<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 1-11956
HEARTLAND TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1487580
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/294-0497
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
As of August 12, 1999, there were 1,671,238 shares of the registrant's common
stock outstanding.
Page 1 of 24
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HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets................................ 3
Consolidated Statements of Operations...................... 4
Consolidated Statements of Cash Flows...................... 5
Notes to Consolidated Financial Statements................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk. 18
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K........................... 20
Signatures................................................. 21
Page 2 of 24
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, except share amounts)
<TABLE>
<CAPTION>
June 30 1999 December 31 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net of reserves 5,839 3,374
Due from affiliate 2 286
Inventories, net 4,413 3,105
Prepaid expenses 175 310
Refundable taxes 735 794
----------------- -----------------
Total current assets 11,164 7,869
----------------- -----------------
Property and equipment:
Machinery and equipment 10,052 9,719
Furniture and fixtures 564 473
Leasehold improvements 1,007 985
----------------- -----------------
Property and equipment at cost 11,623 11,177
Less accumulated depreciation 3,447 2,328
----------------- -----------------
Property and equipment, net 8,176 8,849
----------------- -----------------
Other assets:
Goodwill, net of accumulated amortization 11,783 12,069
Deferred debt issuance costs, net of accumulated amortization 152 248
Other 130 187
Investment in partnerships 8,110 8,141
----------------- -----------------
Total assets $ 39,515 $ 37,363
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Lines of credit(1) $ 5,203 $ 3,603
Accounts payable, trade 4,350 2,837
Accrued expenses and other liabilities 1,547 1,393
Current portion of long-term debt(2) 5,838 2,236
Current portion of capital lease obligations 70 61
Allowance for claims and liabilities 1,281 1,281
Payable to affiliates 247 398
----------------- -----------------
Total current liabilities 18,536 11,809
----------------- -----------------
Long-term debt, less current portion 5,939 7,940
Capital lease obligation, less current portion 193 192
Stockholders' equity:
Common stock, $.30 par value per share, authorized 10,000,000 shares,
1,671,238 shares issued and outstanding 501 501
Additional paid-in capital 10,773 10,773
Retained earnings 3,573 6,148
----------------- -----------------
Total stockholders' equity 14,847 17,422
----------------- -----------------
Total liabilities and stockholders' equity $ 39,515 $ 37,363
================= =================
</TABLE>
(1) includes $4,427 of debt in default
(2) includes $4,050 of debt in default
See accompanying Notes to Condensed Consolidated Financial Statements
Page 3 of 24
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Operations
(Amounts in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 9,209 $ 6,775 $ 17,080 $ 12,017
Cost of sales.................................... 8,250 5,398 14,053 9,199
-------------- -------------- -------------- --------------
Gross margins.................................... 959 1,377 3,027 2,818
Other income:
Interest income............................. -- 30 -- 46
Management fee from affiliate............... 106 106 212 212
Loss from investment in partnerships........ (18) (26) (31) (54)
Miscellaneous, net.......................... 247 (298) 248 (298)
-------------- -------------- -------------- --------------
Total other income (loss)........................ 335 (188) 429 (94)
Other expenses:
Selling, general and administrative......... 2,239 1,627 4,446 3,260
Interest expense............................ 373 137 642 279
Amortization expense........................ 186 156 370 156
Special compensation........................ -- -- -- 188
-------------- -------------- -------------- --------------
Total other expenses.................... 2,798 1,920 5,458 3,883
-------------- -------------- -------------- --------------
Loss before taxes and extraordinary item......... (1,504) (731) (2,002) (1,159)
Income tax expense (benefit)..................... 18 (273) 64 (463)
-------------- -------------- -------------- --------------
Net loss before extraordinary loss............... (1,522) (458) (2,066) (696)
-------------- -------------- -------------- --------------
Extraordinary loss on debt refinancing........... -- -- 509 --
-------------- -------------- -------------- --------------
Net loss......................................... $ (1,522) $ (458) $ (2,575) $ (696)
-------------- -------------- -------------- --------------
Net loss per share before extraordinary loss..... (0.91) (0.27) (1.24) (0.42)
-------------- -------------- -------------- --------------
