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 September 30, 2000
-----------------------------------------
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
330 North Jefferson Court, Chicago, Illinois 60661
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/575-0400
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(Registrant's telephone number, including area code)
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 10, 2000, there were 1,671,238 shares of the registrant's common
stock outstanding.
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets...............................3
Consolidated Statements of Operations.....................4
Consolidated Statements of Cash Flows.....................5
Notes to Consolidated Financial Statements................6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................15
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders.............25
Item 6 Exhibits and Reports on Form 8-K................................25
Signatures................................................................. 26
Page-2 of 27
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, except share amounts)
September 30 December 31
2000 1999
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ............................ $ 91 $ 105
Accounts receivable, net of reserves of $410
($250 at December 31, 1999) ....................... 3,463 3,643
Due from affiliate ................................... 842 --
Inventories, net ..................................... 1,006 3,236
Prepaid expenses and other assets .................... 329 335
-------- --------
Total current assets ............................... 5,731 7,319
Property and equipment:
Machinery and equipment .............................. 8,124 10,339
Furniture and fixtures ............................... 479 593
Leasehold improvements ............................... 437 887
-------- --------
Property and equipment at cost ....................... 9,040 11,819
Less accumulated depreciation .................... 5,184 4,506
-------- --------
Property and equipment, net .......................... 3,856 7,313
Other assets:
Goodwill, net of accumulated amortization of
$1,931 ($1,422 at December 31, 1999).............. 10,920 11,429
Deferred debt issuance costs, net of accumulated
amortization of $133 ($83 at December 31, 1999)... 68 118
Other ................................................ 145 145
Investment in joint venture .......................... 316 --
Investment in partnerships ........................... 8,287 4,387
-------- --------
Total assets ....................................... $ 29,323 $ 30,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit ...................................... $ 500 $ 757
Debt in default ...................................... 6,674 6,172
Accounts payable, trade .............................. 3,453 4,321
Accrued expenses and other liabilities ............... 1,526 1,693
Current portion of long-term debt .................... 2,275 3,867
Current portion of capital lease obligations ......... 74 108
Allowance for claims and liabilities ................. 1,281 1,281
Payable to affiliate ................................. 3,158 1,093
Taxes payable ........................................ 159 --
-------- --------
Total current liabilities 19,100 19,292
-------- --------
Long-term debt, less current portion ................. 3,548 3,888
Capital lease obligation, less current portion ....... 65 222
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 ........................... 11,215 10,773
Accumulated deficit .................................. (5,106) (3,965)
-------- --------
Total stockholders' equity ........................ 6,610 7,309
-------- --------
Total liabilities and stockholders' equity ........ $ 29,323 $ 30,711
======== ========
See accompanying Notes to Consolidated Financial Statements
Page-3 of 27
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Operations
(Amounts in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ......................... $ 5,425 $ 8,909 $ 18,036 $ 25,989
Cost of sales ..................... 3,824 7,474 15,700 21,527
-------- -------- -------- --------
Gross margin ...................... 1,601 1,435 2,336 4,462
Other income (loss):
Management fee from affiliate .. 319 107 319 319
Equity in income (loss) from
investment in partnerships ..... 584 (1,325) 3,900 (3,711)
Equity in loss from joint
venture ........................ (484) -- (687) --
Miscellaneous, net ............. 83 (18) 101 230
-------- -------- -------- --------
Total other income (loss) ......... 502 (1,236) 3,633 (3,162)
Other expenses:
Selling, general and
administrative ................. 1,394 2,341 4,907 6,787
Interest expense ............... 476 474 1,555 1,116
Amortization expense ........... 187 199 559 569
-------- -------- -------- --------
Total other expenses ........ 2,057 3,014 7,021 8,472
-------- -------- -------- --------
Income (loss) before income
taxes and extraordinary item ...... 46 (2,815) (1,052) (7,172)
Income tax expense ................ 51 (3) 89 61
-------- -------- -------- --------
(Loss) before
extraordinary loss ................ (5) (2,812) (1,141) (7,233)
Extraordinary loss on debt
refinancing ....................... -- -- -- 509
-------- -------- -------- --------
Net income (loss) ................. $ (5) $ (2,812) $ (1,141) $ (7,742)
======== ======== ======== ========
Income (loss) per share before
extraordinary loss ................ $ 0.00 $ (1.68) $ (0.68) $ (4.33)
-------- -------- -------- --------
Net income (loss) per share for
extraordinary loss .............. $ -- $ -- $ -- (.30)
-------- -------- -------- --------
Net income (loss) per
share-basic and diluted ........... $ (0.00) $ (1.68) $ (0.68) $ (4.63)
======== ======== ======== ========
Weighted average number of
common shares outstanding ......... 1,671 1,671 1,671 1,671
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page-4 of 27
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
Nine months Ended
September 30, September 30,
2000 1999
----------- ------------
Operating activities:
Net loss ...................................... $ (1,141) $ (7,742)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization .................. 2,121 2,263
Accretion of warrant value ..................... 167 --
Equity in (income) loss from investments in
partnerships ................................... (3,900) 3,711
Equity in loss from joint venture .............. 687 --
Bad debt expense ............................... (162) 15
Reserve for inventory obsolescence ............. 729 ( 420)
Loss from sale of equipment .................... 12 --
Changes in operating assets and liabilities
Accounts receivable ......................... (88) (2,381)
Due from affiliate .......................... -- 284
Inventories, net ............................ 1,193 (1,346)
Prepaid expenses and other assets ........... (19) (147)
Refundable taxes ............................ 19 766
Accounts payable and accrued expenses ....... 110 3,245
Payable to affiliate ........................ 2,065 75
------- -------
Net cash provided by (used in) operating
activities .................................. 1,793 (1,677)
Investing activities:
Purchases of property and equipment .............. (167) (602)
Sale of property and equipment ................... 118 --
Investment in joint venture ...................... 14 --
------- -------
Net cash used in investing activities ............ (35) (602)
Financing activities:
Net borrowings (payments) under line of credit ... (1,974) 1,113
Proceeds from issuance of long-term debt ......... 1,743 2,358
Proceeds on capital leases ....................... -- 203
Payments on capital leases ....................... (191) (46)
Principal payments on long-term debt ............. (1,350) (1,252)
Debt issuance costs .............................. -- (97)
------- -------
Net cash provided by financing activities ........ (1,772) 2,279
------- -------
Decrease in cash and cash equivalents ............ (14) --
Cash and cash equivalents at beginning of period . 105 --
------- -------
Cash and cash equivalents at end of period ....... $ 91 $ --
========== ==========
See accompanying Notes to Consolidated Financial Statements
Page-5 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements of Heartland Technology, Inc. (the
"Company" or "HTI") include the accounts of the Company and its subsidiaries,
P.G. Design Electronics, Inc. ("PG"), Solder Station-One, Inc. ("Solder"), HTI Z
Corp. ("HTI Z" formerly Zecal Corp.), Zecal Technology, LLC (the "LLC"), and HTI
Interests, LLC ("HTII"). The investment in Zecal Technology, LLC, which is 50%
owned and where the Company exercises significant influence over operations, is
accounted for using the equity method. 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 materially reduces its purchases of products
and services, financial results will be materially affected.
