919)
Debt issuance costs (153) (167)
---------- ----------
Net cash provided by financing activities 3,762 2,366
---------- ----------
Increase (decrease) in cash and cash equivalents (3,232) 2,040
Cash and cash equivalents at beginning of year 3,232 1,192
---------- ----------
Cash and cash equivalents at end of year $ -- $ 3,232
========== ==========
</TABLE>
See accompanying notes.
Page 20 of 51
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Cash Flows (continued)
(Operating Company)
Year ended December 31, 1998
(Amount in Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Supplemental cash flow information:
Cash paid for interest $ 889 $ 403
======== ========
Cash paid (refunds received) for income taxes, net $ (34) $ 1,000
======== ========
</TABLE>
See accompanying notes.
Page 21 of 51
<PAGE>
Heartland Technology, Inc.
Statement of Operations
(Investment Company)
Year ended December 31, 1996
(Amounts in Thousands)
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest - nonaffiliates $ 658
Interest - affiliates 107
Management fee from affiliate 425
Equity in earnings - Partnership 7
Other 3
-------
Total Investment Income 1,200
Expenses:
Compensation and benefits 428
Director's fees and expenses 28
Professional fees 210
Advisory fees 20
Custodian fees 6
Taxes 20
Insurance 90
Facility expense allocation 37
General and administrative expenses 236
-------
Total Expenses 1,075
Investment income before taxes 125
Provision for income taxes --
-------
Net Investment Income 125
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 57
Net change in unrealized appreciation (depreciation) on investments:
Nonaffiliates (31)
Affiliates (1,536)
-------
Net change in unrealized depreciation on investments (1,567)
-------
Net realized loss and unrealized depreciation on investments before taxes (1,510)
Income tax benefit --
-------
Net realized loss and unrealized depreciation on investments, net of tax (1,510)
-------
Net decrease in net assets resulting from operations $(1,385)
=======
</TABLE>
See accompanying notes.
Page 22 of 51
<PAGE>
Heartland Technology, Inc.
Statement of Changes in Net Assets
(Investment Company)
Year ended December 31, 1996
(Amounts in Thousands)
<TABLE>
<S> <C>
Operations:
Net investment income $ 125
Net realized gain on sales of investments 57
Net change in unrealized depreciation on investments (1,567)
-------
Net decrease in net assets resulting from operations (1,385)
-------
Net assets at beginning of year 18,969
-------
Net assets at end of year (including undistributed net
investment income of $10,334 at December 31, 1996) $17,584
=======
</TABLE>
See accompanying notes.
Page 23 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
1. Change in Operations and Basis of Presentation
Heartland Technology, Inc. (the "Company" or "HTI") (formerly known as Milwaukee
Land Company) filed an application on June 20, 1997, with the Securities and
Exchange Commission (the "Commission") to deregister as an investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). On December 31, 1997, the Commission issued an order acknowledging that
the Company had ceased to be an investment company.
The accompanying financial statements for the year ended December 31, 1996
reflect the Company's prior status as a non-diversified closed-end management
investment company. As the basis of presentation has changed from the fair value
accounting basis used for investment companies to a historical cost basis for
operating companies as of January 1, 1997, in accordance with generally accepted
accounting principles, the 1996 financial statements are presented separately.
Certain reclassifications have been made to certain components of stockholders'
equity as of January 1, 1997.
2. Organization
Milwaukee Land Company was organized as a corporation under the laws of the
State of Iowa on September 14, 1881. Prior to June 30, 1993, MLC was a wholly-
owned subsidiary of Chicago Milwaukee Corporation ("CMC") or its affiliates.
In 1990, the real estate assets held by MLC and certain other assets and
liabilities were contributed by MLC and CMC to two newly-organized partnerships-
Heartland Partners, L.P., a publicly traded limited partnership of which MLC is
the general partner and also holds limited partner interests ("Heartland") and
CMC Heartland Partners, a general partnership in which HTI and Heartland are the
general partners and MLC is the managing general partner ("CMC Heartland"). On
June 30, 1993, CMC distributed HTI's common stock to CMC stockholders, spinning
off MLC as a separate publicly-held company. CMC has since ceased operation and
was dissolved on May 22, 1995.
On October 31, 1997, MLC changed its name to Heartland Technology, Inc. ("HTI").
Through its partnership interests in Heartland Partners, L.P. (Heartland) and
CMC Heartland Partners, the Company is engaged in the business of
development of real estate, including the properties formerly owned by the
Company. This real estate development business consists of the leasing,
development and sale of various commercial, residential and recreational
properties in Illinois, Georgia, Wisconsin, Montana, Minnesota and Washington.
The investments in Heartland and CMC Heartland (the "Partnerships") are
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 $1,439,000 at January 1, 1998, is being amortized as CMC Heartland's assets
are sold. For the years ended December 31, 1998 and 1997, $82,000 and $620,000
were amortized to income.
In May 1997, HTI and PG Newco Corp ("PG Newco"), a wholly owned subsidiary of
HTI, purchased substantially all of the assets, and assumed certain liabilities
of, PG Design Electronics, Inc. for $16,048,000. PG Design Electronics, Inc. was
engaged in the business of contract design and manufacture of electronics
assemblies for computer and computer printer original equipment manufacturers
("OEM"). PG Newco's name was then changed to PG Design Electronics, Inc. ("PG
Design").
The purchase price consisted of cash paid of $12,325,000, the issuance of notes
totaling $3,000,000 and acquisition related costs of $723,000. The notes 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 the purchase of PG Design Electronics, Inc. voluntarily
left the employment of PG Design prior to the scheduled maturity of the notes.
Because the contingency in the notes linking the payment of the notes and the
continued employment of Peter G. Van Heusden, $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
Page 24 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
compensation amounted to $438,000 for 1997 and $188,000 for the quarter ended
March 31, 1998 and is reported as special compensation on the consolidated
statement of operations.
The contingency related to the continued employment of Peter G. VanHeusden was
removed from the notes on March 30, 1998. The unamortized deferred compensation
remaining of $2,374,000 was added to goodwill and is being amortized on a
straight line basis over 20 years, the remaining period over which the goodwill
resulting from the purchase of PG assets is being amortized.
On April 10, 1998, HTI acquired 100% of the outstanding common stock of Solder a
provider of speciality services to the printed circuit board industry for
$7,394,000. The acquisition was accounted for as a purchase. The purchase price
consisted of cash of $5,185,000, the issuance of notes payable of $1,700,000 and
$175,000, and acquisition expenses of $334,000. A contingent note payable of
$400,000 was also issued, the payment of which is dependent on Solder reaching
certain operating goals. Because it is uncertain at this time whether the amount
will be paid, the amount has not been recorded as purchase price. The excess of
the purchase price over the fair value of the assets acquired was $4,294,000,
has been recorded as goodwill and is being amortized on a straight line basis
over 20 years.
On April 29, 1998 PG Design acquired certain assets and assumed certain
liabilities of Zecal for a total purchase price of $2,187,000. The
purchase price consisted of a note payable to the seller of $1,100,000, pre-
acquisition operating advances of $900,000, and acquisition expenses of
$187,000. The fair value of net assets acquired was $2,642,000, which exceeded
the cost of the acquisition by approximately $455,000. The excess fair value was
allocated proportionately to long term assets. The acquisition has been
accounted for as a purchase.
In the fourth quarter of 1998, Management reviewed the useful lives of its
intangible assets and decided based on current circumstances that a more
appropriate useful life for such assets would be 20 years. Accordingly, an
adjustment was made for $210,000 in the fourth quarter to reflect the change in
estimate.
The consolidated financial statements include the results of the acquired
businesses from their respective dates of acquisition. All significant
intercompany balances and transactions have been eliminated.
Unaudited proforma results of operations for the Company for the calendar years
ended December 31, 1998 and December 31, 1997, assuming the acquisitions had
occurred on January 1, 1998 and January 1, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $30,289,000 $39,648,000
Net income $(2,951,000) $(1,636,000)
Basic earnings per share $ (1.77) $ (.98)
</TABLE>
Page 25 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
Operating Company Statements (1998 and 1997)
3. Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits in banks and
investments with original maturities of three months or less when purchased. The
Company maintains cash balances with financial institutions which at times may
be in excess of the FDIC insurance limit.
(b) Inventories
Inventories are stated at the lower of cost or market, on a first-in, first-out
basis (FIFO method).
(c) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the assets which range
from five to seven years for equipment and ten years for leasehold improvements.
Depreciation expense was $1,831,000 and $623,000, in 1998 and 1997,
respectively, and includes depreciation for assets under capital leases.
(d) Debt Issuance Costs
The cost to acquire debt is being amortized on a straight-line basis over the
terms of the related loan (3-5 years).
(e) Revenue Recognition
Revenue from manufacture of electronic products is recognized upon shipment of
such products.
(f) Use of Estimates
In the preparation of the Company's financial statements in conformity with
general accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
(g) Fair Value of Financial Instruments
For cash and cash equivalents, the carrying amounts approximated fair value. For
variable rate debt that reprices frequently, fair values approximated carrying
values. For all remaining financial instruments, carrying value approximated
fair value due to the relatively short maturity of these instruments.
(h) Net Income (Loss) Per Share
Basic earnings per share is based on weighted average shares outstanding for the
respective periods. Dilutive earnings per share includes the dilutive effects of
options, warrants and convertible securities. Due to the net loss for the year
ended December 31, 1998, the inclusion of any additional shares from outstanding
stock options (Note 14) would be antidilutive. Therefore, no options have been
included in the calculation of diluted earnings per share in 1998. During the
year ended December 31, 1997, there were no items outstanding that would have a
dilutive effect on earnings per share.
Page 26 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
(i) Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation
(j) Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board (FASB) Statement No. 109 "Accounting for Income Taxes". Under
FASB 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
4. Inventories
Inventories consist of the following:
(Amounts in Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw material $3,667 $1,717
Work-in-process 110 201
Finished goods 256 217
------ ------
4,033 2,135
Less: reserve for obsolescence 928 475
------ ------
$3,105 $1,660
====== ======
</TABLE>
5. Investment in Partnerships and Related Party Transactions
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and allocation
of taxable income and loss. The Company also has a .01% general partnership
interest in CMC which entitles the Company to .01% of CMC's available cash for
distribution and an allocation of taxable income and loss before distributions.
The Company also owns the Class B limited partnership interest in Heartland (the
"Class B Interest"). In general, the Class B Interest entitles the holder to .5%
of Heartland's available cash for distribution and allocation of taxable income
and loss. In addition, items of deduction, loss, credit and expense attributable
to the satisfaction of Plan Liabilities (see Note 11) are specially allocated
99% to the holder of the Class B Interest and 1% to the Company as the general
partner until the aggregate amount of all such items allocated to the Class B
Interest equals the aggregate capital contribution with respect to the Class B
Interest. If the aggregate amount of such items specially allocated to the
holder of the Class B Interest is less than the amounts contributed by such
holder to Heartland, such excess will be reflected in the capital account of the
Class B Interest.
The Company has a management agreement with CMC, pursuant to which CMC is
required to pay HTI an annual management fee in the amount of $425,000. The
unpaid management fees of $286,000 and $425,000 are included in due from
affiliate at December 31, 1998 and 1997, respectively. The Company reimburses
Heartland for certain staff salary, office and operating allocations. Total
expense incurred for 1998 and 1997 was $332,000 and $228,000, respectively. As
of December 31, 1998, a portion remained unpaid and is included in payable to
affiliates.
Page 27 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
The condensed financial statements of Heartland as of December 31, 1998 and
1997, and for the years then ended, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
- - -------
Cash and marketable securities $ 3,828 $ 2,755
Receivables, net 353 251
Other assets 720 358
Net properties and investment in joint venture 28,330 23,474
------- -------
Total assets $33,231 $26,838
======= =======
Liabilities:
- - ------------
Accounts payable, accrued expenses and other liabilities $ 7,568 $ 3,797
Allowed for claims and liabilities 2,762 2,169
Distribution payable -- 1,631
Loans payable 13,492 3,750
------- -------
Total liabilities 23,822 11,347
Partners' Capital:
- - -----------------
General partner -- 28
Class A partners -- 5,902
Class B partner 9,409 9,563
Unrealized holding loss -- (2)
------- -------
Total partners' capital 9,409 15,491
------- -------
Total liabilities and partners' capital $33,231 $26,838
======= =======
</TABLE>
Page 28 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
- - ---------
Property sales $ 6,231 $ 7,127
Less: cost of property sales 4,405 3,407
------- -------
Gross profit on property sales 1,826 3,720
Rental and other income 1,463 1,452
------- -------
Total net revenues 3,289 5,172
------- -------
Expenses:
- - ---------
Selling, general and administrative 8,425 6,113
Real estate taxes 399 703
Management fee 425 425
Depreciation and amortization 124 94
------- -------
Total expenses 9,373 7,335
------- -------
Net income (loss) $(6,084) $(2,163)
======= =======
</TABLE>
6. Lines of Credit
PG has a line of credit with General Electric Capital Corporation ("GECC") under
which it may borrow up to $7,000,000. Interest is based on a floating index rate
plus 2.75% (7.65% and 8.5% at December 31, 1998 and 1997 respectively).
Borrowings are collateralized by accounts receivable and inventory and cross
collateralized with the term loan described in Note 7. Commitment fees of .375%
are charged based on the unused portion of the credit facility. On September 28,
1998, GECC placed a limitation on additional Zecal borrowings to a maximum of
$200,000 per month until Zecal returned to profitability. Amount outstanding
under the line of credit at December 31, 1998 and 1997 was $2,173,000 and
$147,000, respectively. The line of credit is subject to certain covenants as
described in Note 7.
Solder has a line of credit with LaSalle National Bank ("LSNB") under which it
may borrow up to a maximum of $1,500,000, not to exceed 85% of eligible accounts
receivable plus the lesser of $200,000 or fifty percent of eligible inventory.
Interest is at a base rate plus 2% (7.33% at December 31, 1998). Borrowings are
collateralized by accounts receivable and inventory. Borrowings under the line
of credit at December 31, 1998 were $679,000. The line of credit matures on
April 30, 2001. The line is subject to an unused line fee of .25% of the average
quarterly unused balance.
Zecal has a line of credit with GECC in the amount of $4,000,000. Borrowings at
December 31, 1998, amounted to $751,000. Interest is based on a floating index
rate plus 3.25% (8.77% at December 31, 1998). Borrowings were collateralized by
accounts receivable and equipment.
7. Long Term Debt
HTI has notes payable to the seller of PG in the principal amount of $3,000,000.
Principal is payable $1,500,000 in September 2000 and $1,500,000 in May, 2002
and bear interest at 8% per year, payable quarterly.
PG has term loans payable to GECC that bear interest at one month LIBOR plus
3.62% (9.24% at December 31, 1998 and 1997 respectively) and require monthly
principal and interest payments. The loans are secured by machinery and
equipment and are cross collateralized with the line of credit described in Note
6. PG was required to maintain a minimum fixed charge ratio and minimum tangible
net worth, was limited in incurring additional indebtedness and in making
capital expenditures, and was restricted from making certain payments. The
outstanding balances on these loans at December 31, 1998 and 1997 are $2,142,000
and $3,756,000, respectively.
Page 29 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
Solder 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 due April 30, 2001 and bears
interest at prime plus 1.5% (8.5% at December 31, 1998). The $900,000 loan is
due April 30, 2003 and bears interest at prime plus 1% (8.0% at December 31,
1998). LSNB granted Solder 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 upon maturity. The
outstanding balances on these loans at December 31, 1998, are $1,007,000 and
$765,000, respectively. An early termination fee of 1-3% of the outstanding
balance of either note will be charged if the loan is repaid prior to maturity.
The Company incurred approximately $64,000 in transaction fees which have been
capitalized and will be amortized over the term of the agreement. The loans are
guaranteed by HTI who has pledged 100% of their stock of Solder.
Solder is in violation of certain financial covenants of the loan agreement at
December 31, 1998. Solder obtained a waiver of the violations from LSNB to
January 1, 2000.
Solder has a $1,700,000 note payable to the sellers of Solder Station-One, Inc.
The note bears interest at 8%. Principal is payable in three semiannual
installments of $400,000 plus a final $500,000 installment. The first
installment is due on October 10, 1999. Interest is paid quarterly beginning
June 30, 1998. The loan is subordinated to the LSNB debt, and as such, due to
the temporary waiver of payments received from LSNB, the Company was not
allowed to make any payments of interest until the credit facility to LSNB was
back in compliance. The $112,000 in deferred interest has been added to the
loan balance and is due no later than October 10, 2001. Interest payments were
resumed as of January 1999.
Solder has a contingent $400,000 note payable to the sellers of Solder Station-
One, Inc. stock. The note was payable April 10, 1999, if Solder's calendar year
1998 operating income was greater than $1,508,999. Since Solder did not achieve
this level of income, the note is payable on April 10, 2001, if Solder's
cumulative operating income for the calendar years 1998, 1999 and 2000 is
greater than $6,027,999. If cumulative operating income of $6,027,999 is not
achieved, the loan is not required to be paid. Due to the uncertainty of Solder
meeting the income thresholds, this amount has not been recorded in notes
payable at December 31, 1998.
Solder has a $175,000 original principal amount non-interest bearing note in
connection with the Solder Station-One, Inc. acquisition. The note is paid out
of the collections of certain accounts receivable. The outstanding balance on
this note at December 31, 1998 was $61,494. The note is subordinated to the
LSNB debt.
Zecal 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. At December 31, 1998,
$1,100,000 was outstanding. Interest and principal payments of $91,667 are due
quarterly beginning July 30, 1999 through April 29, 2002.
Maturities of long term debt subsequent to December 31, 1998 are as follows:
(Amounts in Thousands)
1999 $ 2,236
2000 4,258
2001 1,773
2002 1,863
2003 46
-------
$10,176
========
In January, 1999, the Company refinanced its debt with GECC by entering into an
agreement with Norwest Business Credit, Inc. The Agreement, effective December
31,1998, provides for a line of credit with a maximum available amount of
$10,500,000, and a term loan of $4,500,000. The term loan is payable in 60
monthly installments of $75,000 plus accrued interest. The interest rate on the
loans is the lenders rate plus 0.25% (8.0% at December 31, 1998). An origination
fee of $112,500 was paid in January 1999. The agreement carries an unused line
fee of .25% per annum, payable monthly, based on the average daily unused
amount. A facility fee is payable of .25% per annum on the total facility due
and payable on each of the first day of April, July, October and January. The
Agreement also carries certain prepayment penalties. On January 8 , 1999, the
Company was advanced $5,260,000 from the line of credit and the term loan, the
proceeds of which were used to repay all the loans outstanding with GECC.
In connection with this refinancing, PG incurred approximately $353,000 of
prepayment penalties from GECC. This amount will be recorded as an extraordinary
charge in the first quarter of 1999. The Company is subject to certain
financial covenants per the Agreement. As a result of the GECC prepayment
penalties, the Company is in default of certain financial convenants for which
it received an amendment to the convenants.
Page 30 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
8. Lease Obligations
HTI shares its offices with Heartland. The lease provides for an annual base
rent of $108,000 through December 31, 1999 and is allocated among HTI and
Heartland. The lease is subject to operating expense and tax escalations.
PG leases its office and plant facility under an operating lease at a monthly
rental of $16,000. The lease expires January 31, 2004 with an option to purchase
the building and property at the end of the term. In addition, the Company is
currently leasing office equipment under a non-cancellable lease expiring in
2000.
Zecal's facilities are leased for approximately $9,000 per month through
February 2000.
Solder's facilities are leased for a monthly rate of approximately $24,000
through January 2, 2002. Additionally, Solder incurs operating expense and tax
escalations.
Rent expense for 1998 and 1997 was $590,000 and $104,000, respectively.
