<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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: 1-10520
HEARTLAND TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1487580
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
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(Address of principal executive offices) (Zip Code)
312/294-0497
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-----
As of November 15, 1999, there were 1,671,238 shares of the registrant's common
stock outstanding.
Page 1 of 22
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Heartland Technology, Inc.
September 30, 1999
INDEX
PART I- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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............................................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 19
PART II-OTHER INFORMATION
Item 3. Defaults Upon Senior Securities....................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................................... 20
Signatures..................................................................... 21
</TABLE>
Page 2 of 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net of reserves 5,740 3,374
Due from affiliate 2 286
Inventories, net 4,871 3,105
Prepaid expenses 485 310
Refundable taxes 28 794
---------- ----------
Total current assets 11,126 7,869
Property and equipment:
Machinery and equipment 14,571 9,719
Furniture and fixtures 662 473
Leasehold improvements 1,626 985
---------- ----------
16,859 11,177
Less accumulated depreciation 9,102 2,328
---------- ----------
7,757 8,849
---------- ----------
Other assets:
Goodwill, net of accumulated amortization 11,604 12,069
Deferred debt issuance costs, net 134 248
Other 159 187
Investment in partnerships 8,087 8,141
--------- --------
Total assets 38,867 37,363
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 4,716 $ 3,603
Accounts payable, trade 5,289 2,837
Accrued expenses and other liabilities 2,186 1,393
Current portion of long-term debt 2,856 2,236
Current portion of capital lease obligation 66 61
Allowance for claims and liabilities 1,281 1,281
Payable to affiliates 473 398
--------- ---------
Total current liabilities 16,867 11,809
Long term debt, less current portion 8,426 7,940
Capital lease obligation, less current portion 237 192
Stockholders' equity:
Common stock, $.30 par value per share, authorized
10,000,000 shares, 1,621,238 shares issued and
outstanding 501 501
Additional paid-in capital 10,773 10,773
Retained earnings 2,063 6,148
--------- ---------
Total stockholders' equity 13,337 17,422
--------- ---------
Total liabilities and stockholders' equity $ 38,867 $ 37,363
========= =========
</TABLE>
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 8,909 $ 9,756 $ 25,989 $ 21,773
Cost of sales 7,474 5,667 21,527 14,866
------- ------- -------- --------
Gross margin 1,435 4,089 4,462 6,907
Other income:
Interest income 5 1 5 47
Management fee from affiliate 107 107 319 319
Miscellaneous, net (23) 121 225 (177)
------- ------- -------- --------
Total other income 89 229 549 189
Other expenses:
Selling, general and administrative 2,341 3,351 6,787 6,611
Interest expense 474 262 1,116 541
Amortization expenses 199 108 569 264
Special compensation - - - 188
Loss from investment in partnerships 23 39 54 93
------- ------- -------- --------
Total other expenses 3,307 3,760 8,526 7,697
------- ------- -------- --------
(Loss) income before taxes and extra. loss (1,513) 558 (3,515) (601)
Income tax (benefit) expense (3) 223 61 (240)
------- ------- -------- --------
Net (loss) income before extraordinary loss (1,510) 335 (3,576) (361)
------- ------- -------- --------
Extraordinary loss (debt refinancing) - - (509) -
------- ------- -------- --------
Net (loss) income $(1,510) $ 335 $ (4,085) $ (361)
======= ======= ======== ========
Net loss (income) per share before ext. loss $ (0.90) $ 0.20 $ (2.14) $ (0.21)
======= ======= ======== ========
Net loss per share for extraordinary loss - - $ (0.30) $ _
======= ======= ======== ========
Net loss per share-basic and diluted $ (0.90) $ 0.20 $ (2.44) $ (0.21)
======= ======= ======== ========
Weighted average number of common
shares outstanding 1,671 1,671 1,671 1,671
------- ------- -------- --------
</TABLE>
See accompanying notes to Consolidated Financial Statements
Page 4 of 22
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Operating Activities:
Net loss $ (4,085) $ (361)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,263 1,464
Special compensation amortization - 188
Equity in loss from investments in Partnerships 54 93
Bad debt expense 15 -
Deferred income taxes - (59)
Reserve for inventory obsolescense (420) -
Changes in operating assets and liabilities:
Accounts receivable (2,381) (374)
Due from affiliate 284 (73)
Inventories (1,346) (903)
Prepaid expenses (175) 24
Refundable taxes 766 -
Other assets 38 -
Accounts payable and accrued expenses 3,245 637
Due to affiliate 75 360
Interest payable - 118
Income tax payable - (338)
-------------- --------------
Net cash (used in) provided by operating activities (1,667) 776
Investing activities:
Purchases of property and equipment (602) (1,407)
Acquisition of business, net of cash required - (7,559)
All other investing activities - 51
-------------- --------------
Net cash used in investing activities (602) (8,915)
Financing activities:
Net borrowings under the line of credit 1,113 2,225