Net loss per share for extraordinary loss........ -- -- (0.30) --
-------------- -------------- -------------- --------------
Net loss per share-basic and diluted............. $ (0.91) $ (0.27) $ (1.54) $ (0.42)
============== ============== ============== ==============
Weighted average number of common shares
outstanding...................................... 1,671 1,671 1,671 1,671
============== ============== ============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 4 of 24
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Operating activities: June 30,1999 June 30,1998
- -------------------- -------------- --------------
<S> <C> <C>
Net loss $ (2,575) $ (696)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,437 908
Special compensation amortization -- 188
Equity in loss from investments in Partnerships 31 54
Bad debt expense 15 --
Deferred income taxes -- (67)
Reserve for inventory obsolescence (490) 120
Changes in operating assets and liabilities:
Accounts receivable (2,480) (1,355)
Due from affiliate 284 287
Inventories (818) (1,804)
Prepaid expenses and other assets 138 (23)
Refundable taxes 59 --
Accounts payable and accrued expenses 1,667 1,680
Due to affiliate (151) --
-------------- --------------
Net cash used in operating activities (2,883) (708)
Investing activities:
Purchases of property and equipment (394) (933)
Acquisition of businesses, net of cash required - (7,559)
All other investing activities -- (159)
-------------- --------------
Net cash used in investing activities (394) (8,651)
Financing activities :
Net borrowings under line of credit 1,600 2,611
Proceeds from issuance of long-term debt 2,358 5,856
Proceeds from capital leases 43 --
Payments on capital leases (33) (10)
Principal payments on long-term debt (757) (2,330)
Debt issuance costs 66 --
-- --
Net cash provided by financing activities 3,277 6,127
Decrease in cash and cash equivalents -- (3,232)
Cash and cash equivalents at beginning of period -- 3,232
-------------- --------------
Cash and cash equivalents at end of period $ -- $ --
============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 5 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements and related notes have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and on substantially the same basis as the annual
consolidated financial statements. The consolidated financial statements include
the accounts of Heartland Technology, Inc. ("HTI" or the "Company"), its
subsidiaries, P.G. Design Electronics, Inc. ("PG"), Solder Station-One, Inc.
("Solder") and Zecal Corp. ("Zecal"), a subsidiary of PG. The consolidated
financial statements include the accounts of Solder, from April 10, 1998 and the
accounts of Zecal from April 29, 1998. All significant intercompany transactions
and accounts have been eliminated. Certain reclassifications have been made to
the 1998 financial statements to make them comparable to the current period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Sales to a few large customers continue to account for a significant percentage
of the Company's revenues. The Company does not have long term contracts with
any of these large customers. If the Company loses a major customer, or if a
major customer reduces its purchases of products and services, financial results
will be materially effected.
In the opinion of management, the consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, operating results, and cash flows for
the periods presented. Operating results for the three and the six month periods
ended June 30, 1999, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. The interim statements should be
read in conjunction with the consolidated financial statements and notes
thereto, for the year ended December 31, 1998, as presented in the Company's
Annual Report on Form 10-K.
2. Organization
Milwaukee Land Company ("MLC") 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. ("Heartland"), a publicly traded limited partnership of
which MLC is the general partner and also holds limited partner interests and
CMC Heartland Partners ("CMC Heartland"), a general partnership in which HTI and
Heartland
Page 6 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
are the general partners and MLC is the managing general partner. 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. and CMC Heartland,
the Company is engaged in the business of development of real estate, including
the properties formerly owned by the Company.
In May 1997, HTI purchased substantially all of the assets, and assumed certain
liabilities of, PG Design. PG Design was engaged in the business of contract
design and manufacture of electronics assemblies for computer and computer
printer original equipment manufacturers ("OEM").
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.
On April 29, 1998, PG acquired certain assets and assumed certain liabilities of
Zecal, which owns patented "Z-Strate"(R) technology for plating fine line copper
circuits on a ceramic substrate.