In the opinion of management, the consolidated financial statements reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the financial position, operating results, and cash
flows for the periods presented. Operating results for the three and the nine
month periods ended September 30, 2000, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. The
interim statements should be read in conjunction with the consolidated
financial statements and notes thereto, for the year ended December 31, 1999,
as presented in the Company's Annual Report on Form 10-K.
2. Nature of Business and Organization
The Company is engaged in the electronic contract manufacturing business. On
a contract basis, the Company designs, manufactures and tests electronic
assemblies, designs and tests Z-Strate(R) circuit boards, and provides
services to the printed circuit board industry. While the customer base is
diverse, the primary customers are Original Equipment Manufacturers "(OEM's")
in the computer and computer printer industry. The Company works either on a
turnkey or consignment basis. Turnkey involves procurement of materials as
well as product assembly, whereas the customer provides the components for
consignment orders.
Page-6 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Through its partnership interests in Heartland Partners, L.P. ("Heartland")
and CMC Heartland Partners ("CMC Heartland"), the Company is also engaged in
the business of development of real estate, including the properties formerly
owned by the Company. This real estate development business consists of the
leasing, development and sale of various commercial, residential and
recreational properties in Illinois, Georgia, Wisconsin, Montana, Minnesota,
North Carolina and Washington. The investments in Heartland and CMC Heartland
(collectively, the "Partnerships") are accounted for using the equity method
since the Company has significant influence over the Partnerships'
operations.
In May 1997, HTI purchased substantially all of the assets, and assumed
certain liabilities of PG Design Electronics. PG Design Electronics was
engaged in the business of contract design and manufacture of electronics
assemblies for computer and computer printer OEM's.
On April 10, 1998, HTI acquired 100% of the outstanding common stock of
Solder, a provider of specialty services to the printed circuit board
industry.
On April 29, 1998, PG acquired certain assets and assumed certain liabilities
of Zecal, which owns patented "Z-Strate"(R) technology for plating fine line
copper circuits on a ceramic substrate.
On May 5, 2000, HTI Z and LZ Partners, a third party, funded a newly organized
entity Zecal Technology, LLC. HTI Z contributed all assets and certain
liabilities of Zecal Corp. with a net book value of $947,000 to the LLC in
exchange for a 50% interest. LZ Partners contributed $4 million cash to the LLC.
The name of Zecal Corp. was changed to HTI Z Corp.
On May 19, 2000 PG transferred 100% of its outstanding common stock of HTI Z
Corp. to HTI.
On October 20, 2000 the Company received a $4.5 million cash call in connection
with its ownership of the LLC. The purpose of the cash call is to provide the
LLC with funds for operations and capital expenditures. The Company subscribed
to and funded $1.125 million of the cash call. LZ Partners, the other owner of
the LLC, has subscribed and funded $3 million of the cash call. As a result, the
Company's percentage ownership of the LLC decreased from 50% to 42%. LZ Partners
also received warrants for equity in the LLC which, if exercised, could reduce
the Company's percentage ownership in the LLC to 32%. LZ Partners may subscribe
to the balance of the $4.5 million cash call. If it does, the Company's
percentage ownership will be reduced further. The LLC may issue additional cash
calls in the future and if the Company does not fully subscribe these cash
calls, its percentage of ownership may be reduced further. The Company raised
the funds for the cash call from two sources: $750,000 was through a loan from
the Partnerships, and; $375,000 was raised by issuing a Series B 13%
Subordinated Note with Warrants. The note has a term of five years and an
interest rate of 13% and has warrants for 75,000 shares of Heartland Technology
Class A Common Stock. The warrants have a seven year life. The exercise price is
the closing price of the common stock on the last trading day prior to the
issuance of the warrants which was $4. The Series B Subordinated Note was
purchased by Edwin Jacobson, the Company's President and CEO.
Page-7 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Inventories
The components of inventories consist of the following (amounts in
thousands):
September 30,2000 December 31, 1999
----------------- -----------------
Raw materials $ 1,311 $ 3,826
Work-in-process 118 140
Finished goods 127 188
----------------- ------------------
1,556 4,154
Less: Allowance for obsolescence 550 918
----------------- ------------------
Inventories, net $ 1,006 $ 3,236
================= ==================
4. Investment in Partnerships and Related Party Transactions
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and
allocation of taxable income and loss. The Company also has a .01% general
partnership interest in CMC Heartland which entitles the Company to .01% of
CMC Heartland's available cash for distribution and an allocation of taxable
income and loss before distributions. The Company also owns the Class B
limited partnership interest in Heartland (the "Class B Interest"). In
general, the Class B Interest entitles the holder to .5% of Heartland's
available cash for distribution and allocation of taxable income and loss. The
Partnership Agreement provides generally that the Partnership's losses, other
than those attributable to the satisfaction of Plan Liabilities, 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 was
allocated 100% of the Partnership losses since that date. In addition, items
of deduction, loss, credit and expense attributable to the satisfaction of
Plan Liabilities (hereafter defined) are specially allocated 99% to the holder
of the Class B Interest and 1% to the Company as the general partner until the
aggregate amount of all such items allocated to the Class B Interest equals
the aggregate capital contribution with respect to the Class B Interest. If
the aggregate amount of such items specially allocated to the holder of the
Class B Interest is less than the amounts contributed by such holder to
Heartland, such excess will be reflected in the capital account of the Class B
Interest. Heartland produced net income in 2000 sufficient to credit the Class
B holder for all excess losses charged in prior periods. Pursuant to a
management agreement dated June 27, 1990, between the Company and CMC
Heartland, CMC Heartland is required to pay to the Company an annual
management fee in the amount of approximately $425,000, through June 26, 2000.
On October 19, 2000 the management agreement was amended to extend its term to
June 27, 2005.