Proceeds from issuance of long-term debt 2,358 4,396
Proceeds from capital leases, net of payments 50 -
Principal payments on long term debt (1,252) (1,432)
-------------- -------------
Net cash provided by financing activities 2,269 5,189
-------------- -------------
Decrease in cash and cash equivalents - (2,950)
Cash and cash equivalents at beginning of period - 3,232
-------------- -------------
Cash and cash equivalents at end of period $ - $ 282
============== =============
</TABLE>
See accompanying notes to Consolidated Financial Statements
Page 5 of 22
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HEARTLAND TECHNOLOGY, INC.
September 30, 1999
NOTES TO 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 materially reduces its purchases of products and services,
financial results will be materially affected.
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 nine month
periods ended September 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;
(i) Heartland Partners, L.P. ("Heartland"), a publicly traded limited
partnership of which MLC is the general partner and (ii) CMC Heartland Partners
("CMC Heartland"), a general partnership in which HTI and Heartland are the
general partners and MLC is the managing general partner. Heartland and CMC
Heartland are referred to herein as (the
Page 6 of 22
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HEARTLAND TECHNOLOGY, INC.
September 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
"Partnerships"). 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 interests in the Partnerships, 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):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw materials $ 5,425 $ 3,667
Work-in-process 385 110
Finished goods 154 256
----------------- ---------------
5,964 4,033
Less: allowance for obsolescence 1,093 928
----------------- --------------
Inventories, net $ 4,871 $ 3,105
================= ==============
</TABLE>
4. Net loss per share
Net loss per share for the third quarter of 1999 was $.90 and the net loss for
the nine month period ending September 30, 1999 was $2.44. This compares to net
income of $.20 and net loss of $.21 per share for the comparable periods of
1998. Calculations of net loss per common share are based on 1,671,238 shares
outstanding.
Page 7 of 22
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HEARTLAND TECHNOLOGY,INC.
September 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Information on Unconsolidated Investee
The following is the condensed balance sheet as of September 30, 1999 and
December 31, 1998 and the summarized income statement for the nine month periods
ended September 30, 1999 and 1998 for Heartland, 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>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Asset:
Cash and marketable securities $ 3,704 $ 3,828
Receivables, net 306 353
Other assets 761 720
Net properties and investment in joint venture 38,432 28,330
---------------- ---------------
Total assets $ 43,203 $ 33,231
================ ===============
Liabilities:
Accounts payable, accrued expenses and other liabilities $ 7,366 $ 7,568
Allowance for claims and liabilities 2,781 2,762
Loans payable 27,271 13,492
---------------- ---------------
Total liabilities 37,418 23,822
Total partners' capital 5,785 9,409
---------------- ---------------
Total liabilities and partners' capital $ 43,203 $ 33,231
================ ===============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Property sales $ 7,542 $ 3,005
=============== ================
Gross profit $ 882 $ 87
=============== ================
Net loss $ (3,624) $ (6,229)
=============== ================
</TABLE>
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 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Debt Obligations
The Company's debt obligations, consist of the following:
<TABLE>
<CAPTION>
(amounts in thousands)
Sept. 30, 1999 Dec. 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 (11.5% at September 30, 1999) $ 3,914 $
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% (8.25% at September 30, 1999) 802 679
------------------- -------------------
Total lines of credit $ 4,716 $ 3,603
=================== ===================
Term loan payable to LaSalle National Bank in original principal amount
of $1,200,000. Interest is at prime plus 1.5% (9.75% at September 30,
1999) and is paid monthly. The loan has level monthly principal
payments over three years respectively. $ 740 $ 1,007
Term loan payable to LaSalle National Bank in original principal amount
of $900,000. Interest is at prime plus 1.0% (9.25% at September 30,
1999) and is paid monthly. The loan has level monthly principal
payments over five years respectively. 645 765
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 (11.5% at September 30, 1999) 3,825
Term loan with G.E. Capital Corporation 2,142
Other notes payable 175 350
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 achieves certain financial
ratios. 1,889 1,812
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. 1,008 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 11,282 10,176
-------------------- --------------------
Less current portion of long-term debt 2,856 2,236
-------------------- --------------------
Long term debt, less current portion $ 8,426 $ 7,940
==================== ====================
</TABLE>
Page 9 of 22
<PAGE>
HEARTLAND TECHNOLOGY,INC.