3. Inventories
The components of inventory consist of the following (amounts in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 4,374 $ 3,667
Work-in-process 10 110
Finished goods 175 256
------------- -----------------
4,559 4,033
Less: Allowance for obsolescence 146 928
------------- -----------------
Inventories, net $ 4,413 $ 3,105
============= =================
4. Net Loss per Share
Net loss per share for the second quarter of 1999 was $.91 and the net loss for
the six month period ending June 30, 1999 was $1.54. The net losses for the
comparable periods of 1998 were $.27 and $.42 per share, respectively.
Calculations of earnings per common share are based on 1,671,238 shares
outstanding.
Page 7 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Information on Unconsolidated Investee
The following is the condensed balance sheet as of June 30, 1999 and December
31, 1998 and the summarized income statement for the six month periods ended
June 30, 1999 and 1998 for Heartland Partners, L.P., in which the Company has a
general partnership interest and a Class B limited partnership interest. All
periods are unaudited except for the December 31, 1998 balance sheet and all
amounts are in the thousands.
<TABLE>
<CAPTION>
June 30,1999 Dec. 31,1998
------------ ------------
<S> <C> <C>
Assets:
- ------
Cash and marketable securities $ 3,409 $ 3,828
Receivables, net 243 353
Other assets 704 720
Net properties and investment in joint venture 35,099 28,330
------------ ------------
Total assets $ 39,455 $ 33,231
============ ============
Liabilities:
- -----------
Accounts payable, accrued expenses and other liabilities $ 7,638 $ 7,568
Allowance for claims and liabilities 2,778 2,762
Loans payable 21,929 13,492
------------ ------------
Total liabilities 32,345 23,822
------------ ------------
Total partners' capital 7,110 9,409
------------ ------------
Total liabilities and partners' capital $ 39,455 $ 33,231
============ ============
</TABLE>
Six Months Ended
June 30
1999 1998
----------- -----------
Sales, rental & other income $ 4,562 $ 2,252
=========== ===========
Gross profit $ 598 $ 129
=========== ===========
Net loss $ (2,299) $ (3,422)
=========== ===========
The real estate business includes the Company's investments in real estate
partnerships which consist of a .01% general partnership interest in CMC
Heartland, a 1% general partnership interest and a Class B limited partnership
interest in Heartland. The Class B interest, among other things, entitles the
holder thereof to an allocation of .5% of Heartland's available cash for
distribution and an allocation of taxable income and loss.
Page 8 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Debt Obligations
The companies debt obligations, consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
Line of credit with Wells Fargo Business Credit Inc. (formerly Norwest
Business Credit, Inc.), bearing interest at the base rate plus the 3.25%
default rate (11.0% at June 30, 1999) $ 4,427 $
Line of credit with G. E. Capital Corporation -- 2,924
Line of credit with LaSalle National Bank bearing interest at the base
rate plus 2% (7.2% at June 30, 1999) 776 679
------------- ----------------
Total lines of credit $ 5,203 $ 3,603
============= ================
Term loans payable to LaSalle National Bank in original principal $ 807 (1) $ 1,007 (1)
amounts of $1,200,000 and $900,000. Interest is at prime plus 1.5% and
prime +1% (8.5% and 8.0% at June 30, 1999, respectively) and is paid
monthly. The loans have level monthly principal payments over three and
five years respectively. 675 765
Term loan payable to Wells Fargo Business Credit in an original amount
of $4,500,000. Principal payments of $75,000 plus interest is payable over
a 60 month period. Interest accrues at the base rate plus the 3.25% default
rate (11.0% at June 30, 1999) 4,050
Term loan with G.E. Capital Corporation 2,142
Other notes payable 293 350
Subordinated note to the sellers of Solder bearing 8% interest payable quarterly
and having three semiannual principal payments of $400,000 plus a final payment
of principal and accrued interest. The first installment is due on October 10,
1999. Interest payments are deferred and added to the note balance until Solder 1,852 1,812
achieves certain financial ratios.