Page-8 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed balance sheets as of September 30, 2000 and December 31, 1999 and
the summarized income statement for the three and nine month periods ended
September 30, 2000 and 1999 for Heartland are as follows (amounts in thousands):
September 30 December 31,
2000 1999
--------- ----------
(unaudited)
Assets:
Cash and marketable securities ...................... $ 4,125 $ 4,412
Receivables, net .................................... 137 373
Other assets ........................................ 3,452 1,310
Net properties and investment in joint venture ...... 45,447 51,161
------- -------
Total assets ........................................ $ 53,161 $ 57,256
======= =======
Liabilities:
Accounts payable, accrued expenses and other
liabilities ...................................... $ 11,673 $ 16,030
Allowance for claims and liabilities ................ 2,866 2,804
Loans payable ....................................... 25,229 32,770
------- -------
Total liabilities ................................... $ 39,768 $ 51,604
======= =======
Partners' capital:
General partner ..................................... $ 39 $ --
Class A partners .................................... 3,802 --
Class B partner ..................................... 9,552 5,652
------- -------
Total partners' capital ............................. 13,393 5,652
------- -------
Total liabilities and partners' capital ............. $ 53,161 $ 57,256
======= =======
Page-9 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
2000 1999 2000 1999
------- -------- -------- --------
Revenues:
Property sales ..... $17,463 $ 2,980 $39,957 $ 7,542
Less: cost of
property sales ... 12,068 2,696 29,046 6,660
------- ------- ------- -------
Gross profit
on property sales 5,395 284 10,911 882
------- ------- ------- -------
Rental and
other income ..... 59 154 768 667
------- ------- ------- -------
Total net revenues 5,454 438 11,679 1,549
Expenses:
Selling, general
and administrative 984 1,647 3,715 4,646
Real estate taxes .. 23 68 68 209
Environmental
expenses ......... 22 48 155 318
------- ------- ------- -------
Total expense .... 1,029 1,763 3,938 5,173
======= ======= ======= =======
Net income (loss) .. $ 4,425 $(1,325) $ 7,741 $(3,624)
======= ======= ======= =======
5.Lines of Credit
The Company's lines of credit are as follows:
(Amounts in thousands)
September 30, 2000 December 31, 1999
------------------ -----------------
Line of credit with Wells Fargo
Business Credit, Inc. (formerly
Norwest Business Credit, Inc.),
bearing interest at the base rate
plus 0.25% plus the 3% default
rate (12.75% at September 30,
2000) (included in debt in
default) $ 855 $ 2,572
Line of credit with LaSalle
National Bank bearing interest at
the base rate plus 2% (11.50% at
September 30, 2000) 500 757
----------------- -----------------
Total lines of credit $ 1,355 $ 3,329
=============== ===============
Page-10 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long Term Debt
The Company's debt obligations consist of the following:
(Amounts in thousands)
September 30, December 31,
2000 1999
------------- ------------
Term loan payable to LaSalle National
Bank in original principal amount
of $1,200,000. Interest is at prime
plus 1.5% (11% at September 30, 2000)
and is paid monthly. The loan has
level monthly principal payments
over three years .......................$ 340 $ 607
Term loan payable to LaSalle
National Bank in original principal
amount of $900,000. Interest is at
prime plus 1.0% (10.50% at
September 30, 2000) and is paid
monthly. The loan has level
monthly principal payments over
five years ............................. 465 585
Term loan payable to Wells Fargo
Business Credit in original amount
of $4,500,000. Principal payments
of $35,000 are payable on a weekly
basis. Interest is paid monthly
and accrues at the base rate plus
0.25 % plus the 3% default rate
(12.75% at September 30, 2000)
(included in debt in default) ........... 2,695 3,600
Other notes payable .................... 293 158
Subordinated notes to related parties
bearing interest at 13%
Interest payable quarterly ............. 1,725 450
Subordinated note to the sellers
of Solder bearing 8% interest payable
quarterly and having three semiannual
principal payments of $400,000 plus
a final payment of $500,000 plus accrued
interest. The first installment was due
on October 10, 1999. Interest payments
are deferred and added to the note
balance until Solder achieves certain
financial ratios
(included in debt in default) .......... 2,018 1,927
Subordinated note to the seller of
Zecal Corp. with 8% interest
beginning on April 29, 1999
Interest, with principal payments
of $91,667 are due quarterly
beginning July 30, 1999 (included
in debt in default) .................... 1,106 1,028
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 $1,500,000 in May 2002 ........ 3,000 3,000
------ ------
Total long term debt ................... 11,642 11,355
------ ------
Less current portion of long-term
debt, including debt in default ........ 8,094 4,720
------ ------
Long term debt, less current portion ...$ 3,548 $ 6,635
====== ======
Page-11 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 23, 1999, the Company received subscriptions for $2 million in
subordinated debentures at an interest rate of 13% for a two-year term. The
subscribers were shareholders of the Company. The debentures were accompanied by
warrants which permit the purchase of 165 HTI common shares per $1,000 principal
amount of the debentures, for a total of 330,000 warrants for the entire $2
million subscribed. The warrants are exercisable at any time during their
four-year duration at an exercise price of $2-3/8 per share. The debentures are
secured by the Class B interest in Heartland, which is held by the Company in
the wholly owned subsidiary, HTI Class B, LLC. In the event that Heartland
enters into a loan agreement with the Company collateralized by the Class B
interest, that security interest will be released. By the end of the first
quarter 2000, all $2 million subscriptions had been funded.
In January 1999, the Company refinanced the existing debt of PG and Zecal with
General Electric Capital Corporation ("GECC") by entering into an agreement with
Wells Fargo Business Credit ("WFBC"). The agreement, effective December 31,
1998, provides for a line of credit with a maximum available amount of
$10,500,000, and a term loan of $4,500,000. The term loan is payable in 60
monthly installments of $75,000 plus accrued interest. The interest rate on the
loans is the lender's base rate plus 0.25% plus the 3% default rate (12.75% at
September 30, 2000). At September 30, 2000, the principal amount outstanding
under the line of credit was $855,000 and the amount outstanding on the term
loan was $2,695,000. The agreement carries an unused line fee of 0.25% per
annum, payable monthly, based on the average daily unused amount. A facility fee
of .25% per annum is payable on the total facility on the first day of April,
July, October and January. The agreement carries certain prepayment penalties
and requires the Company to maintain certain financial covenants. On January 8,
1999, the Company was advanced $5,260,000 from the WFBC line of credit and the
term loan, the proceeds of which were used to repay all the loans outstanding
with GECC. In connection with this refinancing, PG incurred approximately
$353,000 of prepayment penalties from GECC. PG was also required to write off
approximately $156,000 in loan origination fees that were being amortized over
the life of the GECC loans. These amounts were recorded as an extraordinary
charge in the first quarter of 1999. As a result of the GECC prepayment
penalties, the Company was in default of certain financial covenants at the end
of the first quarter of 1999. WFBC entered into a second amendment to the loan
agreement and waived those defaults. As a result of the default, WFBC has
assessed the default rate of interest beginning May 1, 1999 (the point at which
the default commenced) and reduced the allowable inventory borrowing base.