Page 31 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
8. Lease Obligations (continued)
The Company leases certain equipment under three to five year capital leases
which expire in the year 2002. Total future minimum lease payments under these
capital leases and the present value of the minimum lease payments as of
December 31, 1998 is shown below:
<TABLE>
<CAPTION>
Future minimum lease payments under capital lease obligations: (Amounts in
Thousands)
December 31
<S> <C>
1999 $ 83
2000 78
2001 77
2002 58
-----------
Thereafter 7
Total minimum lease payments 303
Less amount representing interest 50
-----------
Present value of minimum lease payments 253
Less current portion 61
-----------
Long term portion $ 192
===========
Future minimum lease payments under operating lease obligations:
December 31
1999 $ 1,067
2000 963
2001 965
2002 403
2003 385
Thereafter 121
-----------
Total $ 3,904
===========
</TABLE>
Page 32 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
9. Income Taxes
Income tax expense (benefit) attributable to income (loss) from continuing
operations differs from the amounts computed by applying the U.S. federal income
tax rate of 35 percent to pretax income from operations as a result of the
following:
<TABLE>
<CAPTION>
(Amounts in Thousands)
1998 1997
<S> <C> <C>
Computed "expected" tax (benefit) expense $ (950) $ 962
Change in valuation allowance 265 (217)
State income taxes, net of federal benefits 93 --
Other, net 12 28
------- -------
Income tax (benefit) expense $ (580) $ 773
======= =======
</TABLE>
The deferred tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
reported for income tax purposes at December 31 are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 672 $ --
Basis differences in investment in partnerships 480 480
AMT credit carryforward 919 919
Inventory reserves 377 165
Reserve for discontinued operations 110 110
Reserve for claims, liabilities and reorganization 130 130
Compensation and benefits 257 259
Other, net 124 57
------- -------
Total deferred tax assets 3,069 2,120
Less valuation allowance (2,495) (1,639)
------- -------
Net deferred tax assets 574 481
Deferred tax liabilities:
Excess tax depreciation (426) (149)
Excess tax goodwill amortization (148) (70)
------- -------
Total deferred tax liabilities (574) (219)
------- -------
Deferred tax asset, net $ 0 $ 262
======= =======
</TABLE>
Page 33 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
1998 1997 1996
<S> <C> <C> <C>
Current
Federal $ (983) $1,035 $ --
State 141 -- --
------ ------ ------
(842) 1,035 --
Deferred
Federal 262 (262) --
State -- -- --
------ ------ ------
262 (262) --
------ ------ ------
Total $ (580) $ 773 $ --
====== ====== ======
</TABLE>
Included in the Company's deferred tax assets are AMT carryforwards of
approximately $919,000 which have no expiration date. At December 31, 1998, the
Company has net operating less carryforwards of approximately $1,922,000 which
expire in 2013.
10. Major Customers
A significant part of the Company's manufacturing business is dependent on a few
customers. During the year ended December 31, 1998, approximately 14,400,000 was
shipped to NEC and $5,342,000 was shipped to Hewlett Packard. During the year,
approximately $3,036,000 of product was shipped to Germany. The loss of any one
of these customers could have a material adverse effect on the Company.
11. Contingent Liabilities (Operating Company and Investment Company)
The Company, by reason of its serving as the general partner of the
Partnerships, is liable and responsible to third parties for such Partnerships'
liabilities to the extent the assets of such Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate businesses, in connection with the real estate
transfer the Partnerships have assumed primary responsibility and liability for
the resolution and satisfaction of most of the liabilities for claims remaining
under the plan of reorganization of the predecessor of CMC Real Estate
Corporation ("CMCRE"), certain other contingent liabilities with respect to the
properties transferred to CMC Heartland arising after the consummation of such
plan, and the costs and expenses in resolving such plan and other contingent
liabilities (collectively, the "Plan Liabilities"). Included in the Plan
Liabilities are known environmental liabilities associated with certain of the
properties transferred to the Partnerships arising out of the activities of the
Railroad or certain lessees or other third parties. Further environmental
obligations as yet unknown in respect of these properties may become due and
owing in the future. A majority of the known environmental matters stem from the
use of petroleum products, such as motor oil and diesel fuel, in the operation
of a railroad. The Company and/or the Partnerships have been notified by
government agencies of potential liabilities in connection with certain of these
real estate properties. Descriptions of the known material environmental matters
are included in the reports filed by Heartland with the Commission pursuant to
the provisions of the Securities Exchange Act of 1934, as amended (the "1934
Act").
On June 30, 1993, the Company assumed from CMC, its former parent corporation,
any obligations for which CMC was or might become liable (the "MLC Assumed
Liabilities") arising out of any matters existing on or occurring prior to June
30, 1993 other than (i) the Plan Liabilities, (ii) liabilities directly related
to CMC's business of investing and
Page 34 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
managing its investment securities, (iii) the lawsuit then pending (and since
resolved) against CMC relating to its preferred stock, or (iv) any liabilities
relating to federal, state, local or foreign income or other tax matters.
In the opinion of management, reasonably possible losses from these matters
should not be material to the Company's results of operations or financial
condition.
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. 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.
12. Allowance for Claims and Liabilities
The Company assumed certain share redemption liabilities from CMCRE, then a
majority owned subsidiary of CMC. Preferred shares are redeemable at $100 per
share and common shares at $153.43 per share. At December 31, 1998, 2,409
preferred shares and 4,668 common shares are still outstanding for a liability
of approximately $957,000. The liability is being reduced as the minority
shareholders submit their shares for redemption.
The Company has a $323,000 liability related to workers' compensation claims
incurred while operating under Milwaukee Land Company. This liability is being
reduced as payments are being made to the insurance provider.
Page 35 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
13. Industry Segments
The Company currently is engaged in two lines of business: (1) electronic
manufacturing and (2) real estate. The manufacturing business segment covers the
Company's manufacture of electronics assemblies on a contract basis, primarily
for the computer and computer printer industries, the manufacturing of ceramic
circuit boards and the providing of services for the printed circuit board
industry. The real estate business segment covers the Company's investment in
real estate partnerships. As of and for the years ended December 31, 1998 and
December 31, 1997, certain information relating to the Company's business
segments are set forth in the table below:
Selected Financial Data for 1998
<TABLE>
<CAPTION>
(Amounts in Thousands)
Depreciation
Income (loss) and
Identifiable Sales and before 1998 Amortization Capital
Business Segment Assets Other Income (loss) Taxes Expense Expenditures
<S> <C> <C> <C> <C> <C>
Manufacturing (1) $28,184 $27,668 $(1,530) $2,528 $1,397
Real estate 8,427 414 414
Corporate 752 89 (1,601) -
------- ------- ------- ------ ------
Total Company $37,363 $28,171 $(2,717) $2,528 $1,397
======= ======= ======= ====== ======
</TABLE>
(1) Includes Solder from April 10, 1998 and Zecal from April 29, 1998.
Selected Financial Data for 1997
<TABLE>
<CAPTION>
Depreciation
Income (loss) and
Identifiable Sales and before 1997 Amortization Capital
Business Segment Assets Other Income Taxes Expense Expenditures
<S> <C> <C> <C> <C> <C>
Manufacturing(1) $21,297 $15,093 $ 2,885 $ 776 $ 966
Real estate 8,602 1,012 1,012 -- --
Corporate 280 300 (1,149) -- -
------- ------- ------- ------ ------
Total Company $30,179 $16,405 $ 2,748 $ 776 $ 966
======= ======= ======= ====== ======
</TABLE>
(1) Includes PG from May 31, 1997 through December 31, 1997.
14. Non-qualified Stock Option and Stock Appreciation Rights
On May 27, 1997, HTI stockholders approved the 1997 Incentive and Capital
Accumulation Plan (the "Plan"). Pursuant to the Plan, on January 2, 1998, the
compensation committee of the Board of Directors of the Company granted
(i) non-qualified stock options for 50,000 shares of common stock and stock
appreciation rights ("SAR") with respect to 25,000 shares of common stock to
Peter G. VanHeusden; (ii) non-qualified stock options for 50,000 shares of
common stock and SARs with respect to 25,000 shares of common stock to Edwin
Jacobson; and (iii) SARs with respect to 25,000 shares of common stock to Frank
L. Reed. The benefits granted to Edwin Jacobson vested on
Page 36 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
May 30, 1998. The benefits granted to Peter G. VanHeusden and Frank L. Reed will
all vest on May 30, 2002. The exercise price of the non-qualified stock options
and the SARs is $16.625 per share, which was the fair value of the stock at the
date of grant.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), in accounting for its
employee stock options, because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation (Statement 123)," requires the use
of option-valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options approximates the market price of the underlying stock on
the date of the grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123 as if the Company has accounted for its employees stock options
granted subsequent to December 31, 1994, under the fair value method of
Statement 123. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
December 31
1998
------------
<S> <C>
Loss from continuing operations $ (2,137)
=======
Pro forma loss from continuing operations $ (2,524)
=======
Loss per share from continuing operations
Basic and diluted (1.28)
=======
Pro forma loss per share from continuing
Basic and diluted (1.51)
=======
</TABLE>
The fair value of each option grant is estimated on the day of the grant using
the Black Scholes option valuation model with the following assumptions:
<TABLE>
<CAPTION>
1998
<S> <C>
Expected dividend yield 0
Expected stock price volatility .231
Risk-free interest rate 5.0
Weighted-average expected life of options 7 years
Weighted-average remaining contractual life 9 years
</TABLE>
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Options available for grant under the plans were 75,000 and 175,000 at December
31, 1998 and 1997 respectively.
Page 37 of 51
<PAGE>
Heartland Technology, Inc.
Notes to Financial Statements
December 31, 1998
15. 401(k) Plan
On February 1, 1998, PG established a 401(k) savings plan covering
substantially all of its employees. PG may make contributions up to a
maximum of 2% of the employees compensation and participants fully vest in
employer contributions after 5 years. Employees are permitted to make
contributions into the plan after one year of employment. Contributions made
during 1998 were $49,000.
16. Investment Transactions
Investment transactions for the year ended December 31, 1996 (excluding money
market investments) are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
Purchases $ 3,505
Proceeds from sales and maturities $ 4,921
</TABLE>
INVESTMENT COMPANY STATEMENTS (1996)
17. Summary of Significant Accounting Policies
(a) Investment transactions and investment income
Security transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Interest income is recorded on the accrual basis and includes amortization of
premium and accretion of discount on securities owned.
(b) Use of Estimates
Management is required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
18. Net Assets
Net assets at December 31, 1996 consisted of the following items (dollars in
thousands, except share amounts):
<TABLE>
<CAPTION>
<S> <C>
Common stock - $0.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding $ 501
Paid in capital 10,773
Undistributed net investment income 10,333
Undistributed net realized gains on investment transactions 590
Net unrealized depreciation on investments (4,613)
-----------
Net Assets $ 17,584
===========
</TABLE>
19. Investment Services
During 1996, the Company paid advisory fees for investment advisory services
under an agreement with OFFITBANK, a nonaffiliated investment advisor. For the
services rendered by OFFITBANK under the agreement, the Company paid OFFITBANK
an annual investment advisory fee equal to .20 of 1% per annum of the value of
the portfolio under management. The agreement provided that the advisory fee was
payable quarterly in arrears based on the average month-end value of the
portfolio during such quarter.
20. Federal Income Taxes
As of December 31, 1996, the Company has deferred tax assets consisting of tax
Net operating loss carry forwards of approximately $146,000, AMT credit carry
forwards of approximately $919,000 and tax unrealized investment losses of
approximately $1,113,000. For financial reporting purposes, a valuation
allowance had been provided to offset the deferred tax assets.
Page 38 of 51
<PAGE>
Heartland Technology Inc.
Notes to Financial Statements
December 31, 1998
21. Related Party Transactions
The Company has a management agreement with CMC Heartland, pursuant to which CMC
Heartland is required to pay to the Company and annual management fee in the
amount of $425,000. On December 31, 1996, the Company received $1,181,000
related to previously accrued management fees including $107,000 for interest
related to past due amounts. The 1996 accrued management fee in the amount of
$425,000 was paid on February 14, 1997.
For the year ended December 31, 1996, the Company paid CMC Heartland
approximately $141,000 for staff salary and operating expense allocations.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required to be furnished pursuant to this item with respect to
Directors and Executive Officers of the Company will be set forth under the
captions "Election of Directors" and "Executive Officers" in the Company's
definitive proxy statement, which involves the election of directors (the "Proxy
Statement"), to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report, and
is incorporated herein by reference, or if such Proxy Statement is not filed
with the Commission on or before 120 days after the end of the fiscal year
covered by this Report, such information will be included in an amendment to
this Report filed no later than the end of such 120-day period.
The information required to be furnished pursuant to this item with respect to
compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement, and is incorporated herein by reference, or
if such Proxy Statement is not filed with the Commission on or before 120 days
after the end of the fiscal year covered by this Report, such information will
be included in an amendment to this Report filed no later than the end of such
120-day period.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item will be set forth
under the captions "Director Compensation" and "Executive Compensation" in the
Proxy Statement, and is incorporated herein by reference, or if such Proxy
Statement is not filed with the Commission on or before 120 days after the end
of the fiscal year covered
Page 39 of 51
<PAGE>
by this Report, such information will be included in an amendment to this Report
filed no later than the end of such 120-day period.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item will be set forth
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement, and is incorporated herein by reference, or
if such Proxy Statement is not filed with the Commission on or before 120 days
after the end of the fiscal year covered by this Report, such information will
be included in an amendment to this Report filed no later than the end of such
120-day period.
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item will be set forth
under the caption "Certain Relationships and Related Transaction" in the Proxy
Statement, and is incorporated herein by reference, or if such Proxy Statement
is not filed with the Commission on or before 120 days after the end of the
fiscal year covered by this Report, such information will be included in an
amendment to this Report filed no later than the end of such 120-day period.
Page 40 of 51
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed or incorporated by reference as part of
this report:
1. Financial statements
The financial statements of Heartland Technology, Inc. are included in Part II,
Item 8:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................................................... 16
Operating Company
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. 17
Consolidated Statements of Operations for the year ended December 31, 1998 and 1997........................ 18
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1998 and 1997.............. 19
Consolidated Statements of Cash Flows year ended December 31, 1998 and 1997................................ 20
Investment Company
Statement of Operations for the year ended December 31, 1996............................................... 22
Statement of Changes in Net Assets for the year ended December 31, 1996.................................... 23
Notes to Consolidated Financial Statements................................................................... 24
</TABLE>
The following financial statement schedule is included in Item 14(b)--Schedule
II Valuation Allowance.
2. Financial statement schedules
The financial statements and financial statement schedules of Heartland
Partners, L.P. are included in Item 8 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, of Heartland Partners, L.P. (File No.
1-10520).
3. Exhibits
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)). +
3.1 Certificate of Incorporation, dated as of June 2, 1993 incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
3.2 Certificate of Amendment of Certificate of Incorporation, dated October 29,
1997 incorporated by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
3.3 By-laws, incorporated by reference to Exhibit 3.2 to the Registrant's Form
10/A (Amendment No. 1), dated June 24, 1993.
10.1 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by reference to
Exhibit 3.2 to Heartland Partners, L.P.'s Current Report on Form 8-K dated
January 5, 1998 (File No. 1-10520).
Page 41 of 51
<PAGE>
10.2 Amended and Restated Partnership Agreement of CMC Heartland Partners,
dated as of June 27, 1990, between Heartland Partners L.P. and Milwaukee
Land Company, incorporated by reference to Exhibit 10.3 to Heartland
Partners, L.P.'s Annual Report on Form 10-K for the year ended December
31, 1990 (File No. 1-10520).
10.3 Conveyance Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Milwaukee Land Company, CMC Heartland Partners and
Heartland Partners, L.P., incorporated by reference to Exhibit 10.1 to
Heartland Partners, L.P.'s Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 1-10520).
10.4 Conveyance Agreement, dated June 29, 1993 by and among Chicago Milwaukee
Corporation and Milwaukee Land Company incorporated by reference to
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.5 Facilities Agreement, dated June 29, 1993, by and between Milwaukee Land
Company and Heartland Partners, L.P. incorporated by reference to Exhibit
10.5 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.6 Employment Agreement, dated June 29, 1993, between Milwaukee Land Company
and Edwin Jacobson incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.*
10.7 First Amendment, dated August 7, 1996, to Employment Agreement, dated June
29, 1993, between Milwaukee Land Company and Edwin Jacobson incorporated
by reference to Exhibit 10.7 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.*
10.8 Asset Purchase Agreement, dated as of April 4, 1997, by and among
Milwaukee Land Company, PG Newco Corp., PG Design Electronics, Inc. and
named shareholder indemnitors incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1997.
10.9 Milwaukee Land Company 1997 Incentive and Capital Accumulation Plan
incorporated by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.10 Loan and Security Agreement, dated May 29, 1997, by and between PG Newco
Corp. and General Electric Capital Corporation incorporated by reference
to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.11 Promissory Note, dated May 29, 1997, in the principal amount of
$4,000,000, and related Security Agreement by and between PG Newco Corp.
and General Electric Capital Corporation incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.12 Promissory Note, dated May 29, 1997, in the principal amount of
$674,757.27, and related Security Agreement by and between PG Newco Corp.
and General Electric Capital Corporation incorporated by reference to
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.13 Employment Agreement, dated May 30, 1997, by and between PG Newco Corp.
and Peter G. VanHeusden incorporated by reference to Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.*
10.14 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due September 30, 2000, and payable to PG
Design Electronics, Inc. incorporated by reference to Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
10.15 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due May 30, 2002, and payable to PG Design
Electronics, Inc. incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
Page 42 of 51
<PAGE>
10.16 Second Amendment, dated June 1, 1997, to Employment Agreement, dated June
29, 1993, between Milwaukee Land Company and Edwin Jacobson incorporated
by reference to Exhibit 10.16 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.*
10.17 Stock Appreciation Right Agreement, dated January 2, 1998, between
Heartland Technology, Inc. and Edwin Jacobson incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.*
10.18 Nonqualified Stock Option Agreement, dated January 2, 1998 between
Heartland Technology, Inc. and Edwin Jacobson incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.*
10.19 First Amendment and Waiver, dated January 26, 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 10.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.20 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
September 30, 2000, and payable to PG Design Electronics, Inc. (now PG
Oldco), amended and restated on March 30, 1998 incorporated by reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.21 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due May
30, 2002, and payable to PG Design Electronics, Inc. (now PG Oldco),
amended and restated on March 30, 1998 incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
Page 43 of 51
<PAGE>
10.30 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).
10.31 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).
10.32 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
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.33 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
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.34 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
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.35 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 incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.36 Credit and Security Agreement by and between PG Design Electronics, Inc.
and Norwest Business Credit, Inc. dated as of December 31, 1998. (filed
herewith)
21 Subsidiaries of Heartland Technology, Inc. (filed herewith).
27 Financial Data Schedule (filed herewith).
99.1 Item 8 of the Annual Report on Form 10-K for the fiscal ended December 31,
1998, of Heartland Partners, L.P. (filed herewith).
____________________________
* Management contract or compensatory plan or arrangement.
+ 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
No reports on Form 8-K have been filed during the quarter ended December 31,
1998.
Page 44 of 51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
By: Edwin Jacobson
---------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
By: Richard P.Brandstatter
--------------------------------------
Richard P. Brandstatter
Vice President-Finance, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the dated indicated.
Robert S. Davis Edwin Jacobson
- - -------------------------------------- --------------------------------------
Robert S. Davis Edwin Jacobson
(Director of Heartland (Director of Heartland
Technology, Inc.) Technology, Inc.)
March 31, 1999 March 31, 1999
Gordon E. Newman Ezra K. Zilkha
- - -------------------------------------- --------------------------------------
Gordon E. Newman Ezra K. Zilkha
(Director of Heartland (Director of Heartland
Technology, Inc.) Technology, Inc.)
March 31, 1999 March 31, 1999
John R. Torell, III
- - --------------------------------------
John R. Torell, III
(Director of Heartland
Technology, Inc.)
March 31, 1999
Page 45 of 51
<PAGE>
Heartland Technology Inc.
Schedule II--Valuation Reserves
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Year ended December 31
(in Thousands)
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance beginning of year $ 73 $ 73 $ --
Additions through current year acquisitions 102
Provision 85 73
Deductions (87) --
---- ---- ----
Balance end of year 173 $ 73
==== ==== ====
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
Inventory Obsolescence Reserve
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance beginning of year $ 475 $ -- $ --
Provision 453 475 --
Deduction -- -- --
Other -- -- --
------- ------- -------
Balance end of year $ 928 $ 475 $ --
======= ======= =======
</TABLE>
Income Tax Valuation Allowance
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance beginning of year $1,639 $2,178 $2,178
Provision 856 -- --
Deduction -- (539) --
Other -- -- --
------ ------ ------
Balance end of year $2,495 $1,639 $2,178
====== ====== ======
</TABLE>
Page 46 of 51
<PAGE>
HEARTLAND TECHNOLOGY, INC.
INDEX TO EXHIBITS
Exhibit
Number 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)).
+
3.1 Certificate of Incorporation, dated as of June 2, 1993 incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
3.2 Certificate of Amendment of Certificate of Incorporation, dated
October 29, 1997 incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1997.
3.3 By-laws, incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10/A (Amendment No. 1), dated June 24, 1993.
10.1 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by reference
to Exhibit 3.2 to Heartland Partners, L.P.'s Current Report on Form
8-K dated January 5, 1998 (File No. 1-10520).
10.2 Amended and Restated Partnership Agreement of CMC Heartland Partners,
dated as of June 27, 1990, between Heartland Partners L.P. and
Milwaukee Land Company, incorporated by reference to Exhibit 10.3 to
Heartland Partners, L.P.'s Annual Report on Form 10-K for the year
ended December 31, 1990 (File No. 1-10520).
10.3 Conveyance Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Milwaukee Land Company, CMC Heartland Partners
and Heartland Partners, L.P., incorporated by reference to Exhibit
10.1 to Heartland Partners, L.P.'s Annual Report on Form 10-K for the
year ended December 31, 1990 (File No. 1-10520).