September 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. ("WFBC"). 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
September 30, 1999 is the lender's base rate plus the 3.25% default rate (11.5%
at September 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 that 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 was in default of certain financial covenants
at the end of the first quarter on 1999. WFBC entered into a second amendment to
the loan agreement and waived those defaults. As a result of the Company's
failure to achieve certain profit levels in the second and third quarter, the
Company was and continues to be in violation of the loan agreement. The Company
does not expect to be in compliance with the profit requirements of the WFBC
agreement at yearend; but does expect to receive a waiver of the requirements.
If no waiver is granted, WFBC may exercise any or all of the following remedies
under the agreement including, but not limited to, termination of the
commitment, accelerating the loan and foreclosure on collateral. As a result of
the default, WFBC has assessed the default rate of interest beginning May 1,
1999 (the point at which the default commenced) and reduced the allowable
inventory borrowing base.
The Company continues to be in violation of certain financial covenants with
respect to its LaSalle term loans, for which it has received a waiver to January
1, 2000.
The Company has entered into discussions with the seller of Solder concerning
the accuracy of certain representations made by the seller in connection with
the acquisition of Solder. The Company does not know what the outcome of those
discussions will be. In light of those discussions, the Company did not make a
payment of $400,000 to the seller that was due on October 10, 1999. The seller
has not notified the Company that it is in default, but may do so.
Page 10 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 199
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.
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.
Page 11 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
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 is comprised of 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 $8,909,000 in the third
quarter of 1999 compared to $9,756,000 in the third quarter of 1998. Sales for
the first nine months of 1999 were $25,989,000 compared to $21,773,000 for the
comparable period of 1998. Sales for the three and the nine month periods ending
September 30, 1999 benefited from the inclusion of sales for Solder and Zecal
for the full reporting periods of 1999 compared to the reporting periods of 1998
from the date of acquisition in 1998.
The net loss for the third quarter of 1999 was $1,510,000 or $.90 per share
compared to a profit of $335,000 or $.20 per share for the third quarter of
1998. The net loss for the 1999 nine month period prior to the extraordinary
charge of $509,000 for debt refinancing, was $3,576,000 or $2.14 per share
compared to a loss of $361,000 or $.21 per share in the nine month period of
1998. Third quarter results and the results for the nine months ended September
30, 1999 were unfavorably affected by continued pressure on profit margins.
The 1999 results include the results of operations 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 and
reduced gross margins at PG. 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.
Selling, General & Administrative ("SG&A") expenses for the third quarter of
1999 totaled $2,341,000, compared to $3,351,000 for the third quarter of
1998.For the nine month period ended September 30, 1999 SG&A expenses were
$6,787,000 compared to $6,611,000 in the similar period of 1998. SG&A expenses
for the nine months ended September 30, 1998 only included the expenses of
Solder and Zecal for the periods after April 10, 1998 and April 29, 1998, the
respective dates of acquisition.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
was a loss of $213,000 for the third quarter ended September 30, 1999 compared
to income of $1,367,000 for the comparable quarter last year. For the nine
months ended September 30, 1999, EBITDA was a loss of $136,000 compared to
income of $1,404,000 for the similar period last year. The decreases in EBITDA
are due to the factors described above.
