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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
547 West Jackson Boulevard, Chicago, Illinois 60661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312/294-0497
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant, computed by reference to the last reported sales
price of the Registrant's common stock on the American Stock Exchange as of
March 28, 1999, was approximately $5,280,583. On that date there were 1,671,238
shares outstanding. For purposes of this computation, it is assumed that non-
affiliates of the Registrant are all holders other than directors and officers
of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from the Registrant's definitive proxy statement, which involves
the election of directors, to be filed with the Commission pursuant to
Regulation 14A, or if such proxy statement is not filed with the Commission on
or before 120 days after the end of the fiscal year covered by this Report, such
information will be included in an amendment to this Report filed no later than
the end of such 120-day period.
Exhibit index appears on Page 47.
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We caution you that certain statements in the Management's Discussion and
Analysis of Condition and Results of Operation section, and elsewhere in this
Form 10-K, 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 described in the Management's Discussion
and analysis of Condition and Results of Operations section, and elsewhere in
this Form 10-K. 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 or 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 these documents. The Company claims the protections of the
safe harbor for forward-looking statements contained in Section 21E of the
Securities Exchange Act of 1934.
PART I
Item 1. Business
Heartland Technology, Inc. (the "Company" or "HTI") has two lines of business.
It is engaged in electronic contract manufacturing through its subsidiaries, PG
Design Electronics, Inc. ("PG"), Zecal Corp. ("Zecal") and Solder Station One
("Solder"). The Company also holds general partner interests in partnerships
which are engaged in real estate sales, leasing and development.
History
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The Company was formerly known as Milwaukee Land Company ("MLC"). MLC was
organized as a corporation under the laws of the State of Iowa on September 14,
1881. It was a subsidiary or affiliate of the Chicago, Milwaukee, St. Paul and
Pacific Railroad Company (the "Railroad") and its predecessors. It was formed
for the purpose, among other things, of acquiring and managing land used in the
Railroad's operations.
In 1971, Chicago Milwaukee Corporation ("CMC") was formed as a holding company
for the Railroad. In 1977, the Railroad filed for protection under federal
bankruptcy laws. In 1985, the Railroad's Plan of Reorganization was confirmed by
the federal court and the Railroad was renamed CMC Real Estate Corporation
("CMCRE"). In March 1988, CMC, CMCRE and MLC registered with the Securities and
Exchange Commission (the "Commission") as closed-end, non-diversified management
investment companies under Section 8(a) of the Investment Company Act of 1940
(the "1940 Act"). CMCRE was liquidated into CMC on November 30, 1989, and MLC
became a wholly-owned subsidiary of CMC. 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., a publicly-traded
limited partnership of which HTI is the general partner and holds limited
partner interests ("Heartland"), and CMC Heartland Partners, a general
partnership in which HTI and Heartland are the general partners and HTI is the
managing general partner ("CMC Heartland"). In June 1993, MLC was reincorporated
in the State of Delaware pursuant to a merger transaction with a wholly-owned
subsidiary. On June 30, 1993, CMC distributed MLC's common stock to CMC's
stockholders, spinning off MLC as a separate publicly-held company. CMC has
since ceased operation and was dissolved on May 22, 1995.
In May 1997, MLC and PG Newco Corp. ("PG Newco"), a wholly-owned subsidiary of
MLC, purchased substantially all of the assets, and assumed certain liabilities
of, PG Design Electronics, Inc. ("PG Design"), a company engaged in the business
of contract design and manufacture of electronic assemblies for computer and
computer printer original equipment manufacturers ("OEMs"). PG Newco's name was
then changed to PG Design Electronics, Inc. ("PG").
On October 31, 1997, MLC changed its name to Heartland Technology, Inc. ("HTI").
Effective December 31, 1997, the Commission approved the deregistration of HTI
as an investment company.
On April 10, 1998, the Company acquired the stock of Solder, a provider of
speciality services to the printed circuit board industry.
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On April 29, 1998, PG purchased the assets and assumed certain liabilities of
Zecal which owns patented "Z-Strate"(R) technology for plating fineline copper
circuits on a ceramic substrate.
On December 13, 1999, in contemplation of potential future strategic alliances
which the Company is pursuing, the Company formed HTI Interests, LLC ("HTII").
The Company holds a 99.9% ownership in HTII while HTI Principals, Inc., a newly
formed corporation owned by the directors of the Company, holds the remaining
.1%. The Company's general partner interest in Heartland will be held in HTII.
Electronics Business
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The Company is engaged in the electronic contract manufacturing business through
its subsidiaries. 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 ("SMT") and chip-on-board ("COB") 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 ("Printer PODs").
The Company developed a product called the "Portal(R)" which is an interactive
electronic information center used for point of purchase applications. Due to
insufficient market demand, the Company decided to discontinue production of
Portal. 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.
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 1999, NEC
accounted for approximately 34% and Hewlett Packard accounted for approximately
13% 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 could lose one or all of these customers and the
loss of one or all 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
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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.