10.4 Conveyance Agreement, dated June 29, 1993 by and among Chicago
Milwaukee Corporation and Milwaukee Land Company incorporated by
reference to Exhibit 10.4 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10.5 Facilities Agreement, dated June 29, 1993, by and between Milwaukee
Land Company and Heartland Partners, L.P. incorporated by reference to
Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.6 Employment Agreement, dated June 29, 1993, between Milwaukee Land
Company and Edwin Jacobson incorporated by reference to Exhibit 10.6
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.*
10.7 First Amendment, dated August 7, 1996, to Employment Agreement, dated
June 29, 1993, between Milwaukee Land Company and Edwin Jacobson
incorporated by reference to Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
Page 47 of 51
<PAGE>
10.8 Asset Purchase Agreement, dated as of April 4, 1997, by and among
Milwaukee Land Company, PG Newco Corp., PG Design Electronics, Inc.
and named shareholder indemnitors incorporated by reference to Exhibit
10.8 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.9 Milwaukee Land Company 1997 Incentive and Capital Accumulation Plan
incorporated by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.10 Loan and Security Agreement, dated May 29, 1997, by and between PG
Newco Corp. and General Electric Capital Corporation incorporated by
reference to Exhibit 10.10 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10.11 Promissory Note, dated May 29, 1997, in the principal amount of
$4,000,000, and related Security Agreement by and between PG Newco
Corp. and General Electric Capital Corporation incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10.12 Promissory Note, dated May 29, 1997, in the principal amount of
$674,757.27, and related Security Agreement by and between PG Newco
Corp. and General Electric Capital Corporation incorporated by
reference to Exhibit 10.12 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10.13 Employment Agreement, dated May 30, 1997, by and between PG Newco
Corp. and Peter G. VanHeusden incorporated by reference to Exhibit
10.13 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.*
10.14 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due September 30, 2000, and payable to
PG Design Electronics, Inc. incorporated by reference to Exhibit 10.14
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.15 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due May 30, 2002, and payable to PG
Design Electronics, Inc. incorporated by reference to Exhibit 10.15 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.16 Second Amendment, dated June 1, 1997, to Employment Agreement, dated
June 29, 1993, between Milwaukee Land Company and Edwin Jacobson
incorporated by reference to Exhibit 10.16 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.17 Stock Appreciation Right Agreement, dated January 2, 1998, between
Heartland Technology, Inc. and Edwin Jacobson incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.*
10.18 Nonqualified Stock Option Agreement, dated January 2, 1998 between
Heartland Technology, Inc. and Edwin Jacobson incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.*
10.19 First Amendment and Waiver, dated January 26, 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
10.3 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.20 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
September 30, 2000, and payable to PG Design Electronics, Inc. (now PG
Oldco), amended and restated on March 30, 1998 incorporated by
Page 48 of 51
<PAGE>
reference to Exhibit 10.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10.21 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
May 30, 2002, and payable to PG Design Electronics, Inc. (now PG
Oldco), amended and restated on March 30, 1998 incorporated by
reference to Exhibit 10.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 Third Amendment dated July 13, 1998, between P.G. Design Electronics,
Inc. (formerly known as PG Newco Corp) and General Electric Capital
Corporation, to the Loan Security Agreement, dated May 29, 1997
incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-Q for the quarter ended September 30, 1998.
10.33 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
Page 49 of 51
<PAGE>
Security Agreement dated April 10, 1998 incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended
September 30, 1998.
10.34 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 incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.35 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 incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q for the quarter ended September 30,
1998.
10.36 Credit and Security Agreement by and between PG Design Electronics,
Inc. and Norwest Business Credit, Inc. dated as of December 31, 1998.
(filed herewith)
21 Subsidiaries of Heartland Technology, Inc. (filed herewith).
27 Financial Data Schedule (filed herewith).
99.1 Item 8 of the Annual Report on Form 10-K for the fiscal ended December
31, 1998, of Heartland Partners, L.P. (filed herewith).
_____________________________
* Management contract or compensatory plan or arrangement.
+ 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 50 of 51
<PAGE>
Exhibit 10.36
______________________________________________
______________________________________________
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
P. G. DESIGN ELECTRONICS, INC.
AND
NORWEST BUSINESS CREDIT, INC.
Dated as of December 31, 1998
[LOGO of NORWEST BUSINESS CREDIT goes here]
______________________________________________
______________________________________________
<PAGE>
Table of Contents
-----------------
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS........................................................................................................... 1
Section 1.1 Definitions........................................................................................................ 1
Section 1.2 Cross References................................................................................................... 9
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY............................................................................. 9
Section 2.1 Advances........................................................................................................... 9
Section 2.2 Term Advance....................................................................................................... 10
Section 2.3 Payment of Term Note............................................................................................... 10
Section 2.4 Interest; Minimum Interest Charge; Default Interest; Participations; Usury......................................... 10
Section 2.5 Fees............................................................................................................... 11
Section 2.6 Computation of Interest and Fees; When Interest Due and Payable.................................................... 12
Section 2.7 Capital Adequacy; Increased Costs and Reduced Return............................................................... 12
Section 2.8 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrower............ 13
Section 2.9 Termination and Line Reduction Fees................................................................................ 13
Section 2.10 Mandatory Prepayment.............................................................................................. 13
Section 2.11 Payment........................................................................................................... 13
Section 2.12 Payment on Non-Banking Days....................................................................................... 14
Section 2.13 Use of Proceeds................................................................................................... 14
Section 2.14 Liability Records................................................................................................. 14
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF............................................................................... 14
Section 3.1 Grant of Security Interest......................................................................................... 14
Section 3.2 Notification of Account Debtors and Other Obligors................................................................. 14
Section 3.3 Assignment of Insurance............................................................................................ 15
Section 3.4 Occupancy.......................................................................................................... 15
Section 3.5 License............................................................................................................ 15
Section 3.6 Financing Statement................................................................................................ 16
Section 3.7 Setoff............................................................................................................. 16
ARTICLE IV CONDITIONS OF LENDING............................................................................................... 16
Section 4.1 Conditions Precedent to the Initial Advances....................................................................... 16
Section 4.2 Conditions Precedent to All Advances............................................................................... 19
ARTICLE V REPRESENTATIONS AND WARRANTIES....................................................................................... 19
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification
Number...................................................................................................................... 19
Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements.................................................... 19
Section 5.3 Legal Agreements................................................................................................... 20
Section 5.4 Subsidiaries....................................................................................................... 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 5.5 Financial Condition; No Adverse Change.............................................................................20
Section 5.6 Litigation.........................................................................................................20
Section 5.7 Regulation U.......................................................................................................20
Section 5.8 Taxes..............................................................................................................21
Section 5.9 Titles and Liens...................................................................................................21
Section 5.10 Plans.............................................................................................................21
Section 5.11 Default...........................................................................................................21
Section 5.12 Environmental Matters.............................................................................................21
Section 5.13 Submissions to Lender.............................................................................................23
Section 5.14 Financing Statements..............................................................................................23
Section 5.15 Rights to Payment.................................................................................................23
ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS....................................................................................23
Section 6.1 Reporting Requirements.............................................................................................23
Section 6.2 Books and Records; Inspection and Examination......................................................................26
Section 6.3 Account Verification...............................................................................................26
Section 6.4 Compliance with Laws...............................................................................................26
Section 6.5 Payment of Taxes and Other Claims..................................................................................27
Section 6.6 Maintenance of Properties..........................................................................................27
Section 6.7 Insurance..........................................................................................................27
Section 6.8 Preservation of Existence..........................................................................................28
Section 6.9 Delivery of Instruments, etc.......................................................................................28
Section 6.10 Collateral Account................................................................................................28
Section 6.11 Performance by the Lender.........................................................................................29
Section 6.12 Minimum Combined Book Net Worth...................................................................................29
Section 6.13 Minimum Combined Net Income.......................................................................................30
Section 6.14 Sale or Liquidation of Zecal......................................................................................31
ARTICLE VII NEGATIVE COVENANTS.................................................................................................31
Section 7.1 Liens..............................................................................................................31
Section 7.2 Indebtedness.......................................................................................................32
Section 7.3 Guaranties.........................................................................................................32
Section 7.4 Investments and Subsidiaries.......................................................................................32
Section 7.5 Dividends..........................................................................................................33
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations......................................................33
Section 7.7 Consolidation and Merger; Asset Acquisitions.......................................................................34
Section 7.8 Sale and Leaseback.................................................................................................34
Section 7.9 Restrictions on Nature of Business.................................................................................34
Section 7.10 Capital Expenditures..............................................................................................34
Section 7.11 Accounting........................................................................................................34
Section 7.12 Discounts, etc....................................................................................................34
Section 7.13 Defined Benefit Pension Plans.....................................................................................35
Section 7.14 Other Defaults....................................................................................................35
Section 7.15 Place of Business; Name...........................................................................................35
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 7.16 Organizational Documents..........................................................................................35
Section 7.17 Salaries..........................................................................................................35
Section 7.18 Change in Ownership...............................................................................................35
ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES............................................................................36
Section 8.1 Events of Default..................................................................................................36
Section 8.2 Rights and Remedies................................................................................................38
Section 8.3 Certain Notices....................................................................................................39
Section 8.4 Covenant Default Fees..............................................................................................39
ARTICLE IX MISCELLANEOUS.......................................................................................................39
Section 9.1 No Waiver; Cumulative Remedies.....................................................................................39
Section 9.2 Amendments, Etc....................................................................................................39
Section 9.3 Addresses for Notices, Etc.........................................................................................39
Section 9.4 Further Documents..................................................................................................40
Section 9.5 Collateral.........................................................................................................41
Section 9.6 Costs and Expenses.................................................................................................41
Section 9.7 Indemnity..........................................................................................................41
Section 9.8 Participants.......................................................................................................42
Section 9.9 Execution in Counterparts..........................................................................................42
Section 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging
Information.......................................................................................................42
Section 9.11 Severability of Provisions........................................................................................43
Section 9.12 Headings..........................................................................................................43
Section 9.13 Lender's Actions..................................................................................................43
Section 9.14 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial..........................................................43
</TABLE>
-iii-
<PAGE>
CREDIT AND SECURITY AGREEMENT
Dated as of December 31, 1998
P. G. DESIGN ELECTRONICS, INC., a Delaware corporation (the "Borrower"),
and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"),
hereby agree as follows:
ARTICLE I
Definitions
Section 1.1. Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all of the Borrower's accounts, as such term is
defined in the UCC, including, without limitation, the aggregate unpaid
obligations of customers and other account debtors to the Borrower arising
out of the sale or lease of goods or rendition of services by the Borrower
on an open account or deferred payment basis.
"Advance" means a Revolving Advance or the Term Advance.
"Affiliate" or "Affiliates" means Heartland, Zecal, and any other
Person controlled by, controlling or under common control with the
Borrower, including (without limitation) any Subsidiary of the Borrower.
For purposes of this definition, "control," when used with respect to any
specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as amended,
supplemented or restated from time to time.
"Banking Day" means a day other than a Saturday, Sunday or other day
on which banks are generally not open for business in Milwaukee, Wisconsin.
<PAGE>
"Base Rate" means the rate of interest publicly announced from time to
time by Norwest Bank Minnesota as its "base rate" or, if such bank ceases
to announce a rate so designated, any similar successor rate designated by
the Lender.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's discretion,
the sum of:
(i) the lesser of (A) 85% of Eligible Accounts or (B)
$10,500,000, plus
(ii) the lesser of (A) 50% of Eligible Inventory, which
percentage shall be reduced on the first day of each month
by 1% per month for 25 months commencing on April 1, 1999,
or (B) $3,000,000, minus
(iii) the Zecal Reserve.
"Capital Expenditures" for a period means any expenditure of money for
the lease, purchase or other acquisition of any capital asset required by
GAAP to be included in or reflected by the property, plant or equipment or
similar fixed asset accounts on the balance sheet of the Borrower.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, Investment Property, all sums on
deposit in any Collateral Account, and any items in any Lockbox; together
with (i) all substitutions and replacements for and products of any of the
foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case
of all tangible goods, all accessions; (iv) all accessories, attachments,
parts, equipment and repairs now or hereafter attached or affixed to or
used in connection with any tangible goods; and (v) all warehouse receipts,
bills of lading and other documents of title now or hereafter covering such
goods.
"Collateral Account" has the meaning given in the Collateral Account
Agreement.
"Collateral Account Agreement" means the Collateral Account Agreement
of even date herewith by and among the Borrower, Norwest Bank Wisconsin and
the Lender.
"Combined Book Net Worth" means the aggregate of the common and
preferred stockholders' equity in the Borrower and Zecal, on a combined
basis, as determined in accordance with GAAP.
"Combined Net Income" means, with respect to the Borrower and Zecal,
the combined fiscal year-to-date after-tax net income of the Borrower and
Zecal,
2
<PAGE>
decreased by the sum of any extraordinary, non-operating or non-cash income
recorded by the Borrower and Zecal and increased by any extraordinary, non-
cash or non-operating expense or loss recorded by the Borrower and Zecal,
as determined in accordance with GAAP.
"Commitment" means the Lender's commitment to make Advances pursuant
to Article II.
"Credit Facility" means the credit facility being made available to
the Borrower by the Lender pursuant to Article II.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day
of any month during which an Event of Default has occurred and ending on
the date the Lender notifies the Borrower in writing that such Default or
Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to three percent (3%) over
the Floating Rate, which rate shall change when and as the Floating Rate
changes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Accounts" means all unpaid Accounts, except the following
shall not in any event be deemed Eligible Accounts:
(i) That portion of Accounts unpaid ninety (90) days or more
after the invoice date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
(iii) That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the
Borrower to the customer; provided, however, the Lender may in its
discretion permit such an Account to be an Eligible Account upon
receipt by the Lender of written acknowledgment by the customer that
it has requested that the Borrower issue its invoice prior to such
final delivery;
(iv) Accounts owed by any unit of government, whether foreign or
domestic (provided, however, that there shall be included in Eligible
Accounts that portion of Accounts owed by such units of government for
which the Borrower has provided evidence satisfactory to the Lender
that (A) the Lender has a first priority perfected security interest
and (B) such Accounts may be enforced by the Lender directly against
such unit of government under all applicable laws);
3
<PAGE>
(v) Accounts owed by an account debtor located outside the
United States of America which are not (A) backed by a bank letter of
credit naming the Lender as beneficiary or assigned to the Lender, in
the Lender's possession and acceptable to the Lender in all respects,
in its discretion, or (B) covered by a foreign receivables insurance
policy acceptable to the Lender in its discretion;
(vi) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vii) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected security
interest in the Lender's favor or which are subject to any lien,
security interest or claim in favor of any Person other than the
Lender, including, without limitation, any payment or performance
bond;
(ix) That portion of Accounts that has been restructured,
extended, amended or modified;
(x) That portion of Accounts that constitutes advertising,
finance charges, service charges or sales or excise taxes;
(xi) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if twenty five percent (25%) or more of the total
amount due under Accounts from such debtor is ineligible under clauses
(i), (ii) or (ix) above; and
(xii) Accounts, or portions thereof, otherwise deemed ineligible
by the Lender in its discretion.
"Eligible Inventory" means all Inventory of the Borrower, at the lower
of cost or market value as determined in accordance with GAAP; provided,
however, that the following shall not in any event be deemed Eligible
Inventory:
(i) Inventory that is: in-transit; located at any warehouse, job
site or other premises not approved by the Lender in writing; located
outside of the states, or localities, as applicable, in which the
Lender has filed financing statements to perfect a first priority
security interest in such Inventory; covered by any negotiable or non-
negotiable warehouse receipt, bill of lading or other document of
title; on consignment from any Person; on consignment to any Person or
subject to any bailment unless such consignee or bailee has executed
an agreement with the Lender;
(ii) Supplies, packaging or sample Inventory;
(iii) Work-in-process Inventory;
(iv) Inventory that is damaged, obsolete, slow moving or not
currently saleable in the normal course of the Borrower's operations;
4
<PAGE>
(v) Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof;
(vi) Inventory manufactured by the Borrower pursuant to a
license unless the applicable licensor has agreed in writing to permit
the Lender to exercise its rights and remedies against such Inventory;
(vii) Inventory that is subject to a security interest in favor
of any Person other than the Lender; and
(viii) Inventory otherwise deemed ineligible by the Lender in its
discretion.
"Environmental Laws" has the meaning specified in Section 5.12.
"Equipment" means all of the Borrower's equipment, as such term is
defined in the UCC, whether now owned or hereafter acquired, including but
not limited to all present and future machinery, vehicles, furniture,
fixtures, manufacturing equipment, shop equipment, office and recordkeeping
equipment, parts, tools, supplies, and including specifically (without
limitation) the goods described in any equipment schedule or list herewith
or hereafter furnished to the Lender by the Borrower.
"Event of Default" has the meaning specified in Section 8.1.
"Floating Rate" means an annual rate equal to the sum of the Base Rate
plus one-fourth percent (.25%), which annual rate shall change when and as
the Base Rate changes.
"Funding Date" has the meaning given in Section 2.1.
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements described in Section 5.5.
"General Intangibles" means all of the Borrower's general intangibles,
as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents,
patent applications, copyrights, trademarks, trade names, trade secrets,
licenses and rights under license agreements customer or supplier lists and
contracts, manuals, operating instructions, permits, franchises, the right
to use the Borrower's name, and the goodwill of the Borrower's business.
"Guarantors" means Heartland and Zecal.
"Hazardous Substance" has the meaning given in Section 5.12.
"Heartland" means Heartland Technology, Inc., a Delaware corporation.
5
<PAGE>
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located.
"Investment Property" means all of the Borrower's investment property,
as such term is defined in the UCC, whether now owned or hereafter
acquired, including, but not limited to, all securities, securities
entitlements, securities accounts, commodity contracts, commodity accounts,
stock, bonds, mutual fund shares, money market shares and United States of
America Government securities.
"Loan Documents" means this Agreement, the Notes and the Security
Documents.
"Lockbox" has the meaning given in the Lockbox Agreement.
"Lockbox Agreement" means the Lockbox Agreement by and among the
Borrower, Norwest Bank Wisconsin and the Lender, of even date herewith.
"Maturity Date" means December 30, 2001.
"Maximum Line" means Ten Million Five Hundred Thousand Dollars
($10,500,000), unless said amount is reduced pursuant to Section 2.8, in
which event it means the amount to which said amount is reduced.
"Minimum Interest Charge" has the meaning given in Section 2.4(b).
"Norwest Bank Minnesota" means Norwest Bank Minnesota, National
Association.
"Norwest Bank Wisconsin" means Norwest Bank Wisconsin, National
Association.
"Notes" means the Revolving Note and the Term Note, each a "Note."
"Obligations" means the Notes and each and every other debt, liability
and obligation of every type and description which the Borrower may now or
at any time hereafter owe to the Lender, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it
arises in a transaction involving the Lender alone or in a transaction
involving other creditors of the Borrower, and whether it is direct or
indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, all indebtedness
of the Borrower arising under this Agreement, the Note, or any other loan
or credit agreement or guaranty between the Borrower and the Lender,
whether now in effect or hereafter entered into.
6
<PAGE>
"Permitted Lien" has the meaning given in Section 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for the
Borrower's employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its business
and has any rights of possession, including , without limitation, the
premises legally described in Exhibit D attached hereto.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out
of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to
payment is created, generated or earned by the Borrower or by some other
person who subsequently transfers such person's interest to the Borrower,
whether such right to payment is or is not already earned by performance,
and howsoever such right to payment may be evidenced, together with all
other rights and interests (including all liens and security interests)
which the Borrower may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or
against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit A
hereto and any note or notes issued in substitution therefor, as the same
may hereafter be amended, supplemented or restated from time to time.
"Security Documents" means this Agreement, the Collateral Account
Agreement, the Lockbox Agreement, and any other document delivered to the
Lender from time to time to secure the Obligations, as the same may
hereafter be amended, supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
7
<PAGE>
"Subsidiary" means any corporation of which more than fifty percent
(50%) of the outstanding shares of capital stock having general voting
power under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes shall have or might have voting power
by reason of the happening of any contingency, is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries.
"Term Advance" has the meaning given in Section 2.3.
"Term Note" means the Borrower's term promissory note, payable to the
order of the Lender in substantially the form of Exhibit B hereto and any
note or notes issued in substitution therefor, as the same may hereafter be
amended, supplemented or restated from time to time.
"Termination Date" means the earliest of (i) the Maturity Date, (ii)
the date the Borrower terminates the Credit Facility, or (iii) the date the
Lender demands payment of the Obligations after an Event of Default
pursuant to Section 8.2.
"Total Facility" means for any fiscal quarter, the sum as of the
beginning of such quarter of the Maximum Line plus the principal amount
outstanding under the Term Note.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the state designated in Section 9.13 as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern
this Agreement or any portion hereof.
"Zecal" means Zecal Corp., a Delaware corporation.
