UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A No. 1
[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
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/294-0497
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of May 12, 1999, there were 1,671,238 shares of the registrant's common stock
outstanding.
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets..................................4
Consolidated Statements of Operations........................5
Consolidated Statements of Cash Flows........................6
Notes to Consolidated Financial Statements...................7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation......................................12
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K..............................22
Signatures..............................................................23
Page 2 of 31
<PAGE>
Heartland Technology, Inc.
March 31, 1999
PART I FINANCIAL INFORMATION AND PART II OTHER INFORMATION
(as amended March 29, 2000)
PART I
The undersigned registrant hereby amends and restates Item 1. Financial
Statements and Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Part II Item 6 Exhibits and Reports on
Form 8-K of the previously filed Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999. As more fully explained in Note 1 to the Notes to
Consolidated Financial Statements, the restatement is to correct the non-cash
allocation of equity in losses from the Investment in Heartland Partners, L.P.
(the Partnership) that was reported incorrectly in the results of operations for
the first quarter of 1999. The Partnership Agreement provides generally that the
Partnership's losses will be allocated 1% to the General Partner, 98.5% to the
Class A limited partners, and 0.5% to the Class B limited partner. If the
allocation of a net loss to a partner would cause that partner to have a
negative balance in their capital account, such net loss shall be allocated only
among partners having positive balances in their capital accounts. As of January
1, 1999, the Class B partner was the only partner with a positive capital
balance remaining and as such should be allocated 100% of the Partnership loss
for 1999. However, the loss allocated for the first quarter as reported in the
Form 10-Q was only for the proportional interest of the 1.5% General and .5%
Class B partnership interest held by the company. Therefore, an adjustment to
loss from investment in partnerships of $921,000 for the quarter ended March 31,
1999 has been recorded to reflect the allocation of 100% of the Partnership
loss. Accordingly, net loss per share for the quarter ended March 31, 1999 has
increased from $0.63 to $1.18. Heartland Technology, Inc. as the Class B
Partner, has priority to future Heartland Partners, L.P. profits up to this
excess loss allocation. Additionally, a more detailed reporting of earnings per
share was presented.
Page 3 of 31
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, except share amounts)
<TABLE>
<CAPTION>
March 31 December 31
1999 1999
----------- -----------
<S> <C> <C>
(unaudited)
ASSETS (as amended
March 29, 2000)
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 partnership 7,207 8,141
------- -------
Total assets $37,177 $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 1,809
------- -------
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 4,174 6,148
Total stockholders' equity 15,448 17,422
------- -------
Total liabilities and stockholders' equity $37,177 $37,363
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 4 of 31
<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
----------------- -----------------
(as amended
March 29, 2000)
<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 (934) (28)
Miscellaneous, net 1 ---
----------------- -----------------
Total other income (827) 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 (1,419) (428)
Income tax expense (benefit) 46 (190)
----------------- ----------------
Net loss before extraordinary loss (1,465) (238)
Extraordinary loss on debt refinancing (509) --
----------------- -----------------
Net loss $ (1,974) $ (238)
================= =================
Net loss per share before extraordinary loss $ (.88) $ (.14)
================= =================
Net loss per share for extraordinary loss $ (.30) $ --
================= =================
Net loss per share - basic and diluted $ (1.18) $ (.14)
================= ================
Weighted average number of common shares outstanding 1,671 1,671
================= ================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 5 of 31
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Operating activities: (as amended
March 29, 2000)
<S> <C> <C>
Net loss $(1,974) $ (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 934 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 6 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
RESTATEMENT OF RESULTS OF OPERATIONS AND BASIS OF PRESENTATION
On March 29, 2000, Heartland Technology, Inc. restated its results of
operations for the first quarter of 1999. The restatement is to correct
the non-cash allocation of equity in loss from the Investment in
Heartland Partners, L.P. (the Partnership) that was reported
incorrectly in the results of operations for the first quarter of 1999.
The Partnership Agreement provides generally that the Partnership's
losses will be allocated 1% to the General Partner, 98.5% to the Class
A limited partners, and 0.5% to the Class B limited partner. If the
allocation of a net loss to a partner would cause that partner to have
a negative balance in their capital account, such net loss shall be
allocated only among partners having positive balances in their capital
accounts. As of January 1, 1999, the Class B partner was the only
partner with a positive capital balance remaining and as such should be
allocated 100% of the Partnership losses for 1999. However, the loss
allocated for the first quarter as reported in the Form 10- Q was only
for the proportional interest of the 1.5% General and .5% Class B
partnership interest held by the company. Therefore, an adjustment to
loss from investment in partnerships of $921,000 for the quarter ended
March 31, 1999 has been recorded to reflect the allocation of 100% of
the Partnership loss. Accordingly, net loss per share for the quarter
ended March 31, 1999 has increased from $0.63 to $1.18. Heartland
Technology, Inc. as the Class B Partner, has priority to future
Heartland Partners, L. P. profits up to this excess loss allocation.
