<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 March 31, 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
- --------------------------------------------------------------------------------
(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 May 12, 1999, there were 1,671,238 shares of the registrant's common stock
outstanding.
Page 1
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HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<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...................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 18
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.............................. 19
Signatures............................................... 20
</TABLE>
Page 2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except share amounts)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net of reserves 4,833 3,374
Due from affiliate 392 286
Inventories, net 2,923 3,105
Prepaid expenses 228 310
Refundable taxes 950 794
------- -------
Total current assets 9,326 7,869
------- -------
Property and equipment:
Machinery and equipment 9,757 9,719
Furniture and fixtures 524 473
Leasehold improvements 991 985
------- -------
Property and equipment at cost 11,272 11,177
Less accumulated depreciation 2,878 2,328
------- -------
Property and equipment, net 8,394 8,849
------- -------
Other assets:
Goodwill, net of accumulated amortization 11,953 12,069
Deferred debt issuance costs net of accumulated amortization 146 248
Other 151 187
Investment in partnerships 8,128 8,141
------- -------
Total assets $38,098 $37,363
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,382 $ 3,603
Accounts payable, trade 2,409 2,837
Accrued expenses and other liabilities 1,554 1,393
Current portion of long-term debt 2,199 2,236
Current portion of capital lease obligations 61 61
Allowance for claims and liabilities 1,281 1,281
Payable to affiliates 747 398
------- -------
Total current liabilities 11,633 11,809
------- -------
Long-term debt, less current portion 9,919 7,940
Capital lease obligation, less current portion 177 192
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 5,095 6,148
------- -------
Total stockholders' equity 16,369 17,422
------- -------
Total liabilities and stockholders' equity $38,098 $37,363
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 3
<PAGE>
HEARTLAND TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net sales $ 7,872 $ 5,242
Cost of sales 5,804 3,801
-------------- --------------
Gross margin 2,068 1,441
Other income:
Interest income -- 16
Management fee from affiliate 106 106
Loss from investment in partnerships (13) (28)
Miscellaneous, net 1 --
-------------- --------------
Total other income 94 94
Other expenses:
Selling, general and administrative 2,207 1,633
Interest expense 269 142
Special compensation amortization -- 188
Amortization expense 184 --
-------------- --------------
Total other expenses 2,660 1,963
-------------- --------------
Loss before income taxes and extraordinary item (498) (428)
Income tax expense (benefit) 46 (190)
-------------- --------------
Net loss before extraordinary loss (544) (238)
(509) --
Extraordinary loss on debt refinancing
Net loss after extraordinary loss $ (1,053) $ (238)
============== ==============
Net loss per share - basic and diluted $ (.63) $ (.14)
============== ==============
Weighted average number of common shares outstanding 1,671 1,671
============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 4
<PAGE>
HEARTLAND TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net loss $ (1,053) $ (238)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 737 345
Special compensation amortization -- 188
Equity in loss from investments in Partnerships 13 28
Bad debt expense 15 --
Deferred income taxes (53)
Reserve for inventory obsolescence (143) --
Changes in operating assets and liabilities:
Accounts receivable (1,474) (1,376)
Due from affiliate (106) (185)
Inventories, net 325 (392)
Prepaid expenses and other assets 64 (120)
Refundable taxes (156) --
Accounts payable and accrued expenses (267) 580
Due to affiliate 349 --
-------------- --------------
Net cash provided by operating activities (1,696) (1,223)
INVESTING ACTIVITIES:
Purchases of property and equipment (98) (152)
-------------- --------------
Net cash used in investing activities (98) (152)
FINANCING ACTIVITIES :
Net borrowings (payments) under line of credit (221) 876
Proceeds from issuance of long-term debt 2,358 --
Payments on capital leases (15) --
Principal payments on long-term debt (416) (415)
Debt issuance costs 88 --
-------------- --------------
Net cash used in financing activities 1,794 461
-------------- --------------
Increase (decrease) in cash and cash equivalents -0- (914)
Cash and cash equivalents at beginning of period -0- 3,232
-------------- --------------
Cash and cash equivalents at end of period $ -0- $ 2,318
============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 5
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 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.