"Zecal Reserve" means a reserve against availability of Two Hundred
Fifty Thousand Dollars ($250,000) to be in effect until the earlier of (i)
the sale of substantially all of the stock or assets of Zecal, (ii) the
liquidation of the assets of Zecal, or (iii) the receipt of financial
statements from Zecal which show that Zecal or its successor following a
Zecal Reorganization achieved a positive net income for a fiscal quarter.
Section 1.2. Cross References. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
8
<PAGE>
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1. Advances. The Lender agrees, on the terms and subject to the
conditions herein set forth, to make advances to the Borrower from time to time
from the date all of the conditions set forth in Section 4.1 are satisfied (the
"Funding Date") to the Termination Date, on the terms and subject to the
conditions herein set forth (the "Revolving Advances"). The Lender shall have no
obligation to make an Advance if, after giving effect to such requested Advance,
the sum of the outstanding and unpaid Revolving Advances under this Section 2.1
or otherwise would exceed the Borrowing Base. The Borrower's obligation to pay
the Revolving Advances shall be evidenced by the Revolving Note and shall be
secured by the Collateral as provided in Article III. Within the limits set
forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section
2.8 and reborrow. The Borrower agrees to comply with the following procedures in
requesting Revolving Advances under this Section 2.1:
(a) The Borrower shall make each request for a Revolving Advance to
the Lender before 11:00 a.m. (Milwaukee time) of the day of the requested
Revolving Advance. Requests may be made in writing or by telephone,
specifying the date of the requested Revolving Advance and the amount
thereof. Each request shall be by (i) any officer of the Borrower; or (ii)
any person designated as the Borrower's agent by any officer of the
Borrower in a writing delivered to the Lender; or (iii) any person whom the
Lender reasonably believes to be an officer of the Borrower or such a
designated agent.
(b) Upon fulfillment of the applicable conditions set forth in Article
IV, the Lender shall disburse the proceeds of the requested Revolving
Advance by crediting the same to the Borrower's demand deposit account
maintained with Norwest Bank Wisconsin unless the Lender and the Borrower
shall agree in writing to another manner of disbursement. Upon the Lender's
request, the Borrower shall promptly confirm each telephonic request for a
Revolving Advance by executing and delivering an appropriate confirmation
certificate to the Lender. The Borrower shall repay all Revolving Advances
even if the Lender does not receive such confirmation and even if the
person requesting an Advance was not in fact authorized to do so. Any
request for a Revolving Advance, whether written or telephonic, shall be
deemed to be a representation by the Borrower that the conditions set forth
in Section 4.2 have been satisfied as of the time of the request.
Section 2.2. Term Advance. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make an advance to the Borrower under this
Section 2.2 on or after the Funding Date in the principal amount of Four Million
Five Hundred Thousand Dollars ($4,500,000) (the "Term Advance"). The Borrower's
obligation to pay the Term Advance shall be evidenced by the Term Note and shall
be secured by the Collateral as provided in Article III. Upon fulfillment of
the applicable conditions set forth in Article IV,
9
<PAGE>
the Lender shall deposit the proceeds of the Term Advance by crediting the same
to the Borrower's demand deposit account specified in Section 2.1(b) unless the
Lender and the Borrower shall agree in writing to another manner of
disbursement.
Section 2.3. Payment of Term Note. The outstanding principal balance of
the Term Note shall be due and payable as follows:
(a) Beginning on February 1, 1999, and on the 1st day of each month
thereafter, in equal monthly installments of Seventy Five Thousand Dollars
($75,000) each plus a final payment of all unpaid principal due on the
Maturity Date; and
(b) On the Termination Date, the entire unpaid principal balance of
the Term Note, and all unpaid interest accrued thereon, shall in any event
be due and payable.
Section 2.4. Interest; Minimum Interest Charge; Default Interest;
Participations; Usury. Interest accruing on the Notes shall be due and payable
in arrears on the first day of each month.
(a) Notes. Except as set forth in Sections 2.4(c) and 2.4(d), the
outstanding principal balance of the Notes shall bear interest at the
Floating Rate.
(b) Minimum Interest Charge. Notwithstanding the interest payable
pursuant to Section 2.4(a), the Borrower shall pay to the Lender interest
of not less than Twenty Five Thousand Dollars ($25,000) during each month
(the "Minimum Interest Charge") during the term of this Agreement, and the
Borrower shall pay any deficiency between the Minimum Interest Charge and
the amount of interest otherwise calculated under Sections 2.4(a) on the
date and in the manner provided in Section 2.6.
(c) Default Interest Rate. At any time during any Default Period, in
the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(d) Usury. In any event no rate change shall be put into effect which
would result in a rate greater than the highest rate permitted by law.
Notwithstanding anything to the contrary contained in any Loan Document,
all agreements which either now are or which shall become agreements
between the Borrower and the Lender are hereby limited so that in no
contingency or event whatsoever shall the total liability for payments in
the nature of interest, additional interest and other charges exceed the
applicable limits imposed by any applicable usury laws. If any payments in
the nature of interest, additional interest and other charges made under
any Loan Document are held to be in excess of the limits imposed by any
applicable usury laws, it is agreed that any such amount held to be in
excess shall be considered payment of
10
<PAGE>
principal hereunder, and the indebtedness evidenced hereby shall be reduced
by such amount so that the total liability for payments in the nature of
interest, additional interest and other charges shall not exceed the
applicable limits imposed by any applicable usury laws, in compliance with
the desires of the Borrower and the Lender. This provision shall never be
superseded or waived and shall control every other provision of the Loan
Documents and all agreements between the Borrower and the Lender, or their
successors and assigns.
Section 2.5. Fees.
(a) Origination Fee. The Borrower hereby agrees to pay the Lender a
fully earned and non-refundable origination fee of One Hundred Twelve
Thousand Five Hundred Dollars ($112,500) which shall be due and payable on
the Funding Date.
(b) Unused Line Fee. For the purposes of this Section 2.5(b), "Unused
Amount" means the Maximum Line reduced by outstanding Revolving Advances.
The Borrower hereby agrees to pay to the Lender an unused line fee at the
rate of one-fourth percent (.25%) per annum on the average daily Unused
Amount from the date of this Agreement to and including the Termination
Date, due and payable monthly in arrears on the first day of each month and
on the Termination Date.
(c) Facility Fee. The Borrower hereby agrees to pay to the Lender a
facility fee at the rate of one-fourth percent (.25%) per annum on the
Total Facility, due and payable in arrears on the first day of each April,
July, October and January, commencing April 1, 1999, and on the Termination
Date.
(d) Audit Fees. The Borrower hereby agrees to pay the Lender, on
demand, audit fees in connection with any audits or inspections conducted
by the Lender of any Collateral or the Borrower's operations or business at
the rate of Five Hundred Dollars ($500) per analyst per day for each audit
conducted by the Lender, plus out-of-pocket costs and expenses; provided
that except during a Default Period, the Lender shall charge the Borrower
for no more than a total of four (4) audits or inspections per fiscal year.
(e) Miscellaneous Fees. The Borrower hereby agrees to (i) pay the
Lender for all wire transfer charges and automated clearing house charges
and to (ii) pay overadvance charges of Two Hundred Dollars ($200) per day;
provided, however, that from the first day of any month during which any
Default Period commences or exists at any time, the daily overadvance
charge (if an overadvance exists) shall be Four Hundred Dollars ($400).
Section 2.6. Computation of Interest and Fees; When Interest Due and
Payable. Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days
11
<PAGE>
elapsed in a year of three hundred sixty (360) days. Interest shall be payable
in arrears on the first day of each month and on the Termination Date.
Section 2.7. Capital Adequacy; Increased Costs and Reduced Return. If any
Related Lender determines at any time that its Return has been reduced as a
result of any Rule Change, such Related Lender may require the Borrower to pay
it the amount necessary to restore its Return to what it would have been had
there been no Rule Change. For purposes of this Section 2.7:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(b) "Return," for any period, means the return as determined by such
Related Lender on the Advances based upon its total capital requirements
and a reasonable attribution formula that takes account of the Capital
Adequacy Rules then in effect. Return may be calculated for each calendar
quarter and for the shorter period between the end of a calendar quarter
and the date of termination in whole of this Agreement.
(c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the date of this Agreement, but the term does not include
any changes in applicable requirements that at the Closing Date are
scheduled to take place under the existing Capital Adequacy Rules or any
increases in the capital that any Related Lender is required to maintain to
the extent that the increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
(d) "Related Lender" includes (but is not limited to) the Lender, any
parent corporation of the Lender and any assignee of any interest of the
Lender hereunder and any participant in the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.7, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
Section 2.8. Voluntary Prepayment; Reduction of the Maximum Line;
Termination of the Credit Facility by the Borrower. Except as otherwise provided
herein, the Borrower may prepay the Advances in whole at any time or from time
to time in part. The Borrower may terminate the Credit Facility or reduce the
Maximum Line at any time if it (i) gives the Lender at least thirty (30) days
prior written notice and (ii) pays the Lender the termination
12
<PAGE>
or line reduction fees in accordance with Section 2.9. Any reduction in the
Maximum Line must be in an amount not less than One Hundred Thousand Dollars
($100,000) or an integral multiple thereof. If the Borrower terminates the
Credit Facility, all Obligations shall be immediately due and payable. Upon
termination of the Credit Facility and payment and performance of all
Obligations, the Lender shall release or terminate the Security Interest and the
Security Documents to which the Borrower is entitled by law.
Section 2.9. Termination and Line Reduction Fees. If the Credit Facility is
terminated for any reason as of a date other than the Maturity Date or if the
Borrower reduces the Maximum Line, except if such termination or reduction is
within one hundred twenty (120) days after the Lender required a payment to
restore its Return pursuant to Section 2.7 hereof, the Borrower shall pay the
Lender a fee in an amount equal to a percentage of (i) the Total Facility if the
Credit Facility is terminated, or (ii) the reduction in the Maximum Line, as
applicable, as follows: (A) two percent (2.0%) if the termination or reduction
occurs on or before the first anniversary of the Funding Date; (B) one percent
(1.0%) if the termination or reduction occurs after the first anniversary of the
Funding Date but on or prior to the second anniversary of the Funding Date; and
(C) one-half percent (.5%) if the termination or reduction occurs after the
second anniversary of the Funding Date.
Section 2.10. Mandatory Prepayment. Without notice or demand, if the sum of
the outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving
Advances to the extent necessary to eliminate such excess.
Section 2.11. Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations one (1)
Banking Day after receipt by the Lender; provided, however, that any payments
received by the Lender by wire transfer shall be applied to the Obligation on
the day of receipt by the Lender. The Lender may hold all payments not
constituting immediately available funds for two (2) Banking Days before
applying them to the Obligations. Notwithstanding anything in Section 2.1, the
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time without the Borrower's request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
Section 2.12. Payment on Non-Banking Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Banking Day, such
payment may be made on the next succeeding Banking Day, and such extension of
time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2.13. Use of Proceeds. The Borrower shall use the proceeds of
Advances for (i) repayment of its existing indebtedness, (ii) for loans to Zecal
for payment of Zecal's existing secured indebtedness and Zecal's ordinary
working capital purposes, and (iii) for ordinary working capital purposes of the
Borrower.
13
<PAGE>
Section 2.14. Liability Records. The Lender may maintain from time to time,
at its discretion, liability records as to the Obligations. All entries made on
any such record shall be presumed correct until the Borrower establishes the
contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within thirty (30) days
after receipt.
ARTICLE III
Security Interest; Occupancy; Setoff
Section 3.1. Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender a security interest (collectively referred to
as the "Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.
Section 3.2. Notification of Account Debtors and Other Obligors. The
Lender may at any time (whether or not a Default Period then exists) notify any
account debtor or other Person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.
Section 3.3. Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender may
(but need not), in the Lender's name or in the Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such
14
<PAGE>
monies, and adjust, litigate, compromise or release any claim against the issuer
of any such policy.
Section 3.4. Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the right to
take possession of the Premises at any time during a Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose
of goods that are Collateral and for other purposes that the Lender may in
good faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and terminate
upon the earlier of (i) payment in full and discharge of all Obligations
and termination of the Commitment, and (ii) final sale or disposition of
all goods constituting Collateral and delivery of all such goods to
purchasers.
(d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises; provided, however, that if the Lender does pay or account for any
rent or other compensation for the possession, occupancy or use of any of
the Premises, the Borrower shall reimburse the Lender promptly for the full
amount thereof. In addition, the Borrower will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any
time incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this Section 3.4.
Section 3.5. License. The Borrower hereby grants to the Lender a non-
exclusive, worldwide and royalty-free license to use or otherwise exploit all
trademarks, franchises, trade names, copyrights and patents of the Borrower for
the purpose of selling, leasing or otherwise disposing of any or all Collateral
during any Default Period.
Section 3.6. Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
P. G. Design Electronics, Inc.
48700 Structural Drive
Chesterfield, Michigan 48051
Federal Tax Identification No. 36-4148939
15
<PAGE>
Name and address of Secured Party:
Norwest Business Credit, Inc.
100 East Wisconsin Avenue
Suite 1400
Milwaukee, Wisconsin 53202
Federal Tax Identification No. 41-1237652
Section 3.7. Setoff. The Borrower agrees that the Lender may at any time or
from time to time, at its sole discretion and without demand but with notice to
Borrower at such time, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any Obligation, whether or not due. In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.
ARTICLE IV
Conditions of Lending
Section 4.1. Conditions Precedent to the Initial Advances. The Lender's
obligation to make the initial Advances hereunder shall be subject to the
condition precedent that the Lender shall have received all of the following,
each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Notes, each properly executed by the Borrower.
(c) A true and correct copy of any and all leases pursuant to which
the Borrower is leasing the Premises, together with a landlord's disclaimer
and consent or similar acceptable agreement with respect to each such
lease.
(d) A true and correct copy of any and all leases pursuant to which
the Zecal is leasing its premises, together with a landlord's disclaimer
and consent or similar acceptable agreement with respect to each such
lease.
(e) The Collateral Account Agreement, properly executed by the
Borrower and Norwest Bank Wisconsin.
(f) The Lockbox Agreement, properly executed by the Borrower and
Norwest Bank Wisconsin.
(g) Current searches of appropriate filing offices showing that (i)
no state or federal tax liens have been filed and remain in effect against
the Borrower or Zecal,
16
<PAGE>
(ii) no financing statements or assignments of patents, trademarks or
copyrights have been filed and remain in effect against the Borrower or
Zecal except those financing statements and assignments of patents,
trademarks or copyrights relating to Permitted Liens or to liens held by
Persons who have agreed in writing that upon receipt of proceeds of the
Advances, they will deliver UCC releases and/or terminations and releases
of such assignments of patents, trademarks or copyrights satisfactory to
the Lender, and (iii) the Lender has duly filed all financing statements
necessary to perfect the Security Interest, to the extent the Security
Interest is capable of being perfected by filing.
(h) A certificate of the Borrower's Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Borrower's directors and, if
required, shareholders, authorizing the execution, delivery and performance
of the Loan Documents, (ii) the Borrower's articles of incorporation and
bylaws, and (iii) the signatures of the Borrower's officers or agents
authorized to execute and deliver the Loan Documents and other instruments,
agreements and certificates, including Advance requests, on the Borrower's
behalf.
(i) A letter from an officer of the Borrower identifying those
individuals who are authorized to initiate and confirm payment orders and
to sign collateral reports.
(j) A current certificate issued by the Secretary of State of
Delaware, certifying that the Borrower is in compliance with all applicable
organizational requirements of the State of Delaware.
(k) Evidence that the Borrower is duly licensed or qualified to
transact business in Michigan and in all other jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary.
(l) A certificate of an officer of the Borrower confirming the
representations and warranties set forth in Article V.
(m) An opinion of counsel to the Borrower and the Guarantors,
addressed to the Lender.
(n) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender's loss payable endorsement in the Lender's
favor and with all liability insurance naming the Lender as an additional
insured.
(o) A separate guaranty, properly executed by each Guarantor, pursuant
to which each Guarantor unconditionally guarantees the full and prompt
payment of all Obligations.
(p) A security agreement, properly executed by Zecal.
17
<PAGE>
(q) Lockbox and collateral account agreements, properly executed by
Zecal and Fleet National Bank, or such other bank as is mutually acceptable
to the Lender and Zecal.
(r) Certificates of each Guarantor's Secretary or Assistant Secretary
certifying as to (i) the resolutions of the such Guarantor's directors and,
if required, shareholders, authorizing the execution, delivery and
performance of its guaranty and any other documentation requested by the
Lender, (ii) such Guarantor's articles of incorporation and bylaws, and
(iii) the signatures of such Guarantor's officers or agents authorized to
execute and deliver its guaranty and other instruments, agreements and
certificates, on such Guarantor's behalf.
(s) With respect to each Guarantor, a current certificate issued by
its state of incorporation, certifying that such Guarantor is in compliance
with all applicable organizational requirements of that state.
(t) Evidence that each Guarantor is duly licensed or qualified to
transact business in all other jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary.
(u) Payment of the fees and commissions due through the date of the
initial Advance under Section 2.5 and expenses incurred by the Lender
through such date and required to be paid by the Borrower under Section
9.6, including all legal expenses incurred through the date of this
Agreement.
(v) Written authorization from the Borrower to pay proceeds of the
Advances to third parties.
(w) A payoff letter from General Electric Capital Corporation and any
other party holding a loan or capitalized lease which will be paid with the
proceeds of the initial Advances.
(x) Such other documents as the Lender in its sole discretion may
require.
Section 4.2. Conditions Precedent to All Advances. The Lender's obligation
to make each Advance shall be subject to the further conditions precedent that
on such date:
(a) the representations and warranties contained in Article V are
correct on and as of the date of such Advance as though made on and as of
such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from such
Advance, which constitutes a Default or an Event of Default.
18
<PAGE>
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1. Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Tax Identification Number. The Borrower is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of Delaware and is duly licensed or qualified to transact
business in Michigan and in all other jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. The Borrower has all requisite power
and authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. During its existence, the Borrower has done business
solely under the names set forth in Schedule 5.1 hereto. The Borrower's chief
executive office and principal place of business is located at the address set
forth in Schedule 5.1 hereto, and all of the Borrower's records relating to its
business or the Collateral are kept at that location. All Inventory and
Equipment is located at that location or at one of the other locations set forth
in Schedule 5.1 hereto. The Borrower's tax identification number is correctly
set forth in Section 3.6 hereto.
Section 5.2. Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower's articles of incorporation or bylaws; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.3. Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
19
<PAGE>
Section 5.4. Subsidiaries. The Borrower has no Subsidiaries other than
Zecal.
Section 5.5. Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender its audited financial statements for its
fiscal year ended December 31, 1997, and its unaudited financial statements for
the fiscal year-to-date period ended November 30, 1998 and those statements
fairly present the Borrower's financial condition on the dates thereof and the
results of its operations and cash flows for the periods then ended and were
prepared in accordance with GAAP, except for year-end adjustments and the
absence of footnotes on its interim financial statements. Since the date of the
most recent financial statements, there has been no material adverse change in
the Borrower's business, properties or condition (financial or otherwise).
Section 5.6. Litigation. Except as listed on Schedule 5.6 hereto, there are
no actions, suits or proceedings pending or, to the Borrower's knowledge,
threatened against or affecting the Borrower or any of its Affiliates or the
properties of the Borrower or any of its Affiliates before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower or any of
its Affiliates, would have a material adverse effect on the financial condition,
properties or operations of the Borrower or any of its Affiliates.
Section 5.7. Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
Section 5.8. Taxes. The Borrower and its Affiliates have paid or caused to
be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
Section 5.9. Titles and Liens. The Borrower has good and absolute title to
all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest financial
statements referred to in Section 5.5 and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for
Permitted Liens. No financing statement naming the Borrower as debtor is on file
in any office except to perfect only Permitted Liens.
Section 5.10. Plans. Except as disclosed to the Lender in writing prior to
the date hereof, neither the Borrower nor any of its Affiliates maintains or has
maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax
20
<PAGE>
qualified status exists in connection with any Plan. Neither the Borrower nor
any of its Affiliates has:
(a) Any accumulated funding deficiency within the meaning of ERISA; or
(b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 5.11. Default. The Borrower is in compliance with all provisions of
all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the Borrower's financial condition,
properties or operations.
Section 5.12. Environmental Matters.
(a) Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(i) "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for either the Borrower or the Lender
under common law of any jurisdiction or under any Environmental Law, and no
Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a way
as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has not disposed of
Hazardous Substances in such a manner as to create any liability under any
Environmental Law.
(d) There are not and, to the Borrower's best knowledge, there never
have been any requests, claims, notices, investigations, demands,
administrative proceedings, hearings or litigation, relating in any way to
the Premises, since its occupancy by the Borrower, or the Borrower,
alleging liability under, violation of, or noncompliance with any
Environmental Law or any license, permit or other
21
<PAGE>
authorization issued pursuant thereto. To the Borrower's best knowledge, no
such matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses are
and have in the past always been conducted in accordance with all
Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the Borrower's possession and
are in full force and effect. No permit required under any Environmental
Law is scheduled to expire within twelve (12) months and there is no threat
that any such permit will be withdrawn, terminated, limited or materially
changed.