Subordinated note to the seller of Zecal Corp. with 8% interest beginning
on April 29, 1999. Interest, with principal payments of $91,667 are due
quarterly beginning July 30, 1999. 1,100 1,100
Subordinated notes to the seller of P.G. Design bearing 8% interest, paid
quarterly. The notes are payable $1,500,000 in September 2000 and
$1,500,000 in May 2002. 3,000 3,000
------------- ----------------
Long-term debt 11,777 10,176
------------- ----------------
less Current portion of long-term debt 5,838 2,236
------------- ----------------
Long-term debt, less current portion $ 5,939 $ 7,940
============= ================
(1) LaSalle loan in original amount of $1,200,000
</TABLE>
Page 9 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
6. Debt Obligations (continued)
In January, 1999, the Company refinanced its existing debt with General Electric
Capital Corporation ("GECC") by entering into an agreement with Wells Fargo
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 at June 30, 1999 is the
lender's base rate plus the 3.25% default rate (11.0% at June 30, 1999).
Origination fees of $136,000 were paid in connection with this transaction. The
agreement carries an unused line fee of .25% per annum, payable monthly, based
on the average daily unused amount. A facility fee of .25% per annum is payable
on the total facility on 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. PG was also required to write off approximately
$156,000 in loan origination fees which were being amortized over the life of
the GECC loans. These amounts were 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 covenants. Wells Fargo has waived those defaults.
As a result of the Company's failure to achieve certain profit levels in the
second quarter, the Company was and continues to be in violation of the loan
agreement, as of April 30, 1999. The Company does not expect to be in compliance
with the profit requirements of the Norwest agreement at year end; but does
expect to receive a waiver of the requirements. As a result of the default,
Wells Fargo is assessing the default rate of interest beginning May 1, 1999 and
is reducing the allowable inventory borrowing base.
Solder is in violation of certain financial covenants of the loan agreement at
December 31, 1998, March 31, and June 30, 1999, and has obtained waivers of the
violations from LaSalle Bank to January 1, 2000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operation section and elsewhere
in this Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward- looking statements
are not guarantees of future performance. They involve risks, uncertainties and
other important factors, including the risks discussed below. The Company's
actual future results, performance or achievement of results and the value of
your stock, may differ materially from any such results, performance,
achievement or value implied by these statements. We caution you not to put
undue reliance on any forward-looking statements. In addition, we do not have
any intention or obligation to update the forward-looking statements in this
document. The Company claims the protection of the safe harbor for forward-
looking statements contained in Section 21E of the Securities Exchange Act of
1934.
Page 10 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
The Company is engaged in 2 lines of business: (1) manufacturing and (2) real
estate. The manufacturing segment includes the Company's manufacturing of
electronic assemblies on a contract basis, primarily for the computer and
computer printer industry, the manufacturing of ceramic circuit boards and the
providing of services for the printed circuit board industry.
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 customers purchase 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)" which is an
interactive electronic information center used for point of purchase
applications and information appliances. PG is assembling a liquid crystal
display unit for an automotive entertainment device. In addition, PG has begun
assembling printed circuit boards for two major new customers. Z-Strate(R) based
devices are used in power supply and controller devices. The Company is
prototyping Z-Strate(R) components for cellular telephone, cable television and
chip scale package manufacturers. 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.
The real estate business includes the Company's investments in real estate
partnerships which consist of a .01% general partnership interest in CMC
Heartland, a 1% general partnership interest and a Class B limited partnership
interest in Heartland. The Class B interest, among other things, entitles the
holder thereof to an allocation of .5% of Heartland's available cash for
distribution and an allocation of taxable income and loss.
RESULTS OF OPERATIONS
Net sales of electronic assemblies, computer printer products, ceramic circuit
boards and printed circuit board services totaled $9,209,000 in the second
quarter of 1999 compared to $6,775,000 in the second quarter of 1998. Sales for
the first six months of 1999 were $17,080,000 compared to $12,017,000 for the
comparable period of 1998. Sales for the three month and the six month period
ending June 30, 1999 increased from the similar periods of 1998 due to the sales
of a liquid crystal display unit for an automotive entertainment device, and due
to recording sales for Solder and Zecal in the entire period of 1999.