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 quarter ended March 31, 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 are the general partners and MLC is the managing general partner. On
June 30, 1993, CMC distributed
Page 6
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HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 copper circuits
on a ceramic substrate.
3. Inventories
The components of inventory consist of the following: (amounts in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials $ 3,564 $ 3,667
Work-in-process 52 110
Finished goods 92 256
-------------- -----------------
3,708 4,033
Less: Allowance for obsolescence 785 928
-------------- -----------------
Total $ 2,923 $ 3,105
============== =================
</TABLE>
Page 7
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Net Loss per Share
Net loss per share for the first quarter of 1999 and the first quarter of 1998
amounted to $.63 and $.14 per share, respectively, based on 1,671,238 shares
outstanding.
5. Information on Unconsolidated Investee
The following is the Condensed Balance Sheet as of March 31, 1999 and December
31, 1998 and the summarized income statement 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 December 31, 1998 and
all amounts are in the thousands.
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
--------- --------
<S> <C> <C>
Assets:
-------
Cash and marketable securities $ 2,982 $ 3,828
Receivables, net 526 353
Other assets 1,323 720
Net properties and investment in joint venture 31,482 28,330
------- -------
Total assets $36,313 $33,231
======= =======
Liabilities:
------------
Accounts payable, accrued expenses and other liabilities $ 7,539 $ 7,568
Allowed for claims and liabilities 2,618 2,762
Loans payable 17,594 13,492
------- -------
Total liabilities 27,751 23,822
------- -------
Total partners' capital 8,562 9,409
------- -------
Total liabilities and partners' capital $36,313 $33,231
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
1999 1998
------- -------
<S> <C> <C>
Sales, Rental & Other Income $ 2,042 $ 1,265
======= =======
Gross profit $ 97 $ (168)
======= =======
Net loss $ (847) $(1,851)
======= =======
</TABLE>
The real estate business covers the Company's investments in real estate
partnerships which consist of a .01% general partnership interest in CMC
Heartland, a 1% general partner interest and a Class B limited partnership
interest in Heartland Partners, L.P. ("Heartland"). The Class B interest, among
other things, entitles the holder thereof to an allocation of .5% of Heartland's
available cash for distribution and allocation of taxable income and loss.
Page 8 of 28
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Debt Obligations
The companies debt obligations, consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
March 31, 1999 December 31,1998
-------------- ----------------
<S> <C> <C>
Line of Credit with Wells Fargo Business Credit Inc. (formerly Norwest Business
Credit, Inc.), bearing interest at lenders' rate + .25% (7.75% at March 31,
1999), maximum available amount $10,500,000 $ 2,624 $
Line of Credit G. E. Capital Corporation 2,924
Line of Credit with LaSalle National Bank bearing interest at a base rate
+2% (7.4% at March 31, 1999) 758 679
-------------- ----------------
Total lines of Credit $ 3,382 $ 3,603
============== ================
Term loans payable to LaSalle National Bank in original principal amounts of $ 907/1/ $ 1,007/1/
$1,200,000 and $900,000. Interest is at prime +1.5% and prime +1% (8.5% and 8.0%
at March 31, 1999, respectively) and is paid monthly. The loans have level
monthly principal payments over three and five years respectively. 720 765
Term loan payable to Wells Fargo 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 lender's rate +.25% (7.75% at March 31, 1999) 4,275
Term loan with G.E. Capital Corporation 2,142
Other Notes Payable 300 350
Subordinated note to the sellers of Solder bearing 8% interest payable quarterly
and having three semiannual principal payments of $400,000 plus a final $616,000
payment. The first installment is due on October 10, 1999. 1,816 1,812
Subordinated note to the seller of Zecal Corp. with 8% interest beginning on
April 29, 1999. Interest and 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
-------------- ----------------
Total Long Term Debt 12,118 10,176
-------------- ----------------
less Current Portion of long term debt 2,199 2,236
-------------- ----------------
Long term debt less current portion $ 9,919 $ 7,940
============== ================
</TABLE>
/1/ LaSalle loan in original amount of $1,200,000
Page 9
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 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 is the lenders' rate plus
0.25% (7.75% at March 31, 1998). An origination fee of $112,500 was paid in
January 1999. The agreement carries an unused line fee of .25% per annum,
payable monthly, based on the average daily unused amount. A facility fee 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 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 for which it received a waiver to the
covenants.