(f) To the Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrower's businesses.
Section 5.13. Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.
Section 5.14. Financing Statements. The Borrower has provided to the Lender
signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.15. Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral or other collateral covered by the Security Documents is (or, in the
case of all future Collateral or such other collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in the Borrower's records pertaining thereto as being obligated to
pay such obligation.
22
<PAGE>
ARTICLE VI
Borrower's Affirmative Covenants
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1. Reporting Requirements. The Borrower will deliver, or cause to
be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Borrower, the Borrower's,
Heartland's and Zecal's audited financial statements with the unqualified
opinion of independent certified public accountants selected by the
Borrower and acceptable to the Lender, which annual financial statements
shall include the Borrower's, Heartland's and of Zecal's balance sheet as
at the end of such fiscal year and the related statements of the
Borrower's, Heartland's and of Zecal's income, retained earnings and cash
flows for the fiscal year then ended, prepared, if the Lender so requests,
on a consolidating and consolidated basis to include any Affiliates, all in
reasonable detail and prepared in accordance with GAAP, together with (i)
copies of all management letters prepared by such accountants; (ii) a
report signed by such accountants stating, together with the computations
as to, whether or not the Borrower is in compliance with the requirements
set forth in Sections 6.12, 6.13 and 7.10; and (iii) a certificate of the
Borrower's chief financial officer, substantially in the form of Exhibit C,
stating (A) that such financial statements have been prepared in accordance
with GAAP, (B) whether or not such officer has knowledge of the occurrence
of any Default or Event of Default hereunder not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with respect
thereto, and (c) all relevant facts in reasonable detail to evidence, and
the computations as to, whether the Borrower is in compliance with the
requirements set forth in Sections 6.12, 6.13 and 7.10;
(b) as soon as available and in any event within twenty (20) days
after the end of each month, unaudited/internal balance sheets of Borrower,
Heartland and of Zecal and statements of income and retained earnings of
the Borrower, Heartland and of Zecal as at the end of and for such month
and for the year to date period then ended, prepared, if the Lender so
requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments and
the absence of footnotes; and accompanied by a certificate of the
Borrower's chief financial officer, substantially in the form of Exhibit C
hereto stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments and the absence
of footnotes, (ii) whether such officer has knowledge of the
23
<PAGE>
occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts
with respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether the Borrower is in compliance
with the requirements set forth in Sections 6.12, 6.13 and 7.10;
(c) within fifteen (15) days after the end of each month or more
frequently if the Lender so requires, agings of the Borrower's accounts
receivable and its accounts payable, an inventory certification report, and
a calculation of the Borrower's Accounts, Eligible Accounts, Inventory and
Eligible Inventory as at the end of such month or shorter time period;
(d) at least thirty (30) days before the beginning of each fiscal year
of the Borrower, the projected balance sheets and income statements for
each month of such year, each in reasonable detail, representing the
Borrower's good faith projections and certified by the Borrower's chief
financial officer as being the most accurate projections available and
identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as the
Lender may in its discretion require;
(e) as soon as practicable after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in Section
5.12 or which seek a monetary recovery against the Borrower in excess of
Fifty Thousand Dollars ($50,000);
(f) as promptly as practicable, and in any event not later than five
(5) business days after an officer of the Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such breach, default or event;
(g) as soon as possible, and in any event within thirty (30) days
after the Borrower knows or has reason to know that any Reportable Event
with respect to any Plan has occurred, the statement of the Borrower's
chief financial officer setting forth details as to such Reportable Event
and the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within ten (10) days after
the Borrower fails to make any quarterly contribution required with respect
to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as
amended, the statement of the Borrower's chief financial officer setting
forth details as to such failure and the action which the Borrower proposes
to take with respect thereto,
24
<PAGE>
together with a copy of any notice of such failure required to be provided
to the Pension Benefit Guaranty Corporation;
(i) together with each weekly collateral report, notice of (i) any
disputes or claims by the Borrower's customers exceeding Fifty Thousand
Dollars ($50,000) individually; (ii) credit memos; (iii) any goods returned
to or recovered by the Borrower; and (iv) any change in the persons
constituting the Borrower's officers and directors;
(j) promptly upon knowledge thereof, notice of any loss of or material
damage to any Collateral or other collateral covered by the Security
Documents or of any substantial adverse change in any Collateral or such
other collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent
to its stockholders;
(l) promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
(m) as soon as possible, and in any event by not later than April 30th
of each year, or if a valid extension of the time to file is received by
any such Guarantor, promptly upon the filing of the return, copies of the
federal tax return and all schedules thereto of each Guarantor;
(n) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition; and
(o) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.
Section 6.2. Books and Records; Inspection and Examination. The Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the Borrower's business and financial condition and
such other matters as the Lender may from time to time request in which true and
complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its directors, officers, employees or agents. The
Borrower will permit the Lender, or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral, other
25
<PAGE>
collateral covered by the Security Documents or any other property of the
Borrower at any time during ordinary business hours.
Section 6.3. Account Verification. The Lender may at any time and from time
to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
Section 6.4. Compliance with Laws.
(a) The Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
Section 6.5. Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interest, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower; provided, that the Borrower shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made.
Section 6.6. Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.6 shall prevent the Borrower from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Lender's judgment, desirable in the conduct
of the Borrower's business and not disadvantageous in any material respect
to the Lender.
26
<PAGE>
(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) The Borrower will keep all Collateral and other collateral covered
by the Security Documents free and clear of all security interests, liens
and encumbrances except Permitted Liens.
Section 6.7. Insurance. The Borrower will obtain and at all times maintain
insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
maintain business interruption insurance including coverage for force majeure
and keep all tangible Collateral insured against risks of fire (including so-
called extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the Lender's benefit acceptable to the Lender. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.
Section 6.8. Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
Section 6.9. Delivery of Instruments, etc. Upon request by the Lender, the
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10. Collateral Account.
(a) If, notwithstanding the instructions to debtors to make payments
to the Lockbox, the Borrower receives any payments on Receivables or other
proceeds of Collateral, the Borrower shall deposit such payments and
proceeds into the Collateral Account. Until so deposited, the Borrower
shall hold all such payments and proceeds in trust for and as the property
of the Lender and shall not commingle such payments with any of its other
funds or property.
(b) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.
(c) All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of the Obligations. The
Lender from time to time at its discretion may, after allowing one (1)
Banking Day, apply deposited
27
<PAGE>
funds in the Collateral Account to the payment of the Obligations, in any
order or manner of application satisfactory to the Lender, by transferring
such funds to the Lender's general account.
(d) All items deposited in the Collateral Account shall be subject to
final payment. If any such item is returned uncollected, the Borrower will
immediately pay the Lender, or, for items deposited in the Collateral
Account, the bank maintaining such account, the amount of that item, or
such bank at its discretion may charge any uncollected item to the
Borrower's commercial account or other account. The Borrower shall be
liable as an endorser on all items deposited in the Collateral Account,
whether or not in fact endorsed by the Borrower.
Section 6.11. Performance by the Lender. If the Borrower at any time fails
to perform or observe any of the foregoing covenants contained in this Article
VI or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives the Borrower written notice thereof (or in
the case of the agreements contained in Sections 6.5, 6.7 and 6.10, immediately
upon the occurrence of such failure, without notice or lapse of time), the
Lender may, but need not, perform or observe such covenant on behalf and in the
name, place and stead of the Borrower (or, at the Lender's option, in the
Lender's name) and may, but need not, take any and all other actions which the
Lender may reasonably deem necessary to cure or correct such failure (including,
without limitation, the payment of taxes, the satisfaction of security
interests, liens or encumbrances, the performance of obligations owed to account
debtors or other obligors, the procurement and maintenance of insurance, the
execution of assignments, security agreements and financing statements, and the
endorsement of instruments); and the Borrower shall thereupon pay to the Lender
on demand the amount of all monies expended and all costs and expenses
(including reasonable attorneys' fees and legal expenses) incurred by the Lender
in connection with or as a result of the performance or observance of such
agreements or the taking of such action by the Lender, together with interest
thereon from the date expended or incurred at the Floating Rate. To facilitate
the Lender's performance or observance of such covenants of the Borrower, the
Borrower hereby irrevocably appoints the Lender, or the Lender's delegate,
acting alone, as the Borrower's attorney in fact (which appointment is coupled
with an interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of the Borrower any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by the Borrower under this Section 6.11.
Section 6.12. Minimum Combined Book Net Worth. While any part of the
Obligations remains unpaid, the Borrower and Zecal shall, unless waived in
writing by Lender, continuously maintain:
(a) as of December 31, 1998, a minimum Combined Book Net Worth of
Eleven Million Five Hundred Thousand Dollars ($11,500,000);
28
<PAGE>
(b) from January 1, 1999 through June 29, 1999, a minimum Combined
Book Net Worth of not less than the Combined Book Net Worth as of December
31, 1998 minus Four Hundred Thousand Dollars ($400,000);
(c) as of June 30, 1999, a minimum Combined Book Net Worth of not less
than the Combined Book Net Worth as of December 31, 1998 plus Five Hundred
Thousand Dollars ($500,000);
(d) from July 1, 1999 through December 30, 1999, a minimum Combined
Book Net Worth of not less than the Combined Book Net Worth as of June 30,
1999;
(e) as of December 31, 1999, a minimum Combined Book Net Worth of not
less than both (i) the Combined Book Net Worth as of December 31, 1998 plus
One Million Dollars ($1,000,000) and (ii) the Combined Book Net Worth as of
June 30, 1999 plus Five Hundred Thousand Dollars ($500,000);
(f) thereafter, a minimum Combined Book Net Worth during each fiscal
period from January 1 through December 30 of not less than the Combined
Book Net Worth as of the end of the preceding fiscal year;
(g) as of each June 30 after June 30, 1999, a minimum Combined Book
Net Worth of not less than the Combined Book Net Worth as of the preceding
fiscal year end plus One Million Dollars ($1,000,000);
(h) thereafter, a minimum Combined Book Net Worth during each fiscal
period from July 1 through December 30 of not less than the Combined Book
Net Worth as of the preceding June 30;
(i) as of the end of each fiscal year after December 31, 1999, a
minimum Combined Book Net Worth of not less than both (i) the Combined Book
Net Worth as of the prior fiscal year end plus Two Million Five Hundred
Thousand Dollars ($2,500,000), and (ii) the Combined Book Net Worth as of
the preceding June 30 plus One Million Five Hundred Thousand Dollars
($1,500,000); and
(j) as of March 31, 2000, a minimum Combined Book Net Worth of not
less than the Combined Book Net Worth as of December 31, 1999 plus Five
Hundred Thousand Dollars ($500,000).
Section 6.13. Minimum Combined Net Income. The Borrower and Zecal will
achieve certain levels of Combined Net Income during the term hereof, as
demonstrated on the audited year-end financial statements of the Borrower and
Zecal, as follows:
29
<PAGE>
<TABLE>
<CAPTION>
Minimum Combined Net
--------------------
Period Income
------ ------
<S> <C>
Six month periods ending June 30, 1999 and
December 31, 1999 $ 500,000
Fiscal year ending December 31, 1999 $1,000,000
Six month periods ending each June 30 after
June 30, 1999 $1,000,000
Six month periods ending each December 31 after
December 31, 1999 $1,500,000
Fiscal years ending after December 31, 1999 $2,500,000
Fiscal quarter ending March 31, 2000 $ 500,000
</TABLE>
Section 6.14. Sale or Liquidation of Zecal. In the event substantially
all of the stock or assets of Zecal are sold or Zecal is liquidated, the
Borrower shall cause not less than One Million Four Hundred Fifty Thousand
Dollars ($1,450,000) of the proceeds of such sale or liquidation to be paid to
the Lender for application to the payment of the Obligations, in any order or
manner of application satisfactory to the Lender.
ARTICLE VII
Negative Covenants
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
Section 7.1. Liens. The Borrower will not create, incur or suffer to exist
any mortgage, deed of trust, pledge, lien, security interest, assignment or
transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Schedule 7.1
hereto, securing indebtedness for borrowed money permitted under Section
7.2;
30
<PAGE>
(c) the Security Interest and liens and security interests created by
the Security Documents; and
(d) purchase money security interests and leases relating to the
acquisition of machinery and equipment of the Borrower not exceeding the
lesser of cost or fair market value thereof and so long as no Default
Period is then in existence and none would exist immediately after such
acquisition.
Section 7.2. Indebtedness. The Borrower will not incur, create, assume or
permit to exist any indebtedness or liability on account of deposits or advances
or any indebtedness for borrowed money or letters of credit issued on the
Borrower's behalf, or any other indebtedness or liability evidenced by notes,
bonds, debentures or similar obligations, except:
(a) indebtedness to the Lender arising hereunder or otherwise;
(b) indebtedness of the Borrower in existence on the date hereof and
listed in Schedule 7.2 hereto;
(c) indebtedness relating to Permitted Liens; and
(d) indebtedness to Heartland or to Zecal.
Section 7.3. Guaranties. The Borrower will not assume, guarantee, endorse
or otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7.4. Investments and Subsidiaries.
(a) Subject to Section 7.6 hereof, the Borrower will not purchase or
hold beneficially any stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or make
any investment or acquire any interest whatsoever in, any other Person,
including specifically but without limitation any partnership or joint
venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by U. S. corporations rated "A-1" or "A-2" by Standard & Poor's
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a
31
<PAGE>
maturity of one year or less issued by members of the Federal Reserve
System having deposits in excess of $100,000,000 (which certificates
of deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) travel advances or loans to the Borrower's officers and
employees not exceeding at any one time an aggregate of $10,000; and
(iii) a loan to Zecal out of the proceeds of the Term Advance in
an amount sufficient to pay Zecal's obligations to General Electric
Capital Corporation and loans to Zecal for Zecal's working capital
purposes.
(b) Subject to Section 7.6 hereof, the Borrower will not create or
permit to exist any Subsidiary other than Zecal.
Section 7.5. Dividends. Except as hereinafter provided, the Borrower will
not declare or pay any dividends (other than dividends payable solely in stock
of the Borrower) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly. Provided no
Default Period is in effect, the Borrower may pay dividends to Heartland in
amounts sufficient to pay Heartland's indebtedness to Peter Van Heusden.
Section 7.6. Sale or Transfer of Assets; Suspension of Business Operations.
The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i)
the stock of any Subsidiary, (ii) all or a substantial part of its assets, or
(iii) any Collateral or any interest therein (whether in one transaction or in a
series of transactions) to any other Person other than the sale of Inventory in
the ordinary course of business and will not liquidate, dissolve or suspend
business operations. The Borrower will not in any manner transfer any property,
other than dividends paid to Heartland in accordance with Section 7.5 hereof,
without prior or present receipt of full and adequate consideration.
Notwithstanding any other provision of this Agreement, upon the prior
review and prior written consent of the Lender, the Borrower shall be entitled
to take any of the actions set forth in Section 7.6(a), below, with respect to
Zecal, provided the Borrower has satisfied the conditions of Section 7.6(b),
below:
(a) The Borrower may: (i) cause Zecal to be merged or consolidated
with or into another entity which is not an Affiliate, (ii) cause Zecal to
sell or contribute substantially all of its assets to another entity which
is not an Affiliate, (iii) sell or contribute some or all of the stock of
Zecal to another entity which is or is not an Affiliate, (iv) merge,
consolidate or liquidate Zecal into the Borrower or an Affiliate; or (v)
liquidate the assets of Zecal (any one or more of the foregoing actions to
be called in this Agreement a "Zecal Reorganization");
(b) Prior to and as a precondition to the Borrower effecting any Zecal
Reorganization, the following shall occur: (i) the Borrower shall give the
Lender
32
<PAGE>
prior notice of a proposed Zecal Reorganization with the pertinent details
thereof; (ii) as part of the Zecal Reorganization, the Lender shall receive
as security, in form reasonably satisfactory to the Lender, and at the
Lender's discretion, either a continuing security interest in the assets of
any successor entity to Zecal or a pledge of the stock or other ownership
interests which represent a value of underlying assets which is reasonably
equivalent in value to the Lender's current security interest in Zecal
assets; (iii) as a part of the Zecal Reorganization, any successor entity
to Zecal shall assume both Zecal's obligations to the Borrower for amounts
lent to Zecal by the Borrower and Zecal's obligations to the Lender
pursuant to its guaranty in favor of the Lender; (iv) the Zecal
Reorganization shall be documented and any necessary documents amending or
supplementing the Security Documents shall be entered into in a manner
reasonably satisfactory to the Lender; and (v) if the Zecal Reorganization
is a sale of substantially all of the stock or assets of Zecal, or a
liquidation of Zecal, the amount required to be paid to the Lender under
Section 6.14 hereof shall be provided to be paid under the Zecal
Reorganization.
Section 7.7. Consolidation and Merger; Asset Acquisitions. Except as
provided in Section 7.6 hereof, the Borrower will not consolidate with or merge
into any Person, or permit any other Person to merge into it, or acquire (in a
transaction analogous in purpose or effect to a consolidation or merger) all or
substantially all the assets of any other Person.
Section 7.8. Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9. Restrictions on Nature of Business. Subject to Section 7.6
hereof, the Borrower will not engage in any line of business materially
different from that presently engaged in by the Borrower and will not purchase,
lease or otherwise acquire assets not related to its business.
Section 7.10. Capital Expenditures. The Borrower will not incur or contract
to incur Capital Expenditures of more than Ten Million Dollars ($10,000,000) in
the aggregate during the fiscal year ending December 31, 1999 and (ii) Four
Million Dollars ($4,000,000) in the aggregate during any fiscal year thereafter.
Further, the Borrower will not incur or contract to incur Capital Expenditures
of more than Five Hundred Thousand Dollars ($500,000) in any one transaction or
more than One Million Dollars ($1,000,000) from the Borrower's working capital
in any fiscal year.
Section 7.11. Accounting. The Borrower will not adopt any material change
in accounting principles other than as required by GAAP. The Borrower will not
adopt, permit or consent to any change in its fiscal year.
33
<PAGE>
Section 7.12. Discounts, etc. The Borrower will not, after notice from the
Lender, grant any discount, credit or allowance to any customer of the Borrower
or accept any return of goods sold, or at any time (whether before or after
notice from the Lender) modify, amend, subordinate, cancel or terminate the
obligation of any account debtor or other obligor of the Borrower.
Section 7.13. Defined Benefit Pension Plans. The Borrower will not adopt,
create, assume or become a party to any defined benefit pension plan, unless
disclosed to the Lender pursuant to Section 5.10.
Section 7.14. Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other material
contractual obligation binding upon the Borrower, unless the Borrower is
contesting such obligation in good faith and has created adequate reserves
therefor under GAAP.
Section 7.15. Place of Business; Name. The Borrower will not transfer its
chief executive office or principal place of business, or move, relocate, close
or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.
Section 7.16. Organizational Documents. The Borrower will not amend its
certificate of incorporation, articles of incorporation or bylaws.
Section 7.17. Salaries. The Borrower will not pay excessive or unreasonable
salaries, bonuses, commissions, consultant fees or other compensation, provided
that to the extent the following payments will not result in a violation of, and
so long as the Borrower remains in compliance with, the provisions of Sections
6.12 and 6.13, the Borrower may make payments to Heartland pursuant to
reasonable allocations for overhead and management services in the ordinary
course of the business of Heartland and the Borrower. Further, without the
Lender's written consent, which consent shall not be unreasonably withheld, the
Borrower will not increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than ten percent (10%) plus the increase in the Consumer
Price Index for Urban Wage Earners and Clerical Workers published by the Bureau
of Labor Statistics of the United States Department of Labor from the beginning
of the prior year in any one year, for all such persons in the aggregate, or pay
any such increase from any source other than profits earned in the year of
payment; provided that to the extent the following payments will not result in a
violation of, and so long as the Borrower remains in compliance with, the
provisions of Sections 6.12 and 6.13, the Borrower may pay bonuses and
commissions in excess of the foregoing amounts.
Section 7.18. Change in Ownership. The Borrower will not issue or sell any
stock of the Borrower so as to change the percentage of voting and non-voting
stock owned by each of the Borrower's shareholders, and the Borrower will not
permit or suffer to occur the sale,
34
<PAGE>
transfer, assignment, pledge or other disposition of any or all of the issued
and outstanding shares of stock of the Borrower.