Subsequently, PG failed to achieve certain profit levels in the second and third
quarters of 1999 and WFBC entered into a third amendment to the loan agreement
that reduced the allowable borrowing base and waived the defaults. In January
2000, the Company received notification from WFBC that demanded payment in full,
by May 1, 2000 of all obligations due. On April 21, 2000, WFBC entered into a
fourth amendment to the loan agreement and an amendment to the default letter
that increased the amounts of monthly payments to the term note from $75,000 a
month to $25,000 a week, waived the $10,000 monthly accommodation fee, and
extended the final date for payment to August 1, 2000. Management has been
seeking other sources of credit for PG. On July 28, 2000, WFBC entered into a
sixth amendment of the loan agreement that increases the amount of the weekly
reduction of the term loan from $25,000 to $35,000 effective August 7, 2000.
Also included in the amendment is one-percentage point per week reduction of the
receivable accounts borrowing base from its current level of 85%, effective
September 8, 2000 and extended the final date for payment to November 30, 2000.
The Company is in conversation with the lender and has no reason to believe that
the final date for payment won't be extended for a period of time.
Solder has term loans payable to LaSalle National Bank ("LSNB") in original
principal amounts of $1,200,000 and $900,000. The loans have level monthly
principal payments. Interest is paid monthly. The $1,200,000 loan is for a three
year term and bears interest at the prime rate plus 1.5% (11% at September 30,
2000). The $900,000 loan is for a five year term and bears interest at the prime
rate plus 1% (10.5% at September 30, 2000). LSNB granted Solder a temporary
waiver from paying principal and interest on the $1,200,000 loan for a period
from August 31, 1998, through November 30, 1998. The amounts deferred plus
additional interest are due no later than April 30, 2001. The outstanding
balances on these loans at September 30, 2000, were $340,000 and $465,000,
respectively. An early termination fee of 1% to 3% of the outstanding balance of
either note will be charged if the loan is repaid prior to maturity. The loans
are guaranteed by HTI which has pledged 100% of its stock in Solder.
Page-12 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Solder is in violation of certain financial covenants with respect to its long
term loans. The bank has not notified the Company that it is in default but may
do so.
HTI Z has a note payable to the seller of Zecal's assets in the original
principal amount of $1,100,000. The note bears 8% interest, beginning one year
(April 29, 1999) after issuance. Interest and principal payments of $91,667 are
due quarterly beginning July 30, 1999. At September 30, 2000, $1,106,000 was
outstanding including accrued interest. Payments due October 30, 1999, January
30, 2000 April 30, 2000 and July 31, 2000 have not been made. The seller has not
notified the Company that it is in default, but may do so. Under the Asset
Purchase Agreement, dated May 5, 2000, LLC is obligated to reimburse HTI for all
future payments due after April 30, 2000 on the note to the seller of Zecal's
assets. The reimbursements to be received total $842,000, and are included in
Due from affiliate in the accompanying balance sheet.
7. Industry Segments
The Company currently is engaged in two lines of business: (1) electronic
manufacturing and (2) real estate. The manufacturing business segment covers the
Company's manufacture of electronics assemblies on a contract basis, primarily
for the computer and computer printer industries, the manufacturing of ceramic
circuit boards and the providing of services for the printed circuit board
industry. The real estate business segment covers the Company's investment in
real estate partnerships. Approximately $2,389,000 and $2,652,000 of product was
shipped to Europe in the first nine months of 2000 and 1999, respectively. As of
and for the three and nine months ended September 30, 2000 and 1999, certain
information relating to the Company's business segments are set forth in the
table below:
Selected Financial Data for the three months September 30, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands)
Sales and Income Depreciation
Business segment Identifiable other income (loss) and Capital
assets before amortization expenditures
taxes and expense
extraordinary
item
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Manufacturing ..... $ 20,837 $ 5,024 $ (472) $ 658 $ 24
Real estate ....... 8,287 584 584 -- --
Corporate ......... 199 319 (66) -- --
------------- ------------- ------------- ------------- -------------
Total Company ..... $ 29,323 $ 5,927 $ 46 $ 658 $ 24
============= ============= ============= ============= =============
</TABLE>
Selected Financial Data for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands)
Sales and Income Depreciation
Business segment other income (loss) and Capital
before amortization expenditures
taxes and expense
extraordinary
item
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Manufacturing ..................... $ 17,446 $ (4,400) $ 2,121 $ 167
Real estate ....................... 3,900 3,900 -- --
Corporate ......................... 323 (552) -- --
------------- ------------- ------------- -------------
Total Company ..................... $ 21,669 $ (1,052) $ 2,121 $ 167
============= ============= ============= =============
</TABLE>
Page-13 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Selected Financial Data for 1999
<TABLE>
<CAPTION>
For the three months ended September 30, 1999
---------------------------------------------
Sales and Income Depreciation
Business segment Identifiable other income (loss) and Capital
assets before amortization expenditures
taxes and expense
extraordinary
item
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Manufacturing ......$ 26,069 $ 9,336 $ (1,343) $ 826 $ 208
Real estate ........ 4,387 (1,325) (1,325) -- --
Corporate .......... 255 (338) (147) -- --
------------- ------------- ------------- ------------- -------------
Total Company ......$ 30,711 $ 7,673 $ (2,815) $ 826 $ 208
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999
--------------------------------------------
Sales and Income Depreciation
Business segment other income (loss) and Capital
before amortization expenditures
taxes and expense
extraordinary
item
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Manufacturing ..................... $ 25,966 $ (3,217) $ 2,263 $ 602
Real estate ....................... (3,711) (3,711) -- --
Corporate ......................... 572 (244) -- --
------------- ------------- ------------ -------------
Total Company ..................... $ 22,827 $ (7,172) $ 2,263 $ 602
============= ============= ============ =============
</TABLE>
8. Earnings Per Share
Net income per share for the third quarter of 2000 was $0.02. The net loss for
the comparable period of 1999 was $1.68 per share. Net loss per share for the
nine months ended September 30, 2000 was $0.66 compared to $4.63 for the
comparable period 1999. Calculations of earnings per common share are based on
1,671,238 shares outstanding. Warrants and options to purchase common stock
were outstanding during the first nine months of 2000 but were not included in
the computation of diluted earnings per share because the exercise prices of
the warrants and options were greater than the average market price of the
common shares.