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
Page 7 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 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
Page 8 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
substrate.
2. 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>
4. Net Loss per Share
Net loss per share for the first quarter of 1999 and the first quarter
of 1998 amounted to $1.18 and $.14 per share, respectively, based on
1,671,238 shares outstanding.
Page 9 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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. 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 10 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 $ 907 (1) $ 1,007(1)
amounts of $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 11 of 31
<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
(as amended March 29, 2000)
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion
and Analysis of Financial Condition and Results of Operation section
and elsewhere in this Form 10-Q are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and other important factors,
including the risks discussed below. The Company's actual future
results, performance or achievement of results and the value of your
stock, may differ materially from any such results, performance,
achievement or value implied by these statements. We caution you not to
put undue reliance on any forward-looking statements. In addition, we
do not have any intention or obligation to update the forward-looking
statements in this document. The Company claims the protection of the
safe harbor for forward-looking statements contained in Section 21E of
the Securities Exchange Act of 1934.
Page 12 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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.
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. PG 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 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. The partnership agreement
requires that losses are to be allocated to the Partners having
positive capital balances in their proportional share of ownership
interest until any capital balance reaches zero, at which time, losses
are to be allocated to the remaining Partners, until their capital
balance reaches zero. Subsequent profits are allocated to those
partners who had absorbed losses in excess of their proportional
partnership interest (up to the amount of the excess proportional loss)
before the profits are allocated to all partners in their proportional
partnership interest.
Page 13 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 $1,465,000 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.
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 its investments in the real estate partnerships was
$934,000 in the first quarter of 1999 compared to a loss of $28,000 for
the respective period of 1998. Non-cash allocation of loss in excess of
HTI's proportional interest in Heartland was $921,000 in the first
quarter 1999. HTI has priority to future Heartland profits up to this
excess loss allocation. Management believes that the real estate based
partnership has a high potential to achieve profitability in the
future.
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
Page 14 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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.
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 $1,974,000 for the
quarter.
Page 15 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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.
<PAGE>
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-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
Page 16 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 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.
Page 17 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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.
Access to Financing. The real estate business is capital intensive and
requires expenditures for
Page 18 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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.
Page 19 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 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
Page 20 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
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 21 of 31
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 1999
PART II- OTHER INFORMATION
(as amended March 29, 2000)
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 (as amended March 29, 2000)
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended March 31, 1999.
Page 22 of 31
<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: March 29, 2000 BY: /s/ Edwin Jacobson
-----------------------------
Edwin Jacobson
President and Chief
Executive Officer
(Principal Executive Officer)
Date: March 29, 2000 BY: /s/ Richard P. Brandstatter
-----------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
Page 23 of 31
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
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 (as amended March 29, 2000)
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);
Page 25 of 31
<PAGE>
(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;
(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.
Page 26 of 31
<PAGE>
(c) Such other matters as the Lender may require.
7. Representation and Warranties. The Borrower hereby represents and
warrants to the Lender as follows:
(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.
Page 27 of 31
<PAGE>
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 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 28 of 31
<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 29 of 31
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 30 of 31
Exhibit 10.3
LaSalle National Bank
135 South LaSalle Street
Chicago, IL 60603
(312) 904-5415
May 14, 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 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 the first quarter
of 1999 and is effective through January 1, 2000.
Sincerely,
LASALLE NATIONAL BANK
Charles E. Schroeder, Jr.
First Vice President
Page 31 of 31
<TABLE> <S> <C>
<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> 37,177
<CURRENT-LIABILITIES> 11,633
<BONDS> 0
0
0
<COMMON> 501
<OTHER-SE> 14,947
<TOTAL-LIABILITY-AND-EQUITY> 37,177
<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> (1,419)
<INCOME-TAX> 46
<INCOME-CONTINUING> (1,465)
<DISCONTINUED> 0
<EXTRAORDINARY> (509)
<CHANGES> 0
<NET-INCOME> (1,974)
<EPS-BASIC> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