ARTICLE VIII
Events of Default, Rights and Remedies
Section 8.1. Events of Default. "Event of Default", wherever used herein,
means any one of the following events:
(a) Default in the payment of the Obligations when they become due and
payable;
(b) Default in the payment of any fees, commissions, costs or expenses
required to be paid by the Borrower under this Agreement;
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
(d) The Borrower or any Guarantor shall be or become insolvent, or
admit in writing its or his inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or the Borrower
or any Guarantor shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower or such Guarantor, as the case may be; or the Borrower or any
Guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding
relating to it or him under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower or any such Guarantor; or any judgment, writ, warrant
of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Borrower or any
Guarantor;
(e) A petition shall be filed by or against the Borrower or any
Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor; provided, however, that if the Borrower or such
Guarantor is contesting, in good faith, any petition filed against it, the
filing of such petition shall not constitute an Event of Default unless
such proceeding is not dismissed within forty five (45) days after the
commencement of such proceeding;
(f) Any representation or warranty made by the Borrower in this
Agreement, by any Guarantor in any guaranty delivered to the Lender, or by
the Borrower (or any of its officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or
35
<PAGE>
delivered pursuant to or in connection with this Agreement or any
such guaranty shall prove to have been incorrect in any material respect
when deemed to be effective;
(g) The rendering against the Borrower of a final judgment, decree or
order for the payment of money in excess of Fifty Thousand Dollars
($50,000) and the continuance of such judgment, decree or order unsatisfied
and in effect for any period of thirty (30) consecutive days without a stay
of execution;
(h) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower owed to any Person other than the Lender, or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, in any case resulting in a right by such Person to
accelerate the maturity of such evidence of indebtedness, indenture, other
instrument or lease and the expiration of the applicable period of grace,
if any, specified in such evidence of indebtedness, indenture, other
instrument or lease;
(i) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing thirty (30) days
after written notice to such effect shall have been given to the Borrower
by the Lender; or a trustee shall have been appointed by an appropriate
United States District Court to administer any Plan; or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or the Borrower shall
have filed for a distress termination of any Plan under Title IV of ERISA;
or the Borrower shall have failed to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a
lien on the Borrower's assets in favor of the Plan;
(j) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note;
(k) The Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the Lender's prior written consent;
(l) The Borrower shall fail to pay, withhold, collect or remit any tax
or tax deficiency when assessed or due (other than any tax deficiency which
is being contested in good faith and by proper proceedings and for which it
shall have set aside on its books adequate reserves therefor) or notice of
any state or federal tax liens shall be filed or issued;
36
<PAGE>
(m) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder;
(n) Any Guarantor shall repudiate, purport to revoke or fail to
perform any such Guarantor's obligations under such Guarantor's guaranty in
favor of the Lender, or any Guarantor shall cease to exist except pursuant
to a Zecal Reorganization as to which the Lender has provided its written
consent;
(o) Any event or circumstance with respect to the Borrower shall occur
such that the Lender shall believe in good faith that the prospect of
payment of all or any part of the Obligations or the performance by the
Borrower under the Loan Documents is impaired or any material adverse
change in the business or financial condition of the Borrower shall occur;
or
(p) Any breach, default or event of default by or attributable to any
Affiliate under any agreement between such Affiliate and the Lender.
Section 8.2. Rights and Remedies. During any Default Period, the Lender may
exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the Commitment
to be terminated, whereupon the same shall forthwith terminate;
(b) the Lender may, by notice to the Borrower, declare the Obligations
to be forthwith due and payable, whereupon all Obligations shall become and
be forthwith due and payable, without presentment, notice of dishonor,
protest or further notice of any kind, all of which the Borrower hereby
expressly waives;
(c) the Lender may, without notice to the Borrower and without further
action, apply any and all money owing by the Lender to the Borrower to the
payment of the Obligations;
(d) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which the Borrower
hereby expressly waives) and the right to sell, lease or otherwise dispose
of any or all of the Collateral, and, in connection therewith, the Borrower
will on demand assemble the Collateral and make it available to the Lender
at a place to be designated by the Lender which is reasonably convenient to
both parties;
(e) the Lender may exercise and enforce its rights and remedies under
the Loan Documents; and
37
<PAGE>
(f) the Lender may exercise any other rights and remedies available to
it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (d) or (e) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3. Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten (10) calendar days
before the date of intended disposition or other action.
Section 8.4. Covenant Default Fee. In the event an Event of Default under
Section 8.1(c) occurs on account of the breach of the provisions of either
Section 6.12 or Section 6.13, in the Lender's discretion, without waiving any of
its other rights and remedies, an additional fee in the amount of Two Thousand
Five Hundred Dollars ($2,500) shall be due.
ARTICLE IX
Miscellaneous
Section 9.1. No Waiver; Cumulative Remedies. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
Section 9.2. Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3. Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by facsimile, in
each case addressed or facsimiled to the party to whom notice is being given at
its address or facsimile number as set forth below:
38
<PAGE>
If to the Borrower:
P. G. Design Electronics, Inc.
48700 Structural Drive
Chesterfield, Michigan 48051
Facsimile: 810/598-8082
Attention: Leon F. Fiorentino
With a copy to:
Heartland Technology, Inc.
547 West Jackson Boulevard
Suite 1510
Chicago, Illinois 60661
Attention: Leon F. Fiorentino
If to the Lender:
Norwest Business Credit, Inc.
100 East Wisconsin Avenue
Suite 1400
Milwaukee, Wisconsin 53202
Facsimile: 414/224-7442
Attention: Thomas J. Zak
or, as to each party, at such other address or facsimile number as may hereafter
be designated by such party in a written notice to the other party complying as
to delivery with the terms of this Section. All such notices, requests, demands
and other communications shall be deemed to have been given on (a) the date
received if personally delivered, (b) when deposited in the mail if delivered by
mail, (c) the date sent if sent by overnight courier, or (d) the date of
transmission if delivered by facsimile, except that notices or requests to the
Lender pursuant to any of the provisions of Article II shall not be effective
until received by the Lender.
Section 9.4. Further Documents. The Borrower will from time to time execute
and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
Section 9.5. Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to
39
<PAGE>
Collateral in its possession (as imposed by law) shall be deemed fulfilled if it
exercises reasonable care in physically keeping such Collateral, or in the case
of Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Lender need not otherwise preserve, protect, insure or care for any
Collateral. The Lender shall not be obligated to preserve any rights the
Borrower may have against prior parties, to realize on the Collateral at all or
in any particular manner or order or to apply any cash proceeds of the
Collateral in any particular order of application.
Section 9.6. Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses, including, without limitation, reasonable attorney's fees,
periodic UCC, tax and judgment lien searches, incurred by the Lender in
connection with the Obligations, this Agreement, the Loan Documents and any
other agreement related hereto or thereto, and the transactions contemplated
hereby, including, without limitation, all such costs, expenses and fees
incurred in connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.
Section 9.7. Indemnity. In addition to the payment of expenses pursuant to
Section 9.6, the Borrower agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the foregoing
(the "Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution
and delivery of the Loan Documents or the making of the Advances;
(ii) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.12
proves to be incorrect in any respect or as a result of any violation
of the covenant contained in Section 6.4(b); and
(iii) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) (collectively, "Losses") in connection with
the foregoing and any other investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be designated a
party thereto, which may be imposed on, incurred by or asserted
against any such Indemnitee, in any manner related to or arising out
of or in connection with the making of the Advances and the Loan
Documents or the use or intended use of the proceeds of the Advances,
except for any Losses caused by the gross negligence or willful
misconduct of such Indemnitee.
40
<PAGE>
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 9.8. Participants. The Lender and its participants, if any, are not
partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.
Section 9.9. Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.10. Binding Effect; Assignment; Complete Agreement; Exchanging
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's assignees, participants, accountants, lawyers and
other advisors, and prospective participants and assignees, the Lender, Norwest
Corporation, and all direct and indirect subsidiaries of Norwest Corporation,
may exchange any and all information they may have in their possession regarding
the Borrower and its Affiliates, and the Borrower waives any right of
confidentiality it may have with respect to such exchange of such information
among Norwest Corporation and its subsidiaries.
Section 9.11. Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
41
<PAGE>
Section 9.12. Headings. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 9.13. Lender's Actions. The Lender agrees that at any time which
Lender may, in accordance with this Agreement, act within its "discretion" or
its "sole discretion" or in exercising its right to "consent," Lender shall
exercise good faith and act in a commercially reasonable manner.
Section 9.14. Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The
Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Wisconsin. This
Agreement shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Wisconsin. The parties hereto
hereby (i) consents to the personal jurisdiction of the state and federal courts
located in the State of Wisconsin in connection with any controversy related to
this Agreement; (ii) waives any argument that venue in any such forum is not
convenient, (iii) agrees that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents shall be
venued in either the Circuit Court of Milwaukee County, Wisconsin, or the United
States District Court, Eastern District of Wisconsin; and (iv) agrees that a
final judgment in any such suit, action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BASED ON OR PERTAINING TO THIS AGREEMENT.
42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
NORWEST BUSINESS CREDIT, INC. P. G. DESIGN ELECTRONICS, INC.
By:_____________________________ By:____________________________
Thomas J. Zak, Vice President Its:___________________________
MW2-163768-6
43
<PAGE>
Table of Exhibits and Schedules
<TABLE>
<CAPTION>
<S> <C>
Exhibit A Form of Revolving Note
Exhibit B Form of Term Note
Exhibit C Compliance Certificate
Exhibit D Premises
</TABLE>
___________________
<TABLE>
<CAPTION>
<S> <C>
Schedule 5.1 Trade Names, Chief Executive Office,
Principal Place of Business, and Locations
of Collateral
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
</TABLE>
MW2-163768-6
<PAGE>
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$10,500,000.00 Milwaukee, Wisconsin
December 31, 1998
For value received, the undersigned, P. G. DESIGN ELECTRONICS, INC., a
Delaware corporation (the "Borrower"), hereby promises to pay on the Termination
Date under the Credit Agreement (defined below), to the order of NORWEST
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its office in
Milwaukee, Wisconsin, or at any other place designated at any time by the holder
hereof, in lawful money of the United States of America and in immediately
available funds, the principal sum of Ten Million Five Hundred Thousand Dollars
($10,500,000.00) or, if less, the aggregate unpaid principal amount of all
Advances made by the Lender to the Borrower under the Credit Agreement (defined
below) together with interest on the principal amount hereunder remaining unpaid
from time to time, computed on the basis of the actual number of days elapsed
and a 360-day year, from the date hereof until this Note is fully paid at the
rate from time to time in effect under the Credit and Security Agreement of even
date herewith (as the same may hereafter be amended, supplemented or restated
from time to time, the "Credit Agreement") by and between the Lender and the
Borrower. The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement. This Note may be prepaid only in
accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower hereby agrees to pay all costs of collection, including
reasonable attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
P. G. DESIGN ELECTRONICS, INC.
By:____________________________
MW2-163768-6 Its:___________________________
TERM NOTE
<PAGE>
Exhibit B to Credit and Security Agreement
$4,500,000.00 Milwaukee, Wisconsin
December 31, 1998
For value received, the undersigned, P. G. DESIGN ELECTRONICS, INC., a
Nevada corporation (the "Borrower"), hereby promises to pay on the Termination
Date under the Credit Agreement (defined below), to the order of NORWEST
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its office in
Milwaukee, Wisconsin, or at any other place designated at any time by the holder
hereof, in lawful money of the United States of America and in immediately
available funds, the principal sum of Four Million Five Hundred Thousand Dollars
($4,500,000.00), together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a three hundred sixty (360) day year, from the date hereof
until this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement of even date herewith (as the same may hereafter
be amended, supplemented or restated from time to time, the "Credit Agreement")
by and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Term Note referred to in the Credit Agreement. This Note is secured, among other
things, pursuant to the Credit Agreement and the Security Documents as therein
defined, and may now or hereafter be secured by one or more other security
agreements, mortgages, deeds of trust, assignments or other instruments or
agreements.
The Borrower hereby agrees to pay all costs of collection, including
reasonable attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
P. G. DESIGN ELECTRONICS, INC.
By:___________________________________
Its:__________________________________
<PAGE>
Exhibit C
to Credit and Security Agreement
Compliance Certificate
To: Thomas J. Zak
NORWEST BUSINESS CREDIT, INC.
Date: __________________, 199___
Subject: P. G. Design Electronics, Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as of December
31, 1998, (the "Credit Agreement"), attached are the financial statements of P.
G. Design Electronics, Inc. (the "Borrower") as of and for ________________,
19___ (the "Reporting Date") and the year-to-date period then ended (the
"Current Financials"). All terms used in this certificate have the meanings
given in the Credit Agreement.
I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments and the absence of footnotes, and
fairly present the Borrower's financial condition and the results of its
operations as of the date thereof.
Events of Default. (Check one):
[_] The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
[_] The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement and attached hereto
is a statement of the facts with respect to thereto.
I hereby certify to the Lender as follows:
[_] The Reporting Date marks the end of one of the Borrower's fiscal
months, hence I am completing all paragraphs below except
paragraphs 2 and 4.
[_] The Reporting Date marks the end of the Borrower's fiscal year,
hence I am completing all paragraphs below.
Financial Covenants. I further hereby certify as follows:
1. Minimum Combined Book Net Worth. Pursuant to Section 6.12 of
the Credit Agreement, as of the Reporting Date, the Borrower's
Combined Book Net Worth was $____________ which [_] satisfies [_] does
not satisfy the requirement that
<PAGE>
such amount be not less than the following amounts on the Reporting Date as set
forth below:
(a) as of December 31, 1998, a minimum Combined Book Net Worth of
Eleven Million Five Hundred Thousand Dollars ($11,500,000);
(b) from January 1, 1999 through June 29, 1999, a minimum Combined
Book Net Worth of not less than the Combined Book Net Worth as of December
31, 1998 minus Four Hundred Thousand Dollars ($400,000);
(c) as of June 30, 1999, a minimum Combined Book Net Worth of not less
than the Combined Book Net Worth as of December 31, 1998 plus Five Hundred
Thousand Dollars ($500,000);
(d) from July 1, 1999 through December 30, 1999, a minimum Combined
Book Net Worth of not less than the Combined Book Net Worth as of June 30,
1999;
(e) as of December 31, 1999, a minimum Combined Book Net Worth of not
less than both (i) the Combined Book Net Worth as of December 31, 1998 plus
One Million Dollars ($1,000,000) and (ii) the Combined Book Net Worth as of
June 30, 1999 plus Five Hundred Thousand Dollars ($500,000);
(f) thereafter, a minimum Combined Book Net Worth during each fiscal
period from January 1 through December 30 of not less than the Combined
Book Net Worth as of the end of the preceding fiscal year;
(g) as of each June 30 after June 30, 1999, a minimum Combined Book
Net Worth of not less than the Combined Book Net Worth as of the preceding
fiscal year end plus One Million Dollars ($1,000,000);
(h) thereafter, a minimum Combined Book Net Worth during each fiscal
period from July 1 through December 30 of not less than the Combined Book
Net Worth as of the preceding June 30;
(i) as of the end of each fiscal year after December 31, 1999, a
minimum Combined Book Net Worth of not less than both (i) the Combined Book
Net Worth as of the prior fiscal year end plus Two Million Five Hundred
Thousand Dollars ($2,500,000), and (ii) the Combined Book Net Worth as of
the preceding June 30 plus One Million Five Hundred Thousand Dollars
($1,500,000); and
(j) as of March 31, 2000, a minimum Combined Book Net Worth of not
less than the Combined Book Net Worth as of December 31, 1999 plus Five
Hundred Thousand Dollars ($500,000).
<PAGE>
2. Minimum Combined Net Income. Pursuant to Section 6.13 of the
Credit Agreement, as of the Reporting Date, the Borrower's and Zecal's
Combined Net Income for the fiscal year ending on the Reporting Date was
$_______________, which [_] satisfies [_] does not satisfy the requirement
that such amount be not less than the amount on the Reporting Date as set
forth below:
<TABLE>
<CAPTION>
Period Minimum Combined Net Income
------ ---------------------------
<S> <C>
Six month periods ending June 30, 1999 and December
31, 1999 $ 500,000
Fiscal year ending December 31, 1999 $1,000,000
Six month periods ending each June 30
after June 30, 1999 $1,000,000
Six month periods ending each
December 31 after December 31, 1999 $1,500,000
Fiscal years ending after December 31, 1999 $2,500,000
Fiscal quarter ending March 31, 2000 $ 500,000
</TABLE>
3. Capital Expenditures. Pursuant to Section 7.10 of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the fiscal year ended
______________, 199___, for Capital Expenditures, $__________________ in
the aggregate, which [_] satisfies [_] does not satisfy the requirement
that such expenditures not exceed ______________________________________
Dollars ($_______________) in the aggregate. Further, the Borrower has not
expended or contracted to expend more than Two Hundred Thousand Dollars
($200,000) in any one transaction or expended or contracted to expend more
than One Million Dollars ($1,000,000) from Borrower's working capital for
the year-to-date period ending on the Reporting Date.
4. Salaries. As of the Reporting Date, the Borrower [_] is [_] is not
in compliance with Section 7.17 of the Credit Agreement concerning
salaries.
<PAGE>
Attached hereto are all relevant facts in reasonable detail to evidence,
and the computations of the financial covenants referred to above. These
computations were made in accordance with GAAP.
P. G. DESIGN ELECTRONICS, INC.
By: __________________________________
Its: Chief Financial Officer
<PAGE>
Exhibit D
to Credit and Security Agreement
Premises
The Premises referred to in the Credit and Security Agreement are legally
described as follows:
Location: 48700 Structural Drive
Chesterfield, Michigan 48051
Legal Description: Situated in the Township of Chesterfield, County of Macomb
and State of Michigan, to wit:
Lot 5 and North 100 feet of Lot 6 according to the Plat
thereof as recorded in Liber 90, Pages 33 through 38, both
inclusive of Plats, Macomb County Records.
Commonly known as 48700 Structural Drive.
Location: (offices of Zecal)
456 North Sanford Road
Churchville, New York 14428
Legal Description: ALL THAT TRACT OF PARCEL OF LAND, situate in the Town of
Riga, Monroe County, New York, being part of Lot 51 in the
West Pultney Tract so called, described as follows:
Beginning at a point N 0.36' and W 0.57' from existing
concrete R.O.W. monument remains set in the East line of
North Sanford Road (formerly Sanford Road) at the point of
intersection with the northerly line of the North Sanford
Drive; thence (1) N 00 degrees 54' 50" W along the East line
of Sanford Road, a distance of 974.55' to an iron pipe;
thence (2) N 89 degrees 04' 19" E, a distance of 554.42' to
a point in the north line of property heretofore conveyed by
deed recorded in the Monroe County Clerk's Office in Liber
7262 of Deeds at page 155, which point is also 717.35' West
of the Northeast corner of the aforesaid property so
conveyed; thence (3) S 00 degrees 54' 50" E, a distance of
984.76' to a point in the North line of the North Sanford
Drive; thence (4) S 68 degrees 50' 00" W along the north
line of said new road a distance of 351.52' to an existing
R.O.W. monument; thence (5) N 85 degrees 23' 50" W along the
north line of the monument; thence North Sanford Drive, a
distance of 128.36 feet to an existing R.O.W. monument;
thence (6) N 39 degrees 55' 46" W, along the north
<PAGE>
line of said new road a distance of 153.71' to the point and
place of beginning; containing in all 13.442 acres of land.
<PAGE>
Schedule 5.1
to Credit and Security Agreement
Trade Names, Chief Executive Office, Principal Place of Business, and Locations
of Collateral
Trade Names
Xceed
Chief Executive Office/Principal Place of Business
48700 Structural Drive
Chesterfield, Michigan 48051
Other Inventory and Equipment Locations
Zecal Corp.
456 North Sanford Road
Churchville, New York 14428
<PAGE>
Schedule 5.6
to Credit and Security Agreement
Litigation
As more fully described in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the "Commission") by Heartland on April 2,
1998, as amended on April 27, 1998, April 30, 1998 and on June 23, 1998, the
Borrower has been informed by one of its major customers that the customer has a
patent relating to the demonstration devices for computer printers ("Printer
PODs") and that the customer believes that some or all of the Printer PODs
manufactured by the Borrower infringe the patent. The Borrower is investigating
the claim and, at the same time, exploring resolution of the matter with the
claimed patent holder.
<PAGE>
Schedule 7.1
to Credit and Security Agreement
Permitted Liens
None.
<PAGE>
Schedule 7.2
to Credit and Security Agreement
Permitted Indebtedness and Guaranties
Indebtedness
None.
Guaranties
None.
<PAGE>
Exhibit 21
Subsidiaries of Heartland Technology, Inc.
The following is a list of all of the registrant's direct and indirect
subsidiaries, state of incorporation or organization and the percentage of
ownership of each.
<TABLE>
<CAPTION>
Name of subsidiary State Ownership
<S> <C> <C>
PG Design Electronics, Inc. Delaware 100%
Zecal Corp. Delaware (a)
Solder Station-One California 100%
</TABLE>
.(a) Wholly owned by PG Design Electronics, Inc.