Page-14 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations 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
the Company's stock, may differ materially from any such results, performance,
achievement or value implied by these statements. We caution you not to put
undue reliance on any forward-looking statements. In addition, we do not have
any intention or obligation to update the forward-looking statements in this
document. The Company claims the protection of the safe harbor for
forward-looking statements contained in Section 21E of the Securities Exchange
Act of 1934.
ELECTRONICS BUSINESS
The Company has two lines of business. It is engaged in electronic contract
manufacturing through its subsidiaries, PG, HTI Z (formerly Zecal Corp.),
Solder, and Zecal Technology, LLC. The investment in Zecal Technology, LLC,
which is 42% owned and where the Company exercises significant influence over
operations, is accounted for using the equity method. The Company also holds
general partner interests in partnerships which are engaged in real estate
sales, leasing and development.
On a contract basis, the Company designs, manufactures and tests electronic
assemblies, designs and tests Z-Strate(R) circuit boards, and provides services
to the printed circuit board industry. While the customer base is diverse, the
primary customers are OEMs in the computer, computer printer and
telecommunications industries. The Company works either on a turnkey or
consignment basis. Turnkey involves procurement of materials as well as product
assembly, whereas the customer provides the components for consignment orders.
The Company uses surface mount and chip-on-board technologies 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
electronic circuits on ceramic substrates using its proprietary Z-Strate(R)
process, and provides services to the printed circuit board industry. The
Company's largest 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 ("PODs"). The
Company has introduced refinements to the Z-Strate(R) process to improve its
application in the radio frequency ("RF") wireless and broadband
telecommunications markets. RF applications include wireless communication
products such as cellular phone handsets, cellular phone stations, satellite
phones and coaxial and fiber-optic cable television ("CATV") distribution
systems. Services provided to printed circuit board manufacturers include hot
air solder leveling, solder mask, and precious metal plating.
Page-15 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
The products manufactured by the Company are complex, generally involve low
volume production runs and require the use of modern technology, production
techniques and equipment.
Customer Base. The majority of the Company's customers are located in the
United States; however, their products are shipped internationally. In the
first nine months of 2000, NEC accounted for approximately 25% and Hewlett
Packard accounted for approximately 16% of the Company's business. The Company
believes that it has strong relationships with its major customers which have
been established over the years. However, the Company believes it is likely to
lose NEC as a customer, and could lose other customers and the loss of one or
more of them could have a material adverse effect on the Company's results. The
Company does not have any long-term contractual relationships with any of its
customers.
Zecal's marketing operations are supervised by its Vice President of Marketing.
PG and Solder's marketing and sales are performed by senior management and
technical personnel of the Company. In addition, the Company uses outside sales
representatives.
Strategy. The Company's strategy is to focus on high margin segments of the
electronics manufacturing business. The Company does accept lower margin
business in certain instances to develop or maintain relationships with
companies and to utilize its capacity. While the Company seeks to increase
sales to existing customers, it also plans to diversify products, as well as
the customers and industries to which it sells. The Company is looking for
opportunities for growth by acquisition or joint venture, as well as by
expanding its existing business. The Company aims to grow its business within
its niche of technically advanced design and manufacturing, which it believes
is appropriate for its strengths and long-term objectives. The Company has
added manufacturing capacity, is adding testing equipment and is working on the
design and prototyping of new products. To realize this strategy, the Company
may require the allocation of substantial resources, some or all of which may
be unavailable to the Company.
Page-16 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
Competition. There is significant competition in the electronic contract
manufacturing market. The Company believes that competition in the market
segments it serves is based on product and service quality, reliability and
timely delivery to customers. The Company's competitive advantage has been
maintained by its capacity to handle limited runs of a product on short notice,
and its ability to perform analysis and provide design advice while working
closely with the customer using the latest technologies. The electronics
contract manufacturing industry is comprised of a large number of companies.
The Company faces intense competition from established competitors and from
similar niche players who focus on low volume/high margin production. Certain
competitors have greater financial resources and manufacturing capacity than
the Company. The Company may also face competition from current and potential
customers, including OEMs themselves, who may decide to manufacture product
internally. However, the Company believes that rather than viewing electronic
subcontractors as a competitive threat, OEMs have become increasingly reliant
on, and want to align themselves with subcontractors. During periods of
recession in the electronics industry, the Company's competitive advantages in
the areas of quick-turnaround manufacturing and responsive customer service may
be of reduced importance to OEMs, who may become more price sensitive. Although
the Company generally does not pursue high-volume, price-sensitive business, it
may be at a competitive disadvantage with respect to price when compared to
manufacturers with lower cost structures.
Environmental Issues. Proper waste disposal is a consideration for the Company
because metals and chemicals are used in the manufacturing process. Water used
in the manufacturing process must be treated to remove metal particles and
chemical contaminants before it can be discharged into the municipal sanitary
sewer system. A manufacturing facility must operate under an effluent discharge
permit issued by the appropriate government authority and renewed periodically.
The Company is also subject to environmental laws relating to storage, use and
disposal of chemicals, solid waste and other hazardous materials.
The Company believes that it is currently in compliance with all applicable
environmental protection requirements in all material respects. The Company
does not anticipate any significant expenditures in maintaining its compliance.
However, there is no assurance that violations will not occur in the future as
a result of human error, equipment failure or other causes. The implications of
such potential failure include litigation, fines and other penalties such as
the revocation of the necessary permits. New or more stringent environmental
laws may be passed in the future which could cause the Company to have to
expend money for compliance and could increase its operating costs.
Proprietary Rights. The Company has patents for its Z-Strate(R) technology; but
does not have patents for its other products. The Company also has some non
patented trade secrets and contractual rights to certain designs or processes.
The Company has a number of trademarks, which include: Xceed; Xceed Technology;
Xceed Technology and Design; Color Fusion, Resolutionary and Z-Strate. Other
than the Z-Strate technology, patents and trademarks are of relatively marginal
importance to the Company, since original equipment customers typically
contract for the manufacture of products designed to their specifications.
Page-17 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
Employees. The parent company has no employees and reimburses CMC Heartland for
salary costs for CMC Heartland employees allocated to the Company. The Company
has a total of approximately 104 employees at its subsidiary companies.