Page 12 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
HTI's losses from its investments in the real estate partnerships were $23,000
in the third quarter and $54,000 for the first nine months of 1999 compared to
losses of $39,000 and $93,000 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 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,
and/or capital infusion, reduce its losses or sell assets to continue to meet
its operating needs. The Company is actively pursuing sources for additional
funds, which may be equity capital, loans or a combination thereof. There is no
assurance, however, that the Company will be able to obtain additional funds.
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. ("WFBC"). 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
September 30, 1999 is the lender's base rate plus the 3.25% default rate (11.5%
at September 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 that 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 was in default of certain financial covenants
at the end of the first quarter on 1999. WFBC entered into a second amendment to
the loan agreement and waived those defaults. As a result of the Company's
failure to achieve certain profit levels in the second and third quarter, the
Company was and continues to be in violation of the loan agreement. The Company
does not expect to be in compliance with the profit requirements of the WFBC
agreement at yearend; but does expect to receive a waiver of the requirements.
If no waiver is granted, WFBC may exercise any or all of the following remedies
under the agreement including,
Page 13 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
but not limited to, termination of the commitment, accelerating the loan and
foreclosure on collateral. As a result of the default, WFBC has assessed the
default rate of interest beginning May 1, 1999 (the point at which the default
commenced) and reduced the allowable inventory borrowing base.
The Company continues to be in violation of certain financial covenants with
respect to its LaSalle term loans, for which it has received a waiver to January
1, 2000.
The Company has entered into discussions with the seller of Solder concerning
the accuracy of certain representations made by the seller in connection with
the acquisition of Solder. The Company does not know what the outcome of those
discussions will be. In light of those discussions, the Company did not make a
payment of $400,000 to the seller that was due on October 10, 1999. The seller
has not notified the Company that it is in default, but may do so.
Accounts receivable increased by $2,366,000 and inventory increased by
$1,766,000 from December 31, 1998 levels, due to increased sales in the last
month of the third quarter of 1999 compared to the last month of 1998, and
increases in PG Design inventory related to its Portal(R) and Visteon sales
programs.
Electronics Business
- --------------------
Dependence on Debt Financing. The Company is dependent on existing sources of
debt financing and requires additional sources of debt financing and/or capital
infusion 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 need to continue to rely on lines of credit for
its operating cash needs. As of September 30 1999 and the date of this report,
the Company did not have independent cash reserves. If the Company is unable to
obtain additional sources of financing, and/or capital infusion, or if the
ability to borrow under the lines of credit, because of its defaults, 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 third quarter and the nine months ended
September 30,1999 were principally due to the losses sustained by Zecal. Reduced
gross margins at PG also contributed to the loss.
Dependence on Customers. While the Company has diversified the number of its
customers, a large percentage (approximately 77%) of sales in the first nine
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
Page 14 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
materially affected. 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 1999, the Company has not met 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 affect 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 affect 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 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 electronic 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, 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 has reviewed 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 has
explored with its customers possible resolutions of
Page 15 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
this issue, including obtaining a license to use the technology covered by the
customer's patent. PG had designed a new Printer POD in an effort to reduce
exposure to any claims of 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 an award of damages for
infringement could have a material adverse affect 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
"Dependence on Customers," above.
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 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
Page 16 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
depends on its ability to provide products and services that customers need to
develop and on its ability to 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.
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 affect the Company's financial results.
Leverage. The Partnerships are highly leveraged. The Partnerships' borrowings at
September 30, 1999 were $27,271,000. 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 the
Company's 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 the Company's
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
Page 17 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
period. If the Partnerships fail to manage their cash flows effectively, it may
adversely affect the Company's 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
operation, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on our assessments, the Company has determined that it will be required to
modify or replace significant portions of our software and certain hardware so
that those systems will properly recognize dates beyond December 31, 1999. We
believe that with modifications or replacements of existing software and certain
hardware, the Year 2000 issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 issue
could materially affect our operations.
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, remediation, testing and implementation. To date, we have fully
completed 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 our 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, as well as software reprogramming and
replacement. Once software was reprogrammed or replaced on a system, we began
testing and implementation. These phases ran concurrently for different systems.