<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-K and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,547
<ALLOWANCES> (173)
<INVENTORY> 3,105
<CURRENT-ASSETS> 7,869
<PP&E> 11,177
<DEPRECIATION> (2,328)
<TOTAL-ASSETS> 37,363
<CURRENT-LIABILITIES> 11,809
<BONDS> 8,132
0
0
<COMMON> 501
<OTHER-SE> 16,921
<TOTAL-LIABILITY-AND-EQUITY> 37,363
<SALES> 27,668
<TOTAL-REVENUES> 27,668
<CGS> 20,861
<TOTAL-COSTS> 20,861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,018
<INCOME-PRETAX> (2,717)
<INCOME-TAX> (580)
<INCOME-CONTINUING> (2,137)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,137)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
<PAGE>
Exhibit 99.1
Item 8. Financial Statement and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Partners and Unitholders of Heartland Partners, L.P.
We have audited the accompanying consolidated balance sheets of Heartland
Partners, L.P. (the "Partnership") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Partners, L.P. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 26, 1999
14
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
ASSETS:
- - -------
<S> <C> <C>
Cash......................................................................... $ 1,115 $ 1,890
Restricted cash.............................................................. 2,564 724
Marketable securities (amortized cost of $149 in 1998 and $143 in 1997)...... 149 141
Accounts receivable (net of allowance of $416 in 1998 and $205 in 1997)...... 353 251
Due from affiliate........................................................... 442 --
Prepaid and other assets..................................................... 278 358
Investment in joint venture.................................................. 278 278
------- -------
Total..................................................................... 5,179 3,642
------- -------
Property:
Buildings and other.......................................................... 2,231 2,003
Less accumulated depreciation............................................. 931 807
------- -------
Net buildings and other...................................................... 1,300 1,196
Land held for sale........................................................... 930 1,163
Housing inventories.......................................................... 13,978 4,092
Land held for development.................................................... 6,212 8,829
Capitalized predevelopment costs............................................. 5,632 7,916
------- -------
Net Properties............................................................ 28,052 23,196
------- -------
Total Assets................................................................. $33,231 $26,838
======= =======
LIABILITIES:
- - ------------
Notes payable................................................................ $13,492 $ 3,750
Accounts payable and accrued expenses........................................ 2,636 724
Management fee due affiliate................................................. 283 425
Accrued real estate taxes.................................................... 1,075 1,092
Allowance for claims and liabilities......................................... 2,762 2,169
Unearned rents and deferred income........................................... 1,862 1,200
Distribution payable......................................................... -- 1,631
Other liabilities............................................................ 1,712 356
------- -------
Total Liabilities......................................................... 23,822 11,347
------- -------
PARTNERS' CAPITAL:
- - ------------------
General Partner.............................................................. -- 28
Class A Limited Partners - 2,142 units authorized, issued and outstanding.... -- 5,902
Class B Limited Partner...................................................... 9,409 9,563
Unrealized holding loss on marketable securities............................. -- (2)
------- -------
Total Partners' Capital...................................................... 9,409 15,491
------- -------
Total Liabilities and Partners' Capital...................................... $33,231 $26,838
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
15
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996
(amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
Holding Gain
Class A Class B (Loss) on
General Limited Limited Marketable
Partner Partners Partner Securities Total
------- -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 .................. $ 89 $11,935 $9,594 $ 42 $21,660
Net Income ................................... 4 382 2 -- 388
Distribution ................................. (27) (2,678) (14) -- (2,719)
Marketable securities fair value adjustment .. -- -- -- (44) (44)
----- ------- ------ ----- -------
Balances at December 31, 1996 ................ 66 9,639 9,582 (2) 19,285
Net loss ..................................... (22) (2,130) (11) -- (2,163)
Distribution ................................. (16) (1,607) (8) -- (1,631)
----- ------- ------ ----- -------
Balances at December 31, 1997 ................ 28 5,902 9,563 (2) 15,491
Net Loss ..................................... (28) (5,902) (154) -- (6,084)
Marketable securities fair value adjustment .. -- -- -- 2 2
----- ------- ------ ----- -------
Balances at December 31, 1998 ................ $ -- $ -- $9,409 $ -- $ 9,409
===== ======= ====== ===== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
16
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
(amounts in thousands, except for per unit data)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
- - ---------
Property sales ...................................................... $ 6,231 $ 7,127 $ 6,918
Less: cost of property sales ........................................ 4,405 3,407 1,674
------- ------- -------
Gross profit on property sales .................................. 1,826 3,720 5,244
Rental income ....................................................... 886 1,104 1,039
Portfolio income .................................................... 63 62 419
Miscellaneous income ................................................ 514 286 223
------- ------- -------
Total Net Revenues........................................... 3,289 5,172 6,925
------- ------- -------
Expenses:
- - ---------
Selling ............................................................. 2,876 1,903 501
Real estate taxes ................................................... 399 703 984
General and administrative .......................................... 4,088 4,132 3,355
Environmental Expense ............................................... 1,461 78 1,141
Management fee ...................................................... 425 425 425
Depreciation and amortization ....................................... 124 94 131
------- ------- -------
Total Expenses .................................................. 9,373 7,335 6,537
------- ------- -------
Net Income (Loss) ............................................... $(6,084) $(2,163) $ 388
======= ======= =======
Net income (loss) allocated to General Partner .................. $ (28) $ (22) $ 4
======= ======= =======
Net income (loss) allocated to Class B limited partner .......... $ (154) $ (11) $ 2
======= ======= =======
Net income (loss) allocated to Class A limited partners ......... $(5,902) $(2,130) $ 382
======= ======= =======
Net income (loss) per Class A limited partnership unit .......... $ (2.76) $ (0.99) $ 0.18
======= ======= =======
Average number of Class A limited partnership units outstanding . 2,142 2,142 2,142
======= ======= =======
Distributions declared per Class A limited partnership unit ..... $ -- $ 0.75 $ 1.25
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
17
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
- - ------------------------------------
Net income (loss) ............................................................. $(6,084) $(2,163) $ 388
Adjustments reconciling net income (loss) to net cash used in operating
activities:
Bad debt expense .............................................................. 211 98 27
Depreciation .................................................................. 124 94 131
Accretion of discount on securities ........................................... -- (21) (78)
Loss (Gain) on sale of securities ............................................. -- 3 (79)
Net change in allowance for claims and liabilities ............................ 593 (491) 168
Net change in assets and liabilities:
Decrease (increase) in accounts receivable ................................ (313) 181 205
Increase in housing inventories..... ...................................... (4,852) (3,486) (848)
Decrease in land held for sale ............................................ 233 123 81
Decrease in land held for development ..................................... 790 158 350
(Increase) decrease in capitalized development costs ...................... (923) 1,234 44
Increase (decrease) in accounts payable and accrued liabilities ........... 1,895 476 (208)
(Decrease) increase in management fee due affiliate ....................... (142) -- --
Net change in other assets and liabilities ................................ 1,656 759 (280)
------- ------- -------
Net cash used in Operating Activities ..................................... (6,812) (3,035) (99)
------- ------- -------
Cash Flow from Investing Activities:
- - ------------------------------------
Additions to buildings and other .............................................. (228) (510) (62)
Net (purchases) sales and maturities of marketable securities ................. (6) 4,636 1,259
------- ------- -------
Net cash (used in) provided by investing activities ........................... (234) 4,126 1,197
------- ------- -------
Cash Flow from Financing Activities:
- - ------------------------------------
(Repayment of) proceeds from note payable to Heartland Technology, Inc. ....... -- -- (648)
Advances on notes payable, net ................................................ 9,742 3,011 737
Increase in restricted cash ................................................... (1,840) (424) (300)
Distribution paid to unitholders .............................................. (1,631) (2,719) --
------- ------- -------
Net cash provided by (used in) financing activities ........................... 6,271 (132) (211)
------- ------- -------
Net (decrease) increase in cash ............................................... (775) 959 887
Cash at beginning of year ..................................................... 1,890 931 44
------- ------- -------
Cash at end of year ........................................................... $ 1,115 $ 1,890 $ 931
======= ======= =======
Supplemental Disclosure of Non Cash Operating Activities:
- - ---------------------------------------------------------
Net land held for development and capitalized development costs transferred $ 5,034 $ -- $ --
to housing inventories ...................................................... ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
18
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
1. Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in such
capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Rosemount,
Minnesota ("Bloomfield" or "Rosemount"). CMC has a 100% membership interest in
CMC Heartland Partners II ("CMCII"), CMC Heartland Partners III ("CMCIII"), CMC
Heartland Partners IV ("CMCIV"), CMC Heartland Partners V ("CMCV") CMC Heartland
Partners VI ("CMCVI"), CMC Heartland Partners VII ("CMCVII") and CMC Heartland
Partners VIII ("CMCVIII"). CMCII was formed to participate in the Goose Island
Industrial park joint venture in Chicago, Illinois. CMCIII was formed in 1997 to
develop a portion of the Kinzie Station property in Chicago, IL. CMCV was formed
in 1996 to acquire finished lots and to construct and sell houses in Osprey Cove
("Osprey Cove" or "St. Marys"), a master-planned residential community in St.
Marys, GA. CMCVII was formed in 1998 to acquire and engage in sales, marketing
and construction of homes in the Longleaf Country Club, Southern Pines, NC
("Southern Pines" or "Longleaf"). CMCIV, CMCVI and CMCVIII were formed at
various times to acquire and hold properties under various stages of
negotiations. CMC also owns 100% of the common stock of Lifestyle Communities,
Ltd. ("LCL") which serves as the exclusive sales agent in the St. Marys,
Southern Pines and Kinzie Station developments. LCL is also the general
contractor in the St. Marys development. CMC owns 100% of the stock of Lifestyle
Construction Company, Inc. ("LCC") which serves as the general contractor in
North Carolina. Except as otherwise noted herein, references herein to
"Heartland" or the "Company" include CMC, HDC, CMCI, CMCII, CMCIII, CMCIV, CMCV,
CMCVI, CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account, such net loss shall be allocated only amoung partners having positive
balances in their capital accounts.
The General Partner has the discretion to cause Heartland to make distributions
of Heartland's available cash in an amount equal to 98.5% to the Unitholders,
0.5% to the holder of the Class B Interest and 1% to the General Partner. There
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, which dividend was paid on January 7, 1998. On December 4,
1997, Heartland's partnership agreement was amended to allow the General Partner
in its discretion to establish a record date for distributions of the last day
of any calendar month.
At December 31, 1998, land held for sale consisted of scattered land parcels.
States in which large land holdings are located are Illinois, Iowa, Minnesota,
Montana, North Dakota, South Dakota, Washington, and Wisconsin. The remaining
acreage is located in Idaho, Indiana, Michigan and Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprised of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. Certain air rights and fiber
optics development rights are also owned.
19
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Improved properties of value to Heartland include a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin, a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records, and several small, old warehouse buildings in Milwaukee
which are leased to third parties for warehouse use.
At December 31, 1998, property available for development, including housing
inventories, consisted of 15 sites with a book value of land is $10.8 million.
Heartland reviews these properties to determine whether to hold, develop, either
solely or with a third party joint venturer, or sell them. Heartland's objective
for these properties is to maximize unitholder value over a period of years.
Heartland has a 3.88 acre site in Chicago, Illinois known as Kinzie Station
under development. Phase I consists of 163 units in a Tower Building, 24 units
in a Plaza Building and 6 Townhomes. CMC is also selling and building single
family homes in Osprey Cove located in St. Marys, Georgia, Longleaf Country Club
in Southern Pines, North Carolina and the Bloomfield community in Rosemount,
Minnesota. These sites are classified as housing inventories.
2. Summary of Significant Accounting Policies
Consolidation
- - -------------
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCI, 1%
general partnership interest owned by HDC and 99% owned by CMC; CMC II, CMC III,
CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC, each 100% owned by CMC. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
- - -------------------
Revenues from housing and land sales are recognized in the period in which title
passes and cash is received.
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Marketable Securities
- - ---------------------
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such classification as of each balance sheet
date. Debt securities that the Company does not have the positive intent or
ability to hold to maturity, and all marketable equity securities are classified
as available-for-sale and are carried at fair value. All of Heartland's
marketable securities held at December 31, 1998 and 1997 are classified as
available-for-sale. Unrealized holding gains and losses on securities classified
as available-for-sale are reported as a separate component of partners' capital.
Partners' capital included an unrealized holding loss on marketable securities
classified as available for sale of $2,000 at December 31, 1997. Realized gains
and losses, and declines in value judged to be other than temporary, are
included in net securities gains (losses). Premiums and discounts on marketable
securities are amortized
20
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
on a straight-line basis using the maturity date of the security to determine
the amortization period and such amortization is included in interest income.
The cost of securities sold is based on the specific identification method.
Properties
- - ----------
Properties are carried at their historical cost. Expenditures which
significantly improve the values or extend useful lives of the properties are
capitalized. Predevelopment costs including interest, financing fees, and real
estate taxes that are directly identified with a specific development project
are capitalized. Repairs and maintenance are charged to expense as incurred.
Depreciation is provided for financial statement purposes over the estimated
useful life of the respective assets ranging from 7 years for office equipment
and fixtures to 40 years for building and improvements primarily using the
straight-line method.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the particular development property may not be
recoverable. If these events or changes in circumstances are present, the
Company estimates the sum of the expected future cash flows (undiscounted) to
result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss the Company would
measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property.
Housing inventories, (including completed model homes), consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost which is not in excess of fair value. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units sold in
relation to the total anticipated units in the related development project; such
allocation approximates the relative sales value method. Direct construction
costs are allocated to the specific units sold for purposes of determining costs
of sales. Selling and marketing costs, not including those costs incurred
related to furnishing and developing the models and sales office, are expensed
in the period incurred. Costs incurred in the construction of the model units
and related furnishings are capitalized at cost. The Company intends to offer
these units for sale at the completion of a project and, accordingly, no
amortization of direct construction costs is provided. Housing inventories are
reviewed for impairment whenever events or circumstances indicate the fair value
is less than the cost. If these events or changes in circumstances are present,
the Company then would write down the inventory to its fair value.
As of December 31, 1998 and 1997, management is not aware of any impairment
losses in the Company's real estate assets. Accordingly, no impairment losses
were recognized during any of the years presented.
21
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Housing inventories consisted of the following at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
(amounts in thousands)
1998 1997
-------- -------
<S> <C> <C>
Land under development............................ $ 4,568 $1,421
Direct construction costs......................... 2,109 1,843
Capitalized project costs......................... 7,301 828
------- ------
$13,978 $4,092
======= ======
</TABLE>
Interest, financing fees, and real estate taxes relating to land and
construction in progress are capitalized and, accordingly, are included in the
aggregate cost of housing inventories. These costs are amortized to cost of
sales on a per unit basis in relationship to the total units of the related
development based upon the total estimated budget to be incurred for the
development. This accounting treatment approximates the relative sales value
method. Additionally, the Company provides each home purchaser with a one-year
warranty covering the major components of the unit. The costs associated with
these warranties are immaterial and therefore, expensed as incurred.
Fair Value of Financial Instruments
- - -----------------------------------
Management has considered fair value information relating to its financial
instruments at December 31, 1998. For cash and marketable securities, the
carrying amounts approximate fair value. For variable rate debt that reprices
frequently, fair values approximate carrying values. For all remaining financial
instruments, carrying value approximates fair value due to the relatively short
maturity of these instruments.
Income Taxes
- - ------------
A publicly-traded partnership generally is not liable for Federal income taxes,
provided that for each taxable year at least 90% of its gross income consists of
certain passive types of income. In such case, each partner includes its
proportionate share of partnership income or loss in its own tax return.
Accordingly, no provision for income taxes is reflected in Heartland's financial
statements.
Heartland's assets are carried at historical cost. At December 31, 1998, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
Segment Reporting
- - -----------------
During the fourth quarter of 1998, Heartland adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement No. 131"). Statement No. 131 superseded FASB
Statement of Financial Accounting Standards No. 14, Financial Reporting for
Segments of a Business Enterprise ("Statement No. 14"). Statement No. 131
establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of Statement
No. 131 did not affect Heartland's results of operations or financial position.
The Company has two primary reportable business segments, which consist of land
sales and property development (See Note 11 to the Consolidated Financial
Statements).
22
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Reclassification
- - ----------------
Certain reclassifications have been made to the previously reported 1997 and
1996 statements in order to provide comparability with the 1998 statements.
These reclassifications have not changed the 1997 and 1996 results.
3. Restricted Cash
On May 14, 1997, CMC established a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB") pursuant to which CMC pledged cash
in the amount of $500,000 as an interest reserve. During 1998, LNB increased the
line of credit to $8.5 million and extended the maturity date of the loan to
April 30, 1999, pursuant to which CMC pledged additional cash in the amount of
$350,000 as an interest reserve. On December 30, 1997, CMCV renewed a line of
credit agreement in the amount of $3 million with NationsBank ("NB") pursuant to
which CMCV pledged cash in the amount of $100,000 as an interest reserve. This
cash was released in 1998. On November 30, 1998, CMCI executed an agreement for
a $2,500,000 loan with Bank One relating to the Bloomfield project pursuant to
which CMCI has pledged $502,000 in cash as an interest reserve (see Note 4 to
the Consolidated Financial Statements). Restricted cash also includes
purchasers' earnest money escrow deposits of $1,202,000 and $114,000 at December
31, 1998, and 1997, respectively and a $10,000 construction improvement bond
held by the Osprey Cove Homeowners Association. The total restricted cash at
December 31, 1998 and 1997 was $2,564,000 and $724,000, respectively.
4. Notes Payable
On May 14, 1997, CMC signed a line of credit agreement in the amount of $5
million with LNB, pursuant to which CMC granted LNB a first lien on certain
parcels of land in Chicago, IL which had a carrying value of $5,560,000 and
$6,407,000 as of December 31, 1998, and 1997, respectively. Also, pursuant to
the line of credit agreement, CMC pledged cash in the amount of $500,000 as an
interest reserve. The agreement terminated on May 1, 1998, but was extended
through June 30, 1998. On June 30, 1998, the loan was amended extending the
maturity date to April 30, 1999, and increasing the line to $8.5 million. The
Company has subsequently pledged additional cash in the amount of $350,000
bringing the total interest reserve to $850,000. On October 23, 1998, CMC
amended the loan temporarily increasing the line to $9,500,000 and reducing net
worth requirements to $8,500,000. The $1,000,000 temporary increase was paid
back in December 1998. Advances against the line of credit bear interest at the
prime rate of LNB plus 1.0% (8.75% at December 31, 1998). At December 31, 1998,
and 1997, $8,321,000 and $2,000,000 respectively, had been advanced to the
Company by LNB against the line of credit. The Company is currently in
negotiations with LNB to extend the maturity of the loan, modify certain
existing financial covenants, and increase the amount of the credit facility.
While the Company has no reason to believe that the extension, modification of
terms and increased capacity of the credit facility will not be granted, there
can be no assurance that the contemplated transaction will be approved by LNB.
No adjustments related to this uncertainty have been made in the accompanying
financial statements.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with NB to acquire lots and construct houses in the Osprey
Cove subdivision, St. Marys, Georgia, pursuant to which CMC granted a first
mortgage to NB on specific lots in said subdivision with a carrying value of
$5,138,000 and $4,092,000 at December 31, 1998, and 1997, respectively. On
December 30, 1998, Heartland entered into a modification agreement to its
December 30, 1996, revolving line of credit agreement in the amount of $3
million for Osprey Cove to extend the maturity date to June 30, 1999. The line
of credit with NB bears interest at the prime rate of NB plus 1% (8.75% at
December 31, 1998). At maturity, all outstanding advances and any accrued
interest must be paid. In the event the loan is not renewed, it will be extended
for a period of six months to allow for completion of homes then under
construction, but no new construction will be commenced. NB had advanced
$2,288,000 and $1,750,000 at December 31, 1998, and 1997, respectively against
the revolving line of credit facility.
23
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
Under the terms of the agreement, CMCV is required to maintain a minimum net
worth of $500,000 and a minimum leverage ratio not to exceed of 4:1.
In December 1998 the Company signed a commitment letter for $3,000,000 with NB
to construct homes in the Longleaf community. NB makes individual loans on each
home at the time construction begins. The third party developer subordinates its
lot to NB's construction loan. As of December 31, 1998, the Company had
outstanding balances on 7 term loans totaling $383,000. The carrying value of
the related inventory at December 31, 1998, totaled $546,000. The term of each
loan is one year and bears interest at the NB prime rate plus 1% (8.75% at
December 31, 1998).
On November 30, 1998, Heartland executed an agreement for a $2,500,000 loan with
Bank One relating to the Bloomfield project. The two year loan bears interest at
the prime rate (7.75% at December 31,1998). $500,000 of the loan was placed in
an interest reserve. The loan is collateralized by the Phase II land with a
carry value of $918,000 at December 31, 1998. In addition, Bank One is providing
a $1,750,000 development loan, a letter of credit for $179,000 to the City of
Rosemount and a $4,000,000 revolving credit line for the construction of homes;
these credit facilities were executed in February 1999. The Company believes
that no additional financing will be needed for Phase I of the Rosemount
community.
On January 6, 1999, the Kinzie Station 2.5 year loan agreement in the amount of
$29,812,000 was signed with Corus Bank N.A. The loan bears interest at the prime
rate plus one percent. This loan is collateralized by the real estate contained
in the project. In conjunction with the loan, a Construction Contract with the
guaranteed maximum price of $24,710,000 was entered into with a general
contractor. The first draw was completed in January 1999.