The net loss for the second quarter of 1999 was $1,522,000 or $.91 per share
compared to a loss of $458,000 or $.27 per share for the second quarter of 1998.
The net loss for the six month period prior to the extraordinary charge of
$509,000 for debt refinancing, was $2,066,000 or $1.24 per share
Page 11 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
compared to a loss of $696,000 or $.42 per share in the second quarter of 1998.
Second quarter results and the results for the six months ended June 30, 1999
were favorably affected by the return of approximately $600,000 of excess
inventory to a customer. This inventory had been fully reserved for, at the time
of the PG purchase.
The 1999 results include the results of operation for PG, Solder and Zecal,
whereas the 1998 results only include PG, the accounts of Solder, from April 10,
1998 and the accounts of Zecal from April 29, 1998. The loss in the current
quarter was primarily due to the continuing losses sustained by Zecal.
As detailed in the Company's 1998 10-K, management believes Zecal has the
potential to achieve significant sales and profits, although this is not
assured. However, the process of qualifying the Z-Strate(R) technology with new
manufacturers is a lengthy and expensive one, and management expects Zecal's
losses to continue. Management believes the potential long term benefit offered
by Z-Strate(R) justifies continuing to support this operation.
SG&A expenses for the second quarter of 1999 totaled $2,239,000, compared to
$1,627,000 for the second quarter of 1998. For the six month period ended June
30, 1999 SG&A expenses were $4,446,000 compared to $3,260,000 in the similar
period of 1998. SG&A expenses for the second quarter and for the six months
ended June 30, 1998 only included the expenses of Solder and Zecal for the
periods after April 10, 1998 and April 29, 1998 respectively.
During the second quarter ended June 30, 1999, HTI recovered $247,000 in
unreimbursed expenses, associated with the distribution of shareholder funds
from the dissolution of the former Chicago Milwaukee Corporation. These expenses
were primarily incurred in the period from 1993 through 1997. This reimbursement
is included in Other income in the Consolidated Statement of Operations.
HTI's losses from its investments in the real estate partnerships were $18,000
in the second quarter and $31,000 for the first six months of 1999 compared to
losses of $26,000 and $54,000 for the respective periods of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities in 1999 through borrowings on its lines
of credit. The Company expects that Zecal will continue to lose money and that
the Company will have to obtain additional financing to support its operations.
The Company has begun the process of obtaining additional financing. Management
expects that it will be able to procure additional financing to meet its
operating needs. The Company believes that it will have sufficient funds
available for operating expenses, debt service and capital expenditures from the
cash flow expected to be derived from operations and from the financing it is
presently seeking to put in place. The Company will have to obtain financing,
reduce its losses or sell assets to continue to meet its operating needs.
In January, 1999, the Company refinanced its existing debt with General Electric
Capital Corporation ("GECC") by entering into an agreement with Wells Fargo
Business Credit, Inc. The agreement 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 lender's base rate plus the 3.25% default rate
(11.0% at June 30, 1999).
Page 12 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
Origination fees of $136,000 were paid in connection with this transaction. The
agreement carries an unused line fee of .25% per annum, payable monthly, based
on the average daily unused amount. A facility fee of .25% per annum is payable
on the total facility due and payable on 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. PG was also required to write off approximately
$156,000 in loan origination fees which were being amortized over the life of
the GECC loans. These amount were recorded as an extraordinary charge in the
first quarter of 1999. The Company is subject to certain financial covenants per
the Wells Fargo agreement. As a result of the GECC prepayment penalties, the
Company is in default of certain financial covenants. Wells Fargo has waived
those defaults. As a result of the Company's failure to achieve certain profit
levels in the second quarter, the Company was and continues to be in violation
of the loan agreement as of April 30, 1999. The Company does not expect to be in
compliance with the profit requirements of the Norwest agreement at year end;
but does expect to receive a waiver of the requirements. As a result of the
default, Wells Fargo is assessing the default rate of interest beginning May 1,
1999 and is reducing the allowable inventory borrowing base.