Solder is in violation of certain financial covenants of the loan agreement at
December 31, 1998 and at March 31, 1999, and has obtained waivers of the
violations from LaSalle 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.
The Company is engaged in 2 lines of business: (1) manufacturing and (2) real
estate. The manufacturing segment covers the Company's manufacture of electronic
assemblies on a contract basis primarily for the computer and computer printer
industry, the manufacturing of ceramic circuit boards and the providing of
services for the printed circuit board industry.
Page 10
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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. The Company is also developing a
Portal(R) internet payphone station. P.G. Design is assembling a liquid crystal
display unit for an automotive entertainment device. The initial order was for
$4.5 million. Z-Strate(R) based devices are used in power supply, transformer
and controller devices. The Company is prototyping Z-Strate(R) for cellular
telephone and automotive 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 covers the Company's investments in real estate
partnerships which consist of a .01% general partnership interest in CMC
Heartland, a 1% general partner interest and a Class B limited partnership
interest in Heartland Partners, L.P. ("Heartland"). The Class B interest, among
other things, entitles the holder thereof to an allocation of .5% of Heartland's
available cash for distribution and allocation of taxable income and loss.
RESULTS OF OPERATIONS
Net sales of electronic assemblies, computer printer products, ceramic circuit
boards and printed circuit board services totaled $7,872,000 in the first
quarter of 1999 compared to $5,242,000 in the first quarter of 1998. Sales in
the first quarter of 1999 include revenues from PG, Solder and Zecal, whereas
first quarter 1998 sales included only the results of PG.
The net loss for the first quarter of 1999, prior to the extraordinary charge of
$509,000 for debt financing, was $544,000 compared to a loss of $238,000 in the
first quarter of 1998.
The loss before debt refinancing, in the current quarter was due to the losses
sustained by Zecal. As detailed in the Company's 1998 10-K, management believes
Zecal has the potential to achieve profitability. 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.
Page 11
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
SG&A expenses for the first quarter of 1999 totaled $2,207,000, compared to
$1,633,000 for the first quarter of 1998. First quarter SG&A expenses for 1998
excluded the expenses of Solder and Zecal. For the current quarter, SG&A
expenses of Solder and Zecal, totaled $657,000.
HTI's loss from the real estate segment for the first quarter of 1999 amounted
to $13,000 compared to a loss of $28,000 for the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for the quarter was $0 as the Company financed its activities through
borrowings on its lines of credit. 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
financing presently in place. Management expects that it will be able to procure
additional financing if required and that the Company will require additional
financing for further acquisitions or for the development of new facilities
required for additional business.
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 is the lenders' rate plus
0.25% (7.75% at March 31, 1998). An origination fee of $112,500 was paid in
January 1999. The agreement carries an unused line fee of .25% per annum,
payable monthly, based on the average daily unused amount. A facility fee 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 agreement. As a result of the GECC prepayment penalties, the Company is in
default of certain financial covenants for which it received a waiver to the
covenants.
Solder is in violation of certain financial covenants of the loan agreement at
December 31, 1998 and at March 31, 1999, and has obtained waivers of the
violations from LaSalle to January 1, 2000.
Accounts receivable increased by $1,459,000 and Inventory decreased by $182,000
from December 31, 1998 levels, due to increased sales in the first quarter of
1999 compared to the fourth quarter of 1998.