Raw Materials. The raw materials required for electronics contract
manufacturing, including printed circuit boards, ceramic substrate, chemicals,
memory chips, bare semiconductor dice, electronic components such as resistors,
diodes and capacitors, and solder are generally readily available from outside
suppliers, with lead times ranging from a couple of days to fourteen weeks for
some components. Memory chips for the memory modules are typically provided by
the contract purchaser. The Company has at times experienced delays in its
supply of memory chips. The Company purchases other components from a number of
outside suppliers and is not dependent on any particular supplier.
Cyclical Demand. The Company does not believe that its business is subject to
seasonal variations, but it may be subject to cyclical demand associated with
orders received. The Company is largely dependent on its ability to deliver
short runs and quick turnarounds, requiring the maintenance of sufficient
inventory to meet these demands. The Company does receive monthly forecasts from
its major customers of anticipated needs for long lead components, enabling it
to maintain continuous allotments and shipments of goods from suppliers as
required.
Backlog. The Company has not historically tracked backlog orders because orders
are often received with short lead times and all orders are subject to
cancellation or postponement.
Operations. The Company believes that it made progress on a number of fronts in
2000. Sales at Solder were at record levels during the quarter. Additionally, in
August, Zecal Technology, LLC entered into a strategic alliance with Amkor
Technology, LLC which will enable high-volume production of advanced ceramic
circuits and chip scale packages at Amkor's 3.5 million sq. ft. manufacturing
facilities. The LLC also hired a Vice President of Sales and Marketing who will
lead the development and execution of strategies that will enable the LLC to
penetrate rapidly growing new markets for its products, including wireless and
broadband communications and chip-scale packaging, among others. In this
capacity, he oversees the activities of the Company's sales force and network of
independent distributors. The LLC also entered into an agreement with C-COR.net
to supply C-COR.net with Zecal's latest ceramic circuit technology. The
estimated value of the agreement is $2.3 million annually. Under the agreement,
the LLC will design and manufacture circuitry for use in C-COR.net's next
generation of broadband networking amplifiers and fiber optic receivers.
However, as a result of a decline in orders from our largest customers, NEC and
Hewlett Packard as well as the discontinuation of Portal(R), the Company has
restructured PG in order to increase its competitiveness. In the first nine
months of 2000 it has reduced its staffing by 150 employees and expects an
approximate annual saving of $5,375,000 in staffing expenses.
Page-18 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
PG added a new customer for its Printer PODs in 2000, and is experiencing
increased Printer POD orders from existing customers. PG is seeking additional
customers for its PODs. PG has developed, and is pursuing production orders,for
a new POD to address the PC industry's introduction of Universal Serial Bus
(USB) computers and printers.
Solder's performance continued its rebound in the third quarter. Solder is
also adding several promising new processes to its product lines. New
offerings at Solder will include automated conformal coating for increasingly
miniaturized printed circuit boards; immersion silver plating, a coating
approved by such major companies as Intel, Lucent and Hewlett Packard; and
an epoxy via plug process. Solder Station will be the only company in North
America offering this solution to via hole contamination.
HTI has devoted a great deal of time and attention to the future of Zecal Corp.
and Zecal Technology, LLC (collectively referred to as "Zecal"). The Company
continues to believe that Zecal can be profitable by pursuing the emerging
market for cellular phones and CATV, as well as its historical markets of power
supplies and control devices. There is also a potential market for Z-Strate(R)
in applications involving extreme environmental conditions such as down hole
electronics for the oil well drilling industry and underhood automotive
electronics. Z-Strate(R) retains its superior electrical properties over an
extremely high temperature range. Z-Strate(R) is also well suited for leading
edge "chip scale" packaging because Z-Strate(R)'s coefficient of expansion is
similar to that of the silicon in integrated circuits and the technology
supports integration of high quality passive components (resistors, capacitors
and inductors) in the semiconductor package. The Company believes, based on the
advice of an outside consultant, discussions with potential customers, and its
own analysis, that Z-Strate(R) has significant advantages in performance and
cost over competitive technologies in a wide variety of RF applications.
Z-Strate(R) based devices, which feature very high quality (i.e. low
electrical resistance) copper connections on ceramic substrates, exhibit
significantly lower power losses than RF devices using thick film or organic
printed circuit board technologies. This translates into a longer battery life
for battery powered uses. In addition Z-Strate(R) offers very "fine pitch"
circuits, allowing the high circuit densities and the small devices required
for product miniaturization. The Company believes that Z-Strate(R) based
devices can be produced at lower cost than certain competing technologies.
There is a large market for RF devices. Total cellular phone handset sales for
2000 is expected to be more than 400 million units and about 550 million units
for 2001. Zecal is developing modules for use in cellular telephone handsets and
base stations. These modules have been prototyped and are currently being
qualified by the customers for production. In the event that Zecal receives
orders for the cellular phone handset components, it will have to make a
significant capital investment to expand capacity.
Page-19 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
Zecal's production customers include Texas Instruments Power Trends Products,
Danfoss, Artesyn Technologies,C-COR.net, a manufacturer of semiconductor
processing equipment and a military avionics subcontractor. Prototypes and
prototype customers include a semiconductor package for a major telecom
manufacturer, several major cell phone manufacturers, a manufacturer of SAW
filter devices for cell phones, a manufacturer of cell phone 911 GPS modules, a
RF ball grid array for telecommunications application, and a high power
amplifier surface mount substrate for cell tower applications.
Real Estate Development
Through its investment in the Partnerships, the Company is engaged in the
business of development and sale of real estate, including the properties
formerly owned by the Company. This real estate development business consists of
the leasing, development and sale of various commercial, residential and
recreational properties in Illinois, Georgia, Wisconsin, Montana, Minnesota,
North Carolina and Washington. The Company has a 1% general partnership interest
in Heartland which the Company holds in its wholly owned subsidiary, HTI
Interests, LLC. The interest entitles the Company to 1% of Heartland's available
cash for distribution and allocation of taxable income and loss. The Company
also has a .01% general partnership interest in CMC Heartland which entitles the
Company to .01% of CMC Heartland's available cash for distribution and an
allocation of taxable income and loss before distributions and allocations are
made by Heartland. The Company also owns ( through its wholly owned subsidiary,
HTI Class B, LLC) the Class B limited partnership interest in Heartland (the
"Class B Interest"). In general, the Class B Interest entitles the holder to .5%
of Heartland's available cash for distribution and allocation of taxable income
and loss. In addition, items of deduction, loss, credit and expense attributable
to the satisfaction of Plan Liabilities (described below) are specially
allocated 99% to the holder of the Class B Interest and 1% to the Company
(through HTI Interests, LLC) as the general partner until the aggregate amount
of all such items allocated to the Class B Interest equals the aggregate capital
contribution with respect to the Class B Interest. If the aggregate amount of
such items specially allocated to the holder of the Class B Interest is less
than the amounts contributed by such holder to Heartland, such excess will be
reflected in the capital account of the Class B Interest.