Solder is in violation of certain financial covenants of the loan agreement at
December 31, 1998, March 31, 1999 and June 30, 1999 and has obtained waivers of
the violations from LaSalle Bank to January 1, 2000.
Accounts receivable increased by $2,465,000 and Inventory increased by
$1,308,000 from December 31, 1998 levels, due to increased sales in the last two
months of the second quarter of 1999 compared to the last two months of 1998.
Electronics Business
- --------------------
Dependence on Debt Financing. The Company is dependent on existing sources of
debt financing and requires additional sources in order to continue to fund the
operations of Zecal. The cash outflows used in the 1997 and 1998 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. If the Company
is unable to obtain additional sources of financing, or if the ability to borrow
under the lines of credit, because of the default, 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.
Losses. The losses incurred in the second quarter and the six months ended June
30, 1999 were principally due to the losses sustained by Zecal. Reduced gross
margins at PG also contributed to the loss.
Page 13 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
Dependence on Customers. While we have diversified the number of customers, a
large percentage (approximately 77%) of sales in the first six months of 1999
came from three customers. Sales to a few large customers continue to account
for a significant percentage of revenues. The Company does not have long term
contracts with any of these large customers. If the Company loses a major
customer, or if a major customer reduces its purchases of products and services,
financial results will be materially effected. Also, economic and other
conditions may cause customers to cancel, reduce or delay orders.
Acquisition Integration. The Company's electronic business operations consist of
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 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 both the first and the second quarter of 1999,
the Company did not meet certain minimum ratios and other covenants required
under existing credit agreements and is currently in default on its loan
agreements with Wells Fargo. The high level of debt, the restrictions imposed by
the debt, or the inability to obtain additional sources of funds may adversely
effect financial results, or the Company's ability to operate its business. 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 non-compliance with the credit
agreements, and may lose the existing financing as a result. Any loss or
reductions of the existing financing would adversely effect 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 effect 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 electronic manufacturing and
printed circuit board industries. A decline in demand for these products or
services will adversely effect the business or financial results. New products
and services are being developed, to diversify and grow 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 infringe the patent. PG is reviewing the
Page 14 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
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.
Warranty Issues. One of the Company's major customers has made a claim under the
company's warranty, that parts do not meet performance specifications. The
Company believes that it will be able to resolve the issue to the satisfaction
of both the customer and the Company, and that the resolution will not have a
significant negative impact on the company's financial performance. There can be
no assurance that PG will be successful in resolving this issue on a basis that
is satisfactory both to the customer and PG. The loss of the customer, or the
failure to resolve the issue to the satisfaction of both parties could have a
significant negative impact on future earnings.
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 effect the
Company's business and financial results. Also, customers could vertically
integrate or otherwise decide to compete with the Company.
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
Page 15 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
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 effect the Company's financial efforts.
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
June 30, 1999 were $21,929,000. 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 effect 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.
Page 16 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
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 our assessments, we determined that significant portions of our
software and certain hardware required modifications or replacement so that
those systems properly recognize dates beyond December 31, 1999. We believe that
with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed timely, the Year 2000 issue
could materially affect our operations.
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, remediation, testing and implementation. To date, we have fully
completed 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
lines, 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 September 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 was completed in the first quarter of 1999, with all
remediated systems scheduled to be fully tested and implemented by September 30,
1999, with 100% completion targeted for October 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 approximately 75% 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
September 30, 1999. Testing and implementation of affected equipment is expected
to be completed by October 30, 1999.