Page 12
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
Electronics Business
- --------------------
Dependence on Debt Financing. The Company is dependent on existing sources of
debt financing. The cash outflows used in the recent investing activities,
require that borrowings be available under existing lines of credit for day to
day cash requirements. If the current trends in the industry or significant
fluctuations in operations and results continue, or if the Company is unable to
adapt the business to meet industry needs, the Company will continue to rely on
lines of credit for its operating cash needs, or for any acquisitions. If the
lines of credit are insufficient to meet operating cash requirements, or if the
ability to borrow under the lines of credit becomes restricted in any way, the
Company will be unable to meet day to day cash needs for the business. The
inability to meet day to day cash requirements for the business will adversely
affect the Company's business or financial results.
Losses. The loss before debt refinancing in the current quarter was due to the
losses sustained by Zecal. The losses from Zecal plus the $509,000 of debt
refinancing resulted in a loss of $1,053,000 for the quarter.
Dependence on Customers. A large percentage (approximately 51%) of first quarter
1999 sales came from two customers. This is significantly below the 71% of sales
these two customers represented in 1998. However, 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 expects future acquisitions to have
the same kinds of differences. The Company may have difficulties managing growth
as it integrates new operations, adds customers and expands. Failure to manage
growth, or to control expenses related to growth, may materially affect the
business and financial results.
Leverage; Access to Financing. The Company is highly leveraged, must maintain
certain minimum ratios, and is prohibited from taking certain actions, under
existing credit arrangements. In the first quarter of 1999, the Company did not
meet certain minimum ratios and other covenants required under existing credit
agreements. As a result, the Company sought and received waivers from its
creditors for such covenants. The high level of debt, or the restrictions
imposed by the debt, may adversely effect financial results or the Company's
ability to operate its business, including making future acquisitions. Any
future acquisition is expected to require additional financing. The Company may
not be able to find additional financing sufficient to make any or all of the
desired acquisitions. Even if financing is obtained, the terms may be less
favorable than the current financing terms. The inability to borrow additional
money, or to borrow on terms as favorable as the current terms may adversely
effect the business and financial results. In addition, if the Company continues
to experience the current market trends or negative operating results, it may
fail to comply with financial covenants under the existing credit agreements.
The Company may not be able to obtain waivers from its lenders for future
non-
Page 13
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 and the Company is pursuing acquisitions, to
diversify business beyond the computer segment of the electronic manufacturing
industry, to keep up with the pace of change in the computer industry and to
grow and diversify the business. Failure to successfully develop new products
and services demanded by the industry may adversely affect the business and
financial results.
Proprietary Rights. PG has been informed by one of its major customers that the
customer has a patent relating to demonstration devices for computer printers
("Printer PODs") and that the customer believes that some or all of the Printer
PODs manufactured by PG infringe the patent. PG is reviewing the patent and the
design of its Printer PODs and believes there is uncertainty as to the extent
and validity of the customer's claim of infringement. Additionally, PG is
exploring possible resolutions of this issue, including obtaining a license to
use the technology covered by the customer's patent and/or redesigning the
Printer POD to avoid the alleged infringement. There can be no assurance that PG
will be successful in resolving this issue on a basis that is satisfactory both
to PG and the customer. The loss of the customer, the loss of the right to
continue manufacturing and marketing the Printer PODs and/or the award of
damages for infringement could have a material adverse effect on PG's results of
operations. In addition, the payment of any fees or royalties pursuant to any
license arrangement ultimately entered into with the customer could decrease the
profit margin realized by PG in respect of its Printer POD sales. Similarly,
such profit margin could be negatively impacted by the costs incurred by PG in
its attempts to redesign the Printer POD to avoid the alleged infringement. See
"Forward-Looking Statements--Dependence on Customers."
The Company believes that it is entitled to indemnification from the sellers of
PG for any losses the Company ultimately incurs as a result of the asserted
claim of infringement. While the Company intends to aggressively pursue such
indemnification, if necessary, there can be no assurance that the Company will
be successful in obtaining full or partial indemnification for all or any of
such losses.
Zecal has patented technology for the plating of copper circuits on a ceramic
substrate and has non patented trade secrets relating to Z-Strate(R) and devices
manufactured with Z-Strate(R) as well. The Z-Strate(R) patents are licensed to
another company. Zecal does not receive any payments from this license.