During the years ended December 31, 1998, 1997, and 1996, the Company incurred
and paid interest on loans in the amount of $802,000, $189,000 and $108,000,
respectively, of which $802,000, $126,000 and $0 was capitalized. Interest
expense in 1997 and 1996 is recorded in general and administrative expense.
5. Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. Environmental costs which are
incurred in connection with Heartland's development activities are expensed or
capitalized as appropriate.
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives. (See Note 8).
There is not sufficient information to reasonably estimate all the environmental
liabilities of which management is aware. Accordingly, management is unable to
determine whether environmental liabilities which management is unable to
reasonably estimate will or will not have a material effect on Heartland's
results of operations or financial condition.
24
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
6. Related Party Transactions
CMC has a management agreement with HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000. On December 29,
1995, HTI advanced CMC approximately $648,000 and on February 14, 1996 HTI
advanced an additional $425,000 for past due management fees. Each advance was
in the form of a note payable on demand and bore interest at the prime rate plus
2.5%. Interest expense on the note was approximately $107,000 for 1996. On
December 31, 1996, CMC paid HTI $1,180,400 related to previously accrued
management fees including $107,400 for interest related to the past due amounts.
At December 31, 1997, the management fee accrued and unpaid was approximately
$425,000 representing deferred management fees for the year ended December 31,
1997. In February 1998, CMC paid HTI the $425,000 management fee. $142,000 of
the 1998 management fee was paid in 1998.
Under a management services agreement, HTI reimburses Heartland for reasonable
and necessary costs and expenses for services totaling $322,000 for the year
ended December 31, 1998, $228,000 for 1997 and $180,000 for 1996. HTI owes CMC
$442,000 as of December 31, 1998, related to these expenses.
7. Leases
Heartland is a lessor under numerous property lease arrangements with varying
lease terms. The majority of the leases are cancelable by either party upon
thirty to sixty days notice and provide nominal rental income to Heartland. The
leases generally require the lessee to construct, maintain and remove any
improvements, pay property taxes, maintain insurance and maintain the condition
of the property. Heartland has several major leases on buildings and land in
Chicago, Illinois, Milwaukee, Wisconsin and Minneapolis, Minnesota which account
for over half of Heartland's annual rental income.
Heartland is lessor with one non-cancellable operating lease for $114,400 per
year that will continue as long as the lessee operates its railroad line.
Heartland leases its office premises as well as offices at certain development
sites and certain equipment under various operating leases. Future minimum lease
commitments under non-cancellable operating leases are as follows:
<TABLE>
<S> <C>
1999............................................ $310,000
2000............................................ 192,000
2001............................................ 115,000
2002............................................ 48,000
--------
Total........................................ $665,000
========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was $294,000,
$133,000, and $132,000, respectively.
8. Legal Proceedings and Contingencies
At December 31, 1998, and 1997, Heartland's allowance for claims and liabilities
was approximately $2.8 million and $2.2 million, respectively. During the year
ended December 31, 1998, 1997, and 1996 provisions for, a $1,461,000, $78,000
and $1,141,000, respectively, were recorded with respect to environmental
matters. Significant legal matters are discussed below.
Soo Line Matters
- - ----------------
25
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The Soo Line Railroad Company (the "Soo") has asserted that the Company is
liable for certain occupational injury claims filed after the consummation of an
Asset Purchase Agreement and related agreements ("APA") by former employees now
employed by the Soo. The Company has denied liability for each of these claims
based on a prior settlement with the Soo. The Soo has also asserted that the
Company is liable for the remediation of releases of petroleum or other
regulated materials at six different sites acquired from the Company located in
Iowa, Minnesota and Wisconsin. The Company has denied liability based on the
APA.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements on many of these
claims. As a result of Soo's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
- - ------------------
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest.
On October 1, 1998, the Company entered into a Settlement Agreement with the
Port in which the Port released all claims and the Company agreed to either pay
$1.1 million or to convey real property to be agreed upon between the parties at
a later date. At December 31, 1998, and 1997, Heartland's allowance for claims
and liabilities for this site was $1,100,000 and $290,000, respectively.
The Company will not make a claim on its insurance carriers in this matter
because the settlement amount does not exceed the self insured retention under
the applicable insurance policies.
Wheeler Pit, Janesville, Wisconsin
- - ----------------------------------
In November 1995 the Company settled a claim with respect to the Wheeler Pit
site near Janesville, Wisconsin. The settlement calls for the Company to pay
General Motors $800,000 at $200,000 annually for four years, 32% of the
monitoring costs for twenty-five years beginning in 1997 and 32% of governmental
oversight costs; the oversight costs not to exceed $50,000. Payments of $200,000
were made in 1995, 1996, 1997 and 1998. A payment of $50,000 for past government
oversight costs was made in October 1998. At December 31, 1998, and 1997,
Heartland's allowance for claims and liabilities for this site was $184,000 and
$408,000, respectively, of which $171,000 and $358,000 represents the annual
payments discounted at 4.54% and 6.07% respectively.
Miscellaneous Environmental Matters
- - -----------------------------------
Under environmental laws, liability for hazardous substance contamination is
imposed on the current owners and operators of the contaminated site, as well as
the owner or the operator of the site at the time the hazardous substance was
disposed or otherwise released. In most cases, this liability is imposed without
regard to fault. Currently, the Company has known environmental liabilities
associated with certain of its properties arising out of the activities of its
predecessor or certain of its predecessor's lessees and may have further
material environmental liabilities as yet unknown. The majority of the Company's
known environmental liabilities stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad or in operations
conducted by its predecessor's lessees. The following is a summary of material
known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is liable for some or all of the investigation and remediation of
certain properties in Montana sold by its predecessor's reorganization trustee
26
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
prior to the consummation of its predecessor's reorganization. The Company has
denied liability at certain of these sites based on the reorganization bar of
the Company's predecessors. The Company's potential liability for the
investigation and remediation of these sites was discussed in detail at a
meeting with DEQ in April 1997. While DEQ has not formally changed its position,
DEQ has not elected to file suit. Management is not able to express an opinion
at this time whether the cost of the defense of this liability or the
environmental exposure in the event of the Company's liability will or will not
be material.
At twelve separate sites, the Company has been notified that releases arising
out of the operations of a lessee, former lessee or other third party have been
reported to government agencies. At each of these sites, the third party is
voluntarily cooperating with the appropriate agency by investigating the extent
of any such contamination and performing the appropriate remediation, if any.
The Company has petroleum groundwater remediation projects or long term
monitoring programs at Austin, Minnesota, Farmington, Minnesota, and Miles City,
Montana. At December 31, 1998, and 1997, Heartland's aggregate allowance for
claims and liabilities for these sites were approximately $41,000 and $187,000,
respectively.
In December 1989, the Minnesota Pollution Control Agency ("MPCA") added a site
which includes the Company's Pig's Eye Yard site in St. Paul, Minnesota to its
Permanent List of Priorities based on historical records and an initial
investigation of soil and groundwater conditions adjacent to Pig's Eye Yard.
Portions of this site had been leased to the City of St. Paul for a landfill and
to the Metropolitan Waste Control Commission for disposal of incinerator ash.
The site, which includes portions of the adjacent municipal waste water
treatment plant, was placed on the Superfund Accelerated Clean Up Model list in
1993. No potentially responsible parties ("PRPs") have been formally named at
this site. The Company has reached an agreement to sell its interest in this
property to the city of St. Paul for $630,000, subject to final documentation.
The Company has an interest in property at Moses Lake, Washington previously
owned and used by the United States government as an Air Force base. Sampling by
the Army Corps of Engineers has indicated the presence of various regulated
materials, primarily in the groundwater, which were most likely released as a
result of military or other third party operations. A portion of the Company's
property is located over a well field which was placed on the national priority
list in October 1992. The Company has not been named as a PRP.
The Company is voluntarily investigating the environmental condition of a
property in Minneapolis, Minnesota in connection with a contract to sell the
property. The investigation has indicated certain metal impacts in the soil and
groundwater. The Company's estimate at this time is that the remediation
construction may cost between $425,000 and $881,000. The contract sale price is
$562,000. At December 31, 1998, and 1997, Heartland's aggregate allowance for
claims and liabilities for these sites was approximately $518,000 and $472,000,
respectively.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company, or
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
27
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
9. Compensation and Benefits
An employment agreement with the President and Chief Executive Officer of CMC
provides for a base salary of $275,000 through May 30, 2002, all or a portion of
which may be deferred at the officer's election. The contract provides incentive
compensation equal to 10% of the value of all amounts distributed to Unitholders
and the holder of the Class B Interest in excess of the "Capital Amount" as
defined. The Capital Amount approximates the average market value of the Units
for the first 30 trading days after the Distribution Date, subject to adjustment
as set forth in the contract. During or after the term of employment, incentive
payments will be made with respect to distributions by Heartland during
Heartland's term of existence, and if distributions are made subsequent to such
officer's death, payments will be made to his designee or estate. The contract
also provides that in the event of a "change of control of Heartland" during or
after the term of employment, the officer shall receive a lump sum payment of
$1,250,000.
Heartland sponsors a Group Savings Plan, which is a salary reduction plan
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986.
All full-time permanent employees of Heartland are eligible to participate in
the plan. A participating employee can authorize contributions to the plan in
the form of salary reductions of up to the maximum allowed by the Internal
Revenue Code in any plan year. In 1998 Heartland made matching contributions of
50% of each participant's contribution to the plan. Beginning January 1, 1999,
Heartland will make matching contributions of 25%. Participating 1998 employees
are fully vested with respect to salary reduction and Heartland's contributions.
For all future participants, they are fully vested with respect to salary
reduction immediately but the matching contribution vests at 20% per year.
Benefits are normally distributed upon retirement (on or after age 65), death or
termination of employment, but may be distributed prior to termination of
employment upon showing of financial hardship. Heartland contributed to the plan
approximately $80,000 in 1998, $60,000 in 1997, and $65,000 in 1996 on behalf of
all employees.
10. Marketable Securities
The following is a summary of marketable securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury securities and obligations of U.S.
government agencies............................... $ 149 $ -- $ -- $ 149
======= ========== ======= ========
</TABLE>
At December 31, 1998 and 1997 all marketable securities were classified as
available-for-sale. Proceeds from sale and maturities of debt securities during
1998, 1997, and 1996, were $297,000, $9,015,000, and $27,238,000, respectively.
The gain on sale of securities in 1997 was approximately $3,000. Proceeds from
sales in 1998 and 1996 approximated cost for all securities at the date of sale.
The net adjustment to unrealized holding gains (losses) on marketable securities
included as a separate component of partners' capital was $2,000, $0 and
$(44,000) for the years ended December 31, 1998, 1997 and 1996, respectively.
28
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
The cost and estimated fair value of debt securities at December 31, 1998, by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because the issuers of the securities may have the right
to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
Due in one year or less................. $149 $149
Due after one year through three years.. --- ---
Due after three years................... --- ---
---- ----
Total................................ $149 $149
==== ====
</TABLE>
11. Reportable Segments
The following tables set forth the reconciliation of net income and total assets
for Heartland's reportable segments for the years ended December 31, 1998, 1997
and 1996 (See Note 2 to the Consolidated Financial Statements).
<TABLE>
<CAPTION>
Property
1998 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- - ---------------------------------- -------------- --------------- ------------- ------------
Revenues:
- - ---------
<S> <C> <C> <C> <C>
Property sales.................... $1,814 $ 4,417 $ 0 $ 6,231
Less: cost of property sales...... 215 4,190 0 4,405
------ ------- ------- -------
Gross profit on property sales. 1,599 227 0 1,826
Rental income..................... 886 0 0 886
Portfolio income.................. 0 0 63 63
Miscellaneous income.............. 0 514 0 514
------ ------- ------- -------
Total Net Revenues............. 2,485 741 63 3,289
------ ------- ------- -------
Expenses:
- - ---------
Selling........................... 0 2,876 0 2,876
Real estate taxes................. 209 190 0 399
General and administrative........ 986 327 2,775 4,088
Environmental Expense............. 248 25 1,188 1,461
Management fee.................... 0 0 425 425
Depreciation and amortization..... 0 84 40 124
------ ------- ------- -------
Total Expenses................. 1,443 3,502 4,428 9,373
------ ------- ------- -------
Net Income (Loss).............. $1,042 $(2,761) $(4,365) $(6,084)
====== ======= ======= =======
Properties, net of accumulated
depreciation............... $ 937 $26,296 $ 819 $28,052
====== ======= ======= =======
Total assets................... $1,290 $29,403 $ 2,538 $33,231
====== ======= ======= =======
</TABLE>
29
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Property
1997 (amounts in thousands) Land Sales(1) Development(2) Corporate (3) Consolidated
- - ----------------------------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
- - ---------
Property sales..................... $1,708 $ 5,419 $ 0 $ 7,127
Less: cost of property sales....... 125 3,282 0 3,407
------ ------- ------- -------
Gross profit on property sales.. 1,583 2,137 0 3,720
Rental income...................... 1,104 0 0 1,104
Portfolio income................... 0 0 62 62
Miscellaneous income............... 0 286 0 286
------ ------- ------- -------
Total Net Revenues............ 2,687 2,423 62 5,172
------ ------- ------- -------
Expenses:
- - ---------
Selling............................ 0 1,903 0 1,903
Real estate taxes.................. 182 521 0 703
General and administrative......... 565 50 3,517 4,132
Environmental Expense.............. 0 78 0 78
Management fee..................... 0 0 425 425
Depreciation and amortization...... 0 67 27 94
------ ------- ------- -------
Total Expenses................ 747 2,619 3,969 7,335
------ ------- ------- -------
Net Income (Loss)............. $1,940 $ (196) $(3,907) $(2,163)
====== ======= ======= =======
Properties, net of accumulated
depreciation................ $1,171 $21,371 $ 654 $23,196
====== ======= ======= =======
Total assets.................. $1,422 $21,854 $ 3,562 $26,838
====== ======= ======= =======
</TABLE>
30
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Property
1996 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- - ----------------------------------- -------------- --------------- ------------- ------------
Revenues:
- - ---------
<S> <C> <C> <C> <C>
Property sales...................... $1,218 $5,700 $ 0 $6,918
Less: cost of property sales........ 81 1,593 0 1,674
------ ------ ------- ------
Gross profit on property sales... 1,137 4,107 0 5,244
Rental income....................... 1,039 0 0 1,039
Portfolio income.................... 0 0 419 419
Miscellaneous income................ 0 223 0 223
------ ------ ------- ------
Total Net Revenues............... 2,176 4,330 419 6,925
------ ------ ------- ------
Expenses:
- - ---------
Selling............................. 0 501 0 501
Real estate taxes................... 130 854 0 984
General and administrative.......... 582 0 2,773 3,355
Environmental Expense............... 0 1,141 0 1,141
Management fee...................... 0 0 425 425
Depreciation and amortization....... 0 59 72 131
------ ------ ------- ------
Total Expenses................... 712 2,555 3,270 6,537
------ ------ ------- ------
Net Income (Loss)................ $1,464 $1,775 $(2,851) $ 388
====== ====== ======= ======
</TABLE>
(1) The Land Sales reportable business segment consists of the approximately
15,730 acres of land located throughout 12 states for sale or rental as of
December 31, 1998, and after the related sales and marketing general and
administrative expenses.
(2) The Property Development reportable business segment consists of the
approximately 915 acres representing 15 sites that Heartland is in the
process of developing or homebuilding communities in which the Company is
currently acquiring finished lots, and building and then selling homes. The
related selling and operating expenses are also reported for this business
segment.
(3) The Corporate level consists of portfolio income from investments and
salaries and general and administrative expenses for the employees and
occupied office space in Chicago, Illinois.
31
<PAGE>
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1998, 1997 AND 1996
(amounts in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end
Description of year expenses Deductions of year
- - ----------- ---------- ---------- -------------- -------
Year Ended December 31, 1998:
<S> <C> <C> <C> <C>
Allowance for claims and liabilities... $2,169 $1,461 $ (868)(a) $2,762
====== ====== ========== ======
Year Ended December 31, 1997:
Allowance for claims and liabilities... $2,660 $ 78 $ (569)(a) $2,169
====== ====== ========== ======
Year Ended December 31, 1996:
Allowance for claims and liabilities... $2,492 $1,141 $ (973)(a) $2,660
====== ====== ========== ======
</TABLE>
Note: (a) Payments
32
<PAGE>
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Cost Capitalized Gross Amount at Which
Initial Cost to Subsequent Carried
Heartland to Acquisition (1) at Close of Period (1)
---------------------- -------------------------- ------------------------------------
Building,
Buildings & Carrying Improvement and
Description Land Improvements Improvements(3) Costs(4) Land Carrying Costs Total
- - ----------- ---- ------------ --------------- -------- ------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Developable Sites
Chicago, IL................... (7) $ 4,434 $ 1 $3,233 $2,964 $ 4,434 $ 6,198 $10,632
Milwaukee, WI................. 856 939 1,356(6) 1,198 856 3,493 4,349
Fife, WA...................... 2,573 - 262 358 2,573 620 3,193
Rosemount, MN................. (10) 956 - 1,607 526 956 2,133 3,089
Osprey........................ (8) 1,898 - 2,586 208 1,898 2,794 4,692
Longleaf...................... (9) - - 590 - - 590 590
Other developable properties
less than 5% of total........ 63 - 146(6) 40 63 186 249
------- ---- ------ ------ ------- ------- -------
Total developable properties.. 10,780 940(5) 9,780 5,294 10,780 16,014 26,794
------- ---- ------ ------ ------- ------- -------
Sale Properties............... 930 - 10(5) - 930 10 940
------- ---- ------ ------ ------- ------- -------
TOTAL......................... $11,710 $940 $9,790 $5,294 $11,710 $16,024 $27,734
======= ==== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Life on
Which
Depreciation
In Latest
Date of Income
Accumulated Completion of Date Statement
Description Depreciation Construction Acquired Is Computed
- - ----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Developable Sites
Chicago, IL................... (7) $ 18 Various Various (2)
Milwaukee, WI................. 480 Various Various (2)
Fife, WA...................... -- Various Various
Rosemount, MN................. -- N/A Various
Osprey........................ (8) -- N/A Various
Other developable properties
less than 5% of total........ -- N/A Various
----
Total developable properties.. 498
----
Sale Properties............... 3 Various Various
----
TOTAL......................... $501
====
</TABLE>
(1) See Attachment A to Schedule III for reconciliation of beginning of period
total to total at end of period.
(2) Reference is made to Note 2 to the Consolidated Financial Statements for
information related to depreciation.
(3) Improvements include all costs which increase the net realizable value of
the property except carrying costs.
(4) Carrying costs consists primarily of legal fees, real estate taxes and
interest.
(5) These amounts are included in Buildings and other on the Consolidated
Balance Sheet. Also included in the amount shown on the Consolidated
Balance Sheet for Buildings and other is furniture and equipment of $1,249,
with related accumulated depreciation of $430.
(6) These amounts include a total of $32 that is included in Buildings and
other on the Consolidated Balance Sheet.
(7) Includes certain parcels of land encumbered by a $8,321,000 short-term loan
(See Note 4 to the Consolidated Financial Statements).
(8) Includes parcels of land encumbered by a $2,288,000 short-term loan (See
Note 4 to the Consolidated Financial Statements).
(9) Includes homes encumbered by a $383,000 short-term loan (See Note 4 to the
Consolidated Financial Statements).
(10) Includes parcel of land encumbered by a $2,500,000 two year loan (See Note
4 to the Consolidated Financial Statements).
33
<PAGE>
Exhibit 99.1
HEARTLAND PARTNERS, L.P.
ATTACHMENT A TO SCHEDULE III
RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING
OF YEAR WITH TOTAL AT END OF YEAR
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at January 1.......... $22,982 $21,280 $20,903
------- ------- -------
Additions during year:
Other acquisitions............ 939 1,125 663
Improvements.................. 8,218 3,987 1,388
------- ------- -------
Total Additions............ 9,157 5,112 2,051
------- ------- -------
Deductions during year:
Cost of real estate sold... 4,405 3,410 1,674
------- ------- -------
Total deductions........... 4,405 3,410 1,674
------- ------- -------
Balance at December 31........ $27,734 $22,982 $21,280
======= ======= =======
</TABLE>
Reconciliation Of Real Estate Accumulated Depreciation
At Beginning of Year with Total At End of Year
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at January 1.......... $ 440 $ 382 $ 323
----- ----- -----
Additions during year:
Charged to Expense.......... 61 61 59
----- ----- -----
Total Additions........... 61 61 59
----- ----- -----
Deductions during year:
Cost of real estate sold.... --- 3 ---
----- ----- -----
Total deductions.......... --- 3 ---
----- ----- -----
Balance at December 31........ $ 501 $ 440 $ 382
===== ===== =====
</TABLE>
34