Page-20 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
The Company, by reason of its serving (through HTI Interests, LLC with respect
to Heartland) as the general partner of the Partnerships, is liable and
responsible to third parties for such Partnerships' liabilities to the extent
the assets of such Partnerships are insufficient to satisfy such liabilities.
In addition to liabilities incurred as a result of their ongoing real estate
businesses, in connection with the real estate transfer, the Partnerships have
assumed primary responsibility and liability for the resolution and
satisfaction of most of the liabilities for claims remaining under the plan of
reorganization of the predecessor of CMC Real Estate, certain other contingent
liabilities with respect to the properties transferred to CMC Heartland arising
after the consummation of such plan, and the costs and expenses in resolving
such plan and other contingent liabilities (collectively, the "Plan
Liabilities"). Included in the Plan Liabilities are known environmental
liabilities associated with certain of the properties transferred to the
Partnerships arising out of the activities of the Railroad or certain leasees
or other third parties. Further environmental obligations as yet unknown in
respect of these properties may become due and owing in the future. A majority
of the known environmental matters stem from the use of petroleum products,
such as motor oil and diesel fuel, in the operation of a railroad. The Company
and/or the Partnerships have been notified by government agencies of potential
liabilities in connection with certain of these real estate properties.
Descriptions of the known material environmental matters are included in the
reports filed by Heartland with the Securities and Exchange Commission pursuant
to the provisions of the Securities Exchange Act of 1934, as amended,(the "1934
Act").
On June 30, 1993, the Company assumed from Chicago Milwaukee Corporation
("CMC"), its former parent corporation, any obligations for which CMC was or
might become liable (the "MLC Assumed Liabilities") arising out of any matters
existing on or occurring prior to June 30, 1993 other than (i) the Plan
Liabilities, (ii) liabilities directly related to CMC's business of investing
and managing its investment securities, (iii) the lawsuit then pending (and
since resolved) against CMC relating to its preferred stock, or (iv) any
liabilities relating to federal, state, local or foreign income or other tax
matters.
Economic, and Other Conditions Generally. The real estate industry is highly
cyclical and is affected by changes in national, global and local economic
conditions and events, such as employment levels, availability of financing,
interest rates, consumer confidence and the demand for housing and other types
of construction. Real estate developers are subject to various risks, many of
which are outside the control of the developer, including real estate market
conditions, changing demographic conditions, adverse weather conditions and
natural disasters, such as hurricanes, tornados, delays in construction
schedules, cost overruns, changes in government regulations or requirements,
increases in real estate taxes and other local government fees and availability
and cost of land, materials and labor. The occurrence of any of the foregoing
could have a material adverse effect on the financial conditions of the
Partnerships, and in turn the Company.
Page-21 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
Access to Financing. The real estate business is capital intensive and requires
expenditures for land and infrastructure development, housing construction and
working capital. Accordingly, the Partnerships anticipate incurring additional
indebtedness to fund their real estate development activities. As of September
30, 2000, the Partnerships' total consolidated indebtedness was $25,229,000.
There can be no assurance that the amounts available from internally generated
funds, cash on hand, the Partnerships' existing credit facilities and sale of
non-strategic assets will be sufficient to fund the Partnerships' anticipated
operations. They may be required to seek additional capital in the form of
equity or debt financing from a variety of potential sources, including
additional bank financing and sales of debt or equity securities. No assurance
can be given that such financing will be available or, if available, will be on
terms favorable to the Partnerships. If the Partnerships are not successful in
obtaining sufficient capital to fund the implementation of its business
strategy and other expenditures, development projects may be delayed or
abandoned. Any such delay or abandonment could result in a reduction in sales
and would adversely affect the Partnerships', and in turn the Company's, future
results of operations.
Period-to-Period Fluctuations. The Partnerships' real estate projects are
long-term in nature. Sales activity varies from period to period, and the
ultimate success of any development cannot always be determined from results in
any particular period or periods. Thus, the timing and amount of revenues
arising from capital expenditures are subject to considerable uncertainty. The
inability of the Partnerships to manage effectively their cash flows from
operations would have an adverse effect on their ability to service debt, and
to meet working capital requirements.
RESULTS OF OPERATIONS
Net sales of electronic assemblies, computer printer products , ceramic circuit
boards and printed circuit boards services totaled $5,425,000 in the third
quarter of 2000 compared to $8,909,000 in the third quarter 1999. Sales for the
first nine months of 2000 were $18,036,000 compared to $25,989,000 for the
comparable period in 1999. Sales for the three and nine month periods ended
September 30, 2000 decreased from similar periods of 1999 due to lower than
expected sales of memory modules offset by an increase in sales at HTI Z and
Solder.
The loss from joint venture of $687,000 from the nine months ended September
30, 2000 reflects the results of Zecal Technology, LLC's net loss on an equity
basis from May 6, 2000.
Net loss for the third quarter of 2000 totaled $5,000 or $0.003 per share
compared to a net loss in the third quarter 1999 of $2,812,000 or $1.68 per
share. The net loss for the nine month period was $1,141,000, compared to a net
loss of $7,742,000 for the comparable period in 1999. The results for the
quarter and nine months ended September 30, 2000 are positively affected by the
income allocation of $4,235,000 and $584,000 from Heartland for the second and
third quarters, respectively. HTI, as general partner and owner of the Class B
interest, had been allocated excess losses from Heartland in previous quarters.
Heartland, in generating a net income in the second and third quarters,
allocated 100% of its net income to HTI's Class B Interest up to the amount of
excess losses absorbed, at which time, net income from Heartland was then
allocated to all unitholders based on their ownership interest. The third
quarter net income results are positively impacted by decreased net losses at
both PG and HTI Z (formerly Zecal Corp.) while Solder reported net income for
both the three and nine months ended September 30, 2000.
Page-22 of 27
<PAGE>
HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
Selling, general and administrative ("SG&A")expenses for the third quarter of
2000 totaled $1,394,000 compared to $2,341,000 for the third quarter of 1999.