Page 17 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
We have begun to query our significant suppliers and subcontractors that do not
share information systems with the Company (external agents). To date, we are
not aware of any external agent with a Year 2000 issue that would materially
impact our results of operations, liquidity, or capital resources. However, we
have no means of ensuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially affect 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 $85,000 ($45,000 expensed and $40,000 capitalized for new
systems and equipment), related to all phases of the Year 2000 project. Of the
total remaining project costs, approximately $5,000 is attributable to the
purchase of new software and operating equipment, which will be capitalized. The
remaining $35,000 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
September 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 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 3. 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 $1,482,000 of long term debt at 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 $15,000, based
on the outstanding indebtedness as of June 30, 1999.
Page 18 of 24
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 1999
The Company has approximately $4,050,000 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 $40,000 based on
the outstanding indebtedness as of June 30, 1999.
The Company has $5,952,000 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 19 of 24
<PAGE>
PART II- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
See Financial Statements: Condensed Consolidated Balance Sheets and Notes to
Consolidated Financial Statements, Debt Obligations.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on June 23, 1999.
At the Annual Meeting Edwin Jacobson and John Torell III were elected to be
directors of the Company to hold office until the 2002 Annual Meeting of
Stockholders. Votes cast for Mr. Jacobson were 1,567,035, votes withheld were
1,076 and non-votes were 103,127. Votes cast for Mr. Torell were 1,566,710,
votes withheld were 1,401 and non-votes were 103,127. Directors whose terms of
office continued after the meeting were Robert S. Davis, Gordon H. Newman and
Ezra K. Zilkha.
The appointment of Ernst & Young LLP as the Company's independent accountants
for the fiscal year 1999 was ratified with 1,567,078 votes for, 758 votes
against, 275 abstentions and 103,127 non-votes.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Default letter of June 30, 1999 on the Credit and Security
Agreement between P.G. Design Electronics, Inc. and Wells Fargo
Business Credit, Inc.
10.2 Default letter of July 28, 1999 on the Credit and Security
Agreement between P.G. Design Electronics, Inc. and Wells Fargo
Business Credit, Inc.
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended June 30, 1999.
Page 20 of 24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
Date: August 13, 1999 BY: /s/ Edwin Jacobson
------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 BY: /s/ Richard P. Brandstatter
---------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
Page 21 of 24
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Default letter of June 30, 1999 on the Credit and Security
Agreement between P.G. Design Electronics, Inc. and Wells Fargo
Business Credit, Inc.
10.2 Default letter of July 28, 1999 on the Credit and Security
Agreement between P.G. Design Electronics, Inc. and Wells Fargo
Business Credit, Inc.
27.1 Financial Data Schedule
Page 22 of 24
<PAGE>
Exhibit 10.1
Wells Fargo Business Credit,Inc.
100 E. Wisconsin Avenue
Suite 1400
Milwaukee, WI 53202-4122
(414) 224-7440
(414) 224-7442 Fax
June 30, 1999
Richard P. Brandstatter
Vice President- Finance
CMC Heartland Partners
547 West Jackson Boulevard
Suite 1510
Chicago, IL 60661
Dear Rick:
Please take this letter as written notification by Wells Fargo Business Credit,
Inc. ("WFBCI") to P.G. Design Electronics, Inc. ("Borrower") that the following
actions will be taken under the Credit and Security Agreement dated December 31,
1998 (as so supplemented and amended, the "Agreement"):
1) Borrower's Floating Rate will be increased to 1.75% retroactive to May
1, 1999.
2) In the even "sic" Borrower and Zecal Corporation is unable to raise
$5,000,000 in additional equity or subordinated debt prior to November
1, 1999, Borrower's Floating Rate will be increased to 3.25% retroactive
to May 1, 1999. (Should the additional equity or debt be raised by Zecal
Corporation, a portion of the proceeds will need to be used to repay
entirely the intercompany obligation to P.G. Design Electronics, Inc.)
3) Borrower's Net Worth covenants will be revised for the remainder of
fiscal 1999. In the event Borrower violates the revised Net Worth
covenants, Borrower's Floating Rate will be increased to 3.25%
retroactive to May 1, 1999.