Competition. The electronic manufacturing business is very competitive. Many
customers are sensitive to prices and also demand high quality products using
the most advanced technologies. If a competitor
Page 14
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 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.
Acquisition Strategy. The Company is actively seeking acquisitions in the
electronic manufacturing industry. The Company believes that strategic
acquisitions will help grow and diversify the business. In analyzing
acquisitions, careful consideration is given to the new markets, customers and
competitors and any other factors that are believed to be relevant to the
investment decision. Although investment decisions are carefully analyzed,
factors effecting the success of acquired businesses may not develop according
to plans, which may adversely affect the Company's business or financial
results.
Fluctuations in Results. The Company's operations and financial results can
fluctuate significantly due to the level and timing of customer orders. The
Company's results may also vary due to product life cycle changes and
acquisition activities. Future performance and profitability are difficult to
predict because of these fluctuations. Variations in results could result in the
Company having insufficient cash to pay for expected operating expenses, debt
amortization payments, or capital expenditures.
Real Estate Business
- --------------------
Economic, and Other Conditions Generally. Global, national and local conditions
and events affect the real estate industry. The industry is also highly
cyclical. Developers face many uncontrollable risks. The real estate market,
demographics, weather, government interference, unexpected increases in expenses
and availability and cost of land, materials and labor may adversely affect the
Partnerships' business or financial results. Any negative impact on the
Partnerships may materially effect our financial results.
Leverage. The Partnerships are highly leveraged. The Partnerships' borrowings at
March 31, 1999 were $17,594,000. 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.
Page 15
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
Access to Financing. The real estate business is capital intensive and requires
expenditures for land and infrastructure development, housing construction and
working capital. Funds currently available to the Partnerships may not be
sufficient to fund future needs. Accordingly, the Partnerships expect to borrow
additional money to fund their activities. The Partnerships may need additional
funding in the form of equity or debt financing. Additional funding may be
unavailable on terms favorable to the Partnerships, or at all. If the
Partnerships are not successful in funding the implementation of their business
strategy and other expenditures, they may delay or abandon development projects.
Delay or abandonment of development projects may adversely affect our business
or financial results.
Period-to-Period Fluctuations. The Partnerships' real estate projects are
long-term in nature. Sales activity varies from period to period. The ultimate
success of any development cannot be determined from short term results. Short
term results are unpredictable. The timing and amount of revenue varies
considerably from period to period. If the Partnerships fail to manage their
cash flows effectively, it may adversely affect our financial results.
YEAR 2000
- ---------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on 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
line, we have determined that most of the products we have sold and will
continue to sell do not require remediation to be Year 2000 compliant.
Accordingly, we do not believe that the Year 2000 presents a material exposure
as it relates to the Company's products. In addition, we have gathered
information about the Year 2000 compliance status of our significant suppliers
and subcontractors and continue to monitor their compliance.
For its information technology exposures, to date the Company is substantially
complete on the remediation phase and we expect to complete software
reprogramming and replacement no later than June 30, 1999. Once software is
reprogrammed or replaced for a system, we will begin testing and implementation.
These phases run concurrently for different systems. We have begun the testing
and implementation of our remediated systems. Completion of the testing phase
for all significant systems
Page 16
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
was completed in the first quarter of 1999, with all remediated systems
scheduled to be fully tested and implemented by June 30, 1999, with 100%
completion targeted for September 30, 1999.
The remediation of operating equipment is significantly more difficult than the
remediation of the information technology systems because some of the
manufacturers of the equipment have not yet provided the necessary remediation
programming. Therefore, we are 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 June
30, 1999. Testing and implementation of affected equipment is expected to be
completed by September 30, 1999.
We have begun to query our significant suppliers and subcontractors that do not
share information systems with the Company (external agents). To date, we are
not aware of any external agent with a Year 2000 issue that would materially
impact our results of operations, liquidity, or capital resources. However, we
have no means of ensuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially affect the Company's business or its financial
results. The effect of non-compliance by external agents is not determinable.