For the nine month period ended September 30, 2000, SG&A expenses were
$4,907,000 compared to $6,787,000 in the similar period of 1999. SG&A expenses
for the third quarter and for the nine months ended September 30,2000 decreased
in comparison to similar periods in 1999 reflecting a reduction in expenses at
both PG and HTI corporate. For the same periods, Solder's SG&A was increased.
Interest expense for the three months ended September 30, 2000 was $476,000
compared to $474,000 for the same period in 1999. Interest expense for the nine
months ended September 30, 2000 was $1,555,000 compared to $1,116,000 a year
ago. The increase in interest expense, with a relatively stable interest
bearing debt balance for the periods reflects the increase in prime over the
last year as well as the additional default interest rates charged by WFBC.
Interest expense also includes a $167,000 nine-month amortization of the value
of the warrants issued in the fourth quarter 1999 and the first quarter 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities in the first quarter of 2000 through
borrowings on its lines of credit.
Solder has a line of credit with LSNB under which it may borrow up to
$1,500,000. Interest is based on a base rate plus 2% (11.5% at September 30,
2000). Borrowings are collateralized by accounts receivable and inventory.
Borrowings under the line of credit at September 30, 2000 was $500,000 and was
$757,000 at December 31, 1999. The line of credit matures on April 30, 2001.
Solder is in violation of certain financial covenants with respect to its LSNB
term loans. The bank has not notified the Company that it is in default, but
may do so. The Company has entered into discussions with the seller of Solder
concerning the accuracy of certain representations made by the seller in
connection with the acquisition of Solder. The Company does not know what the
outcome of those discussions will be. In light of those discussions,the Company
did not make payments of $400,000 to the seller that were due on October 10,
1999 and on January 10,2000. The seller has not notified the Company that it
is in default, but may do so.
Solder has a subordinated note payable to the former owners in the original
principal amount of $1,700,000. The note bears 8% interest. Principal is
payable in three semiannual $400,000 installments plus a final $500,000
installment. Installments were due on October 10, 1999 and April 10, 2000.
Interest is paid quarterly beginning September 30, 1998. The debt is
subordinated to the LSNB debt, and as such, interest payments are not allowed
until the credit facility to LSNB is in compliance. Deferred interest in the
amount of $318,000 has been added to the loan balance and is due no later than
October 10, 2001. The Company did not make payments of $400,000 each to the
seller that were due on October 20, 1999 and on April 20, 2000. The seller has
not notified the Company that it is in default, but may do so.
HTI has notes payable to the seller of PG in the principal amount of
$3,000,000. The notes are payable $1,500,000 in September 2000 and $1,500,000
in May 2002. The notes bear interest at 8% per year, which is paid quarterly.
Pursuant to an interim agreement with the seller, the Company did not make the
September 2000 payment of $1,500,000 to the seller that was due September 30.
The interim agreement with the seller, which is currently in effect until
November 27, 2000, provides that during the pendancy of negations to
restructure and extend the terms of the notes the Company will not be in
default for nonpayment of the note due September 30, 2000.
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HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
The Company believes that it will have sufficient funds available for operating
expenses, debt service and capital expenditures from cash flow expected to be
derived from operations and financing presently in place as well as additional
financing that management is seeking. Management expects that it will be able
to procure additional financing if required and that the Company will require
additional financing for further acquisitions or for the development of new
facilities required for additional business.
The Company requires additional funding in order to develop new products and to
realize existing opportunities. If the Company is unable to obtain such
financing on favorable terms, or not at all, it may have a material adverse
effect on the Company's results of operations and future prospects.
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PART II- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on October 31, 2000.
At the Annual Meeting Gordon H. Newman and Robert S. Davis were elected to be
directors of the Company to hold office until the 2003 Annual Meeting of
Stockholders. Votes cast for Mr. Newman were 1,480,456, votes withheld were
3,576 and non-votes were 187,206. Votes cast for Mr. Davis were 1,480,556,
votes withheld were 3,476 and non-votes were 187,206. Directors whose terms of
office continued after the meeting were Edwin Jacobson, John R. Torell, III and
Ezra K. Zilkha.
The amendment to the Milwaukee Land Company 1997 Incentive and Capital
Accumulation Plan was ratified with 1,446,591 votes for, 20,637 votes against,
16,804 abstentions and 187,206 non-votes.
The appointment of Ernst & Young LLP as the Company's independent accountants
for the fiscal year 2000 was ratified with 1,481,900 votes for, 546 votes
against, 1,586 abstentions and 187,206 non-votes.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Form of Series B Warrant dated October 17, 2000 for 75,000 shares
with an exercise price of $4.00 per share exercisable on or
before October 17, 2007. (filed herewith)
10.2 Form of 13% Subordinated Note dated October 17, 2000 for
$375,000, with interest paid quarterly due October 17, 2005.
(filed herewith)
10.3 Form of LLC Interest and Warrant Purchase Agreement between the
Company, Zecal Technology, LLC, HTI Z Corp. and LZ Partners, LLC
dated October 16, 2000. (filed herewith)
10.4 Form of Zecal Technology, LLC Warrant dated October 16, 2000 for
$3,000,000 of Preferred Company Interest granted to LZ Partners,
LLC exercisable on or before October 15, 2005. (filed herewith)
10.5 Form of Amendment to Management Agreement between the Company and
the Partnerships dated October 17, 2000. (filed herewith)
27.1 Financial Data Schedule - (filed herewith)
b) Reports on Form 8-K
None
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HEARTLAND TECHNOLOGY, INC.
SEPTEMBER 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
Date: November 14, 2000 BY: /s/ Edwin Jacobson
----------------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 BY: /s/ Richard P. Brandstatter
----------------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and Accounting Officer)
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Heartland Technology, Inc.
Index to Exhibits
10.1 Form of Series B Warrant dated October 17, 2000 for 75,000 shares
with an exercise price of $4.00 per share exercisable on or
before October 17, 2007. (filed herewith)
10.2 Form of 13% Subordinated Note dated October 17, 2000 for
$375,000, with interest paid quarterly due October 17, 2005.
(filed herewith)
10.3 Form of LLC Interest and Warrant Purchase Agreement between the
Company, Zecal Technology, LLC, HTI Z Corp and LZ Partners, LLC
dated October 16, 2000. (filed herewith)
10.4 Form of Zecal Technology, LLC Warrant dated October 16, 2000 for
$3,000,000 of Preferred Company interest granted to LZ Partners,
LLC exercisable on or before October 15, 2005. (filed herewith)
10.5 Form of Amendment to Management Agreement between the Company and
the Partnerships dated October 17, 2000. (filed herewith)
27.1 Financial Data Schedule - (filed herewith)
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