The letter shall not be deemed to be an does not constitute a waiver of any
Default or Event of Default under the Agreement or breach, Default or Event of
Default under any Security Document or other document held by the Lender whether
or not known to the Lender and whether or not existing on the date of this
letter. It is acknowledged that in fact various defaults do exist and continue
to exist. This letter shall not in any way require the Lender to defer any of
its rights or remedies. Nothing in this letter shall be deemed to be a waiver of
rights or remedies nor deemed as an agreement to forbear, or restrict Lender in
taking any action or remedies afforded to it in the Agreement, or any other
document or as allowed by law. Lender retains any and all rights available to
it.
Lender, at its sole discretion and without any requirement to do so, may
consider to continue to make Advances under the Agreement subject to all of its
rights and remedies.
If you have any questions, please do not hesitate to contact me (414) 224-7432.
Sincerely,
Wells Fargo Business Credit, Inc.
/s/ Thomas Zak
Thomas J. Zak
Vice President
cc: Edwin Jacobson/CMC Heartland Partners
John Stewart/WFBCI
Mel Rutlin/WFBCI
Page 23 of 24
<PAGE>
Exhibit 10.2
Wells Fargo Business Credit,Inc.
100 E. Wisconsin Avenue
Suite 1400
Milwaukee, WI 53202-4122
(414) 224-7440
(414) 224-7442 Fax
July 28, 1999
Richard P. Brandstatter
Vice President- Finance
CMC Heartland Partners
547 West Jackson Boulevard
Suite 1510
Chicago, IL 60661
Dear Rick:
Please take this letter as written notification by Wells Fargo Business Credit,
Inc. ("WFBCI") to P.G. Design Electronics, Inc. ("Borrower") that as a result of
the losses sustained by Borrower during the month of June, the following actions
will be taken under the Credit and Security Agreement dated December 31, 1998
(as so supplemented and amended, the Agreement"):
1) Borrower's interest rate will be increased to the full default rate of
interest, which is three percent (3%) over the floating rate. This rate
of interest will be implemented retroactive to May 1, 1999.
2) Effective August 15, 1999 and each month thereafter, the inventory
advance rate shall be reduced 2.5%. This advance rate reduction is in
addition to the 1% per month reduction noted in the current definition
of the Borrowing Base.
3) Effective August 15, 1999 Borrower's inventory line limit will be
reduced to $1,700,000. This line limit will be reduced by $100,000 per
month each month beginning September 15, 1999.
The letter shall not be deemed to be an does not constitute a waiver of any
Default or Event of Default under the Agreement or breach, Default or Event of
Default under any Security Document or other document held by the Lender whether
or not known to the Lender and whether or not existing on the date of this
letter. It is acknowledged that in fact various defaults do exist and continue
to exist. This letter shall not in any way require the Lender to defer any of
its rights or remedies. Nothing in this letter shall be deemed to be a waiver of
rights or remedies nor deemed as an agreement to forbear, or restrict Lender in
taking any action or remedies afforded to it in the Agreement, or any other
document or as allowed by law. Lender retains any and all rights available to
it.
Lender, at its sole discretion and without any requirement to do so, may
consider to continue to make Advances under the Agreement subject to all of its
rights and remedies.
If you have any questions, please do not hesitate to contact me (414) 224-7432.
Sincerely,
Wells Fargo Business Credit, Inc.
/s/ Thomas J. Zak
Thomas J. Zak
Vice President
cc: Edwin Jacobson/ CMC Heartland Partners
John Stewart/ WFBCI
Mel Rutlin/ WFBCI
Page 24 of 24
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
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<RECEIVABLES> 6,015
<ALLOWANCES> (176)
<INVENTORY> 4,413
<CURRENT-ASSETS> 11,164
<PP&E> 11,623
<DEPRECIATION> (3,447)
<TOTAL-ASSETS> 39,515
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<COMMON> 501
<OTHER-SE> 14,346
<TOTAL-LIABILITY-AND-EQUITY> 39,515
<SALES> 17,080
<TOTAL-REVENUES> 17,080
<CGS> 14,053
<TOTAL-COSTS> 14,053
<OTHER-EXPENSES> 4,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 642
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<INCOME-TAX> 64
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