We will utilize both internal and external resources to reprogram, or replace,
test, and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $125,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $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 June
1999 and determine whether such a plan is necessary. If we are unable to
successfully implement any of the four phases of our Year 2000 plan and we do
not develop a contingency plan to 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.
Page 17
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 $1,625,000 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 $16,000, based
on the outstanding indebtedness as of March 31, 1999.
The Company has approximately $4,275,000 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 $43,000 based on
the outstanding indebtedness as of March 31, 1999.
The Company has $5,916,000 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 18
<PAGE>
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Second Amendment to Credit and Security Agreement and Waiver of
Defaults between P.G. Design Electronics, Inc. and Norwest
Business Credit, Inc., dated March 30, 1999.
10.2 1998 Covenant Waiver between Solder Station-One, Inc. and
LaSalle National Bank dated March 31, 1999.
10.3 1999 Covenant Waiver between Solder Station-One, Inc. and
LaSalle National Bank dated May 14, 1999.
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended March 31, 1999.
Page 19
<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: May 14, 1999 BY: /s/ Edwin Jacobson
-----------------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 BY: /s/ Richard P. Brandstatter
-----------------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
Page 20
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Second Amendment to Credit and Security Agreement and Waiver of
Defaults between P.G. Design Electronics, Inc. and Norwest Business
Credit, Inc., dated March 30, 1999.
10.2 1998 Covenant Waiver between Solder Station-One, Inc. and LaSalle
National Bank dated March 31, 1999.
10.3 1999 Covenant Waiver between Solder Station-One, Inc. and LaSalle
National Bank dated May 14, 1999.
27.1 Financial Data Schedule
Page 21
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT
AND WAIVER OF DEFAULTS
THIS SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT AND WAIVER OF
DEFAULTS, dated as of March 30, 1999, is made by and between P.G. DESIGN
ELECTRONICS, INC., a Delaware corporation (the "Borrower"), and NORWEST BUSINESS
CREDIT, INC., a Minnesota corporation (the "Lender").
RECITALS:
The borrower and the Lender have entered into a Credit and Security
Agreement dated as of December 31, 1998, as amended (the "Credit Agreement").
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement unless otherwise specified.
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are
-------------
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein.
2. Amendment to Section 6.12. Section 6.12 of the Credit Agreement is
-------------------------
amended to read as follows:
(a) from February 1, 1999 through June 29, 1999, a minimum Combined
Book Net Worth of not less than the Combined Book Net Worth as of
January 31, 1999 minus One Hundred Fifty Thousand Dollars ($150,000);
-----
(b) as of June 30, 1999, a minimum Combined Book Net Worth of not less
than the Combined Book Net Worth as of December 31,1 998 plus Five
----
Hundred Thousand Dollars ($500,000);
(c) from July1, 1999 through December 30, 1999, a minimum Combined Book
Net Worth of not less than the Combined Book Net Worth as of June 30,
1999;
(d) as of December 31, 1999, a minimum Combined Book Net Worth of not
less than both (i) the Combined Net Worth as of December 31, 1998 plus
One Million Dollars ($1,000,000) and (ii) the Combined Book Net Worth
as of June 30, 1999 plus Five Hundred Thousand Dollars ($500,000);
----
(e) thereafter, a minimum Combined Book Net Worth during each fiscal
period from January 1 through December 30 of not less than the Combined
Book Net Worth as of the end of the preceding fiscal year;
<PAGE>
(f) as of each June 30 after June 30, 1999, a minimum Combined Book Net
Worth of not less than the Combined Book Net Worth as of the preceding
fiscal year end plus One Million Dollars ($1,000,000);
----
(g) thereafter, a minimum Combined Book Net Worth during each fiscal
period from July 1 through December 30 of not less than the Combined
Book Net Worth as of the preceding June 30;
(h) as of the end of each fiscal year after December 31, 1999, a
minimum Combined Book Net Worth of not less than both (i) the Combined
Book Net Worth as of the prior fiscal year end plus Two Million Five
----
Hundred Thousand Dollars ($2,500,000), and (ii) the Combined Book Net
Worth as of the preceding June 30 plus One Million Five Hundred
----
Thousand Dollars ($1,500,000); and
(i) as of March 31, 2000, a minimum Combined Book Net Worth of not less
than the Combined Book Net Worth as of December 31, 1999 plus Five
----
Hundred Thousand Dollars ($500,000).