We have also begun testing and implementation of our remediated systems. The
testing phase for all significant systems is completed, with all remediated
systems fully tested and expected to be implemented with 100% completion
targeted for November 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 90% complete in the remediation phase of our
operating equipment. Testing of this equipment is more difficult than the
testing of the information technology systems; as a result, the Company has been
testing its remediated operating equipment. Once
Page 18 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
testing is satisfactorily completed, the operating equipment will be ready for
immediate use. The Company expects to complete its remediation efforts by
November 30, 1999. Testing and implementation of affected equipment is expected
to be completed by November 30, 1999.
We have queried our significant suppliers and subcontractors that do not share
information systems with the Company (external agents). To date, we are not
aware of any external agent with a Year 2000 issue that would materially impact
our results of operations, liquidity, or capital resources. However, we have no
means of ensuring that external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could materially affect our business or financial results. The effect of
non-compliance by external agents is not determinable.
We will utilize both internal and external resources to reprogram, or replace,
test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $200,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $190,000 ($30,000 expensed and $160,000 capitalized for
new systems and equipment), related to all phases of the Year 2000 project. Of
the total remaining project costs, none of the remaining $10,000 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, the Company would be unable to take customer orders, manufacture
products, finance construction or collect payments. In addition, disruptions in
the economy generally resulting from Year 2000 issues could also materially
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 revenue cannot
be reasonably estimated at this time.
We have formulated our contingency plans if we do not complete all phases of the
Year 2000 program. If we are unable to successfully implement the four phases of
our Year 2000 plan and our contingency plan fails, or if Year 2000 issues
negatively affect our suppliers, our customers or the economy generally, our
business or financial results may be materially 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 $1,385,000 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
Page 19 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
annual interest expense would change by approximately $14,000, based on the
outstanding indebtedness as of September 30, 1999.
The Company has approximately $3,825,000 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 $38,000 based on
the outstanding indebtedness as of September 30, 1999.
The Company has $5,897,000 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.
PART II- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The Company has been and continues to be in default of its loan agreement with
Wells Fargo Business Credit, Inc. ("WFBC") related to non-achievement of the
financial covenant pertaining to attainment of certain profit levels. The
Company does not expect to be in compliance at December 31, 1999 but does expect
to receive a waiver of the requirement. If no waiver is granted, WFBC may
exercise any or all of the following remedies under the agreement including, but
not limited to, termination of the commitment, accelerating the loan and
foreclosure on collateral. As a result of the default, WFBC has assessed the
default rate of interest beginning May 1, 1999 and reduced the allowable
borrowing base.
The Company has entered into discussions with the seller of Solder concerning
the accuracy of certain representations made by the seller in connection with
the acquisition of Solder. The Company does not know what the outcome of those
discussions will be. In light of those discussions, the Company did not make a
payment of $400,000 to the seller that was due on October 10, 1999. The seller
has not notified the Company that it is in default, but may do so.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended September
30, 1999.
Page 20 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
Date: November 15, 1999 BY: /s/ Edwin Jacobson
----------------------------------------
Edwin Jacobson
President and Chief Executive Officer of
(Principal Executive Officer)
Date: November 15, 1999 BY: /s/ Richard P. Brandstatter
-------------------------------------------
Richard P. Brandstatter
Vice President- Finance, Secretary
And Treasurer
(Principal Financial and Accounting Officer)
Page 21 of 22
<PAGE>
HEARTLAND TECHNOLOGY, INC.
September 30, 1999
Index to Exhibits
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
Page 22 of 22
<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 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<RECEIVABLES> 5,909
<ALLOWANCES> (169)
<INVENTORY> 4,871
<CURRENT-ASSETS> 11,126
<PP&E> 16,859
<DEPRECIATION> (9,102)
<TOTAL-ASSETS> 38,867
<CURRENT-LIABILITIES> 18,536
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<COMMON> 501
<OTHER-SE> 12,836
<TOTAL-LIABILITY-AND-EQUITY> 38,867
<SALES> 25,989
<TOTAL-REVENUES> 25,989
<CGS> 21,527
<TOTAL-COSTS> 21,527
<OTHER-EXPENSES> 7,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,116
<INCOME-PRETAX> (3,515)
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