3. No Other Changes. Except as explicitly amended by this Amendment, all
----------------
of the terms and conditions of the Credit Agreement shall remain in full force
and effect and shall apply to any advance or letter of credit thereafter.
4. Waiver of Defaults. Prior to giving effect to this Amendment, the
------------------
Borrower is in default of the Credit Agreement on account of its failure to
satisfy the minimum Combined Book Net Worth requirements set forth in Section
6.12 (b) (the "Defaults"):
Upon the terms and subject to the conditions set forth in this Amendment,
the Lender hereby waives the Defaults. This waiver shall be effective only in
this specific instance and for the specific purpose for which it is given, and
this waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.
5. Amendment Fee. The Borrower shall pay the Lender as of the date hereof
-------------
a fully earned, non-refundable fee in the amount of Two Thousand Five Hundred
Dollars ($2,500) in consideration of the Lender's execution of this Amendment.
6. Conditions Precedent. This Amendment, and the waiver set forth in
--------------------
Paragraph 4 hereof, shall be effective when the Lender shall have received an
executed original hereof, together with each of the following, each in substance
and form acceptable to the Lender in its sole discretion:
(a) The Acknowledgment and Agreement of Guarantors set forth at the end
of this Amendment, duly executed by each Guarantor.
(b) Payment of the fee described in Paragraph 5.
(c) Such other matters as the Lender may require.
7. Representation and Warranties. The Borrower hereby represents and
-----------------------------
warrants to the Lender as follows:
<PAGE>
(a) The Borrower has all requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or by-laws of the Borrower, or (iii) result in a breach of
or constitute a default under any indenture or loan or credit agreement or
any other agreement lease or instrument to which the Borrower is a party or
by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
8. References. All references in the Credit Agreement to "this Agreement"
----------
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby.
9. No Other Waiver. Except as set forth in Paragraph 4 hereof, the
---------------
execution of this Amendment and acceptance of any documents related hereto shall
not be deemed to ve a waiver of any Default or Event of Default under the Credit
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 Amendment.
10. Release. The Borrower, and each Guarantor by signing the Acknowledgment
-------
and Agreement of Guarantors set forth below, each hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower or such Guarantor has had, now has or has made claim to have against
any such person or by reason of any act, omission, matter, cause or thing
whatsoever arising from the beginning of time to and including the date of this
Amendment, whether such claims, demands and causes of action are matured or
unmatured or known or unknown.
11. Costs and Expenses. The Borrower hereby reaffirms its agreement under
------------------
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its
<PAGE>
sole discretion and without further authorization by the Borrower, make a loan
to the Borrower under the Credit Agreement, or apply the proceeds of any loan,
for the purpose of paying such fees, disbursements, costs and expenses and the
fee required under paragraph 6 thereof.
12. Miscellaneous. This Amendment and the Acknowledgment and Agreement of
-------------
Guarantors may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed an original and all of which
counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
NORWEST BUSINESS CREDIT, INC. P. G. DESIGN ELECTRONICS, INC.
By: Thomas Zak By: Lawrence Adelson
--------------------------- -------------------------------------
Its: Vice President Its: Vice President - General Counsel
--------------------------- -------------------------------------
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of P.G. Design
Electronics, Inc. (the "Borrower") to Norwest Business Credit, Inc. (the
"Lender") pursuant to a separate Guaranty each dated as of December 31, 1998
(each, a "Guaranty"), hereby (i) acknowledges receipt of the foregoing
Amendment; (ii) consents to the terms (including without limitation the release
set forth in paragraph 11 of the Amendment) and execution thereof; (iii)
reaffirms its obligations to the Lender pursuant to the terms of the Guaranty;
and (iv) acknowledges that the Lender may amend, restate, extend, renew or
otherwise modify the Credit Agreement and any indebtedness or agreement of the
Borrower, or enter into any agreement or extend additional or other credit
accommodations, without notifying or obtaining the consent of the undersigned
and without impairing the liability of the undersigned under its Guaranty for
all of the Borrower's present and future indebtedness to the Lender.
HEARTLAND TECHNOLOGY, INC.
By: Lawrence Adelson
-----------------------------------
Its: Vice President - General Counsel
-----------------------------------
ZECAL CORP.
By: Lawrence Adelson
-----------------------------------
Its: Vice President - General Counsel
-----------------------------------
<PAGE>
EXHIBIT 10.2
LaSalle National Bank
135 South LaSalle Street
Chicago, IL 60603
(312) 904-5415
March 31, 1999
Richard P. Brandstatter
Vice President-Finance
Heartland Technology, Inc.
547 W. Jackson Boulevard
Chicago, IL 60661
Re: Covenant Waiver for Solder Station-One, Inc. for 1998
Dear Rick:
Please be advised the LaSalle National Bank has received your covenant waiver
request letter dated March 22, 1999. LaSalle National Bank hereby grants Solder
Station One, Inc.'s waiver request as it pertains to section 11.2 (f) i of the
Loan Agreement related to the required $375,000 step-up of the Net Worth
Required and section 11.2 (f) iii of the Loan Agreement related to the required
$1,500,000 minimum EBITDA. The Bank further agrees that section 11.2 (f) iv
should not contain the word "Tangible." All other conditions remain unchanged
and in full force and effect.
This waiver applies to the covenant violations that occurred in 1998 and is
effective through January 1, 2000.
Sincerely,
LASALLE NATIONAL BANK
Charles E. Schroeder, Jr.
First Vice President
<PAGE>
LaSalle National Bank
- --------------------------------------------------------------------------------
LASALLE BANKS
Exhibit 10.3
135 South LaSalle Street
Chicago, Illinois 60603
(312) 904-5415
FAX: (312) 904-4364
Charles E. Schroeder, Jr.
First Vice President
May 14, 1999
Mr. Richard P. Brandstatter
Vice President--Finance
Heartland Technology, Inc.
547 W. Jackson Boulevard
Chicago, Illinois 60661
Re: Covenant Waiver for Solder Station One, Inc. for March 31, 1999 Violation
Dear Rick:
Please be advised that LaSalle National Bank has received your covenant waiver
request letter dated May 7, 1999. LaSalle National Bank hereby grants Solder
Station One, Inc.'s waiver request as it pertains to section 11.2 (f) ii of the
Loan Agreement related to the required minimum Debt Service Coverage Ratio of
1.25 times. All other conditions remain unchanged and in full force and effect.
This waiver applies to the covenant violation that occurred in first quarter of
1999 and is effective through January 1, 2000.
Sincerely,
LASALLE NATIONAL BANK
/s/ Charles E. Schroeder, Jr.
Charles E. Schroeder, Jr.
First Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,020
<ALLOWANCES> (187)
<INVENTORY> 2,923
<CURRENT-ASSETS> 9,326
<PP&E> 11,272
<DEPRECIATION> (2,878)
<TOTAL-ASSETS> 38,098
<CURRENT-LIABILITIES> 11,633
<BONDS> 0
0
0
<COMMON> 501
<OTHER-SE> 15,868
<TOTAL-LIABILITY-AND-EQUITY> 38,098
<SALES> 7,872
<TOTAL-REVENUES> 7,872
<CGS> 5,804
<TOTAL-COSTS> 5,804
<OTHER-EXPENSES> 2,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> (498)
<INCOME-TAX> 46
<INCOME-CONTINUING> (544)
<DISCONTINUED> 0
<EXTRAORDINARY> (509)
<CHANGES> 0
<NET-INCOME> (1,053)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