The Company invested approximately $879,000 for equipment in 1999, of which
$203,000 was acquired under captitalized leases. In 1998, approximately
$5,701,000 was invested for equipment which included the $2,027,000 for fixed
assets acquired in the Solder purchase on April 10, 1998 and the $2,277,000 in
fixed assets acquired in the Zecal purchase on April 29, 1998.
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, Z-Strate and Portal.
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.
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 300 employees at the three 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
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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
1999. 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 1st quarter
of 2000 it has reduced its staffing by 65 employees and expects an approximate
annual saving of $2,511,000 in staffing expenses. Whereas at Zecal and Solder,
the Company believes that to achieve profitable growth as well as to maintain
existing business that it needed to improve its organizational structure and
personnel. To that end, the Company and its subsidiaries have hired management,
engineering, manufacturing, sales and finance personnel.
PG Design is focused on diversification and new products. PG is actively seeking
new opportunities for custom memory module business from NEC and is seeking to
add additional semiconductor manufacturers as custom memory module customers.
PG was successful in adding contract manufacturing customers outside of the
computer and computer printer industries in 1999. PG will continue to focus on
expanding this area of its business in 2000.
PG added a new customer for its Printer PODs in 1999, and is experiencing
increased Printer POD orders from existing customers. PG is seeking additional
customers for its PODs. PG developed a new POD in 1999 to address the PC
industry's introduction of Universal Serial Bus (USB) computers and printers.
HTI has devoted a great deal of time and attention to the future of 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. There were about 258 million new
cellular phone handsets sold in 1999, and this market alone is projected to
double by the year 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.
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In anticipation of this growth, the Company is seeking a new comprehensive
financial package for Zecal, which will significantly increase its manufacturing
capability, and secure additional operating capital.
Realization of these prospects is likely to require significant financing. The
Company may or may not be able to obtain the needed financing.
Current Financing
The Company has lines of credit with LaSalle National Bank (LSNB) and Wells
Fargo Business Credit (WFBC) formerly Norwest Business Credit. It is in
violation of loan covenants of these lines of credit. In January 2000, we
received notification from WFBC that demanded payment in full by May 1, 2000, of
all obligations due WFBC which at December 31, 1999 was approximately
$6,172,000. Management is seeking sources of credit for PG. We received a waiver
of the LSNB loan covenants on March 30, 2000.
Real Estate Development
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Through its investment in Heartland and CMC Heartland (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 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 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 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.
Additionally, pursuant to a management agreement 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 December 31, 1999.
The Company, by reason of its serving 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 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 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
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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.
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 December
31, 1999, the Partnerships' total consolidated indebtedness was $32,770,000.
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.
Item 2. Properties
HTI's corporate headquarters is at 547 West Jackson Boulevard, Suite 1510,
Chicago, Illinois. It shares approximately 9,000 square feet of leased office
space with Heartland. The lease provides for an annual base rent of $108,000
through the lease expiration date of May 31, 2000, and is subject to operating
expense and tax escalation. Management has secured office space at Kinzie
Station, which is being developed by the Partnership. The annual rent is
expected to be approximately $30,000.
PG's corporate and manufacturing headquarters are located at 48700 Structural
Drive, Chesterfield, Michigan. The building, which operates both as an office
and a plant, has approximately 32,000 square feet of floor space. This facility
is leased at a monthly rate of about $18,000 for a ten year term ending January
31, 2004, with an option to purchase the building and property at the end of the
term.
Solder's corporate and manufacturing headquarters are located at 2221 and 2231
West Cape Cod Way, Santa Ana, California. The buildings on this site occupy
approximately 21,200 square feet. These facilities are leased for a monthly rate
of approximately $24,000 in 1999. The lease expires January 1, 2002. The Company
has options to acquire the buildings at the end of the lease term.
Zecal's corporate and manufacturing headquarters are located at 456 North
Sanford Road, Churchill, New York. The 31,500 square foot facility has been
leased for approximately $9,000 per month through February 2000, and thereafter,
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on a month-to-month basis. The property is in a foreclosure proceeding and Zecal
does not have a written lease for the facility. If Zecal is not able to obtain a
new lease and is required to relocate, the relocation may have a material
adverse effect on the operations of Zecal.
Item 3. Legal Proceedings
PG design 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 Design infringe the patent. PG Design 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
Design 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. The Company
believes that it is entitled to indemnification from the sellers of PG Design
for any losses the Company ultimately incurs as a result of the asserted claim
of infringement.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders in the quarter ended
December 31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the American Stock Exchange under the
symbol "HTI". The high and low sales prices for each quarterly period of 1999
and 1998 are shown below.
<TABLE>
<CAPTION>
1999 High Low
<S> <C> <C>
First quarter 5 5/8 3 7/8
Second Quarter 6 1/2 4 1/4
Third Quarter 6 4 3/4
Fourth Quarter 4 3/4 2 1/4
1998
First Quarter 17 3/16 16 1/4
Second Quarter 17 3/8 12 1/4
Third Quarter 12 3/4 7 5/8
Fourth Quarter 8 3/8 5 3/8
</TABLE>
No dividends have been paid on the Company's common stock. See Item 7
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and Note 8 in Item 8 "Financial Statements and Supplementary Data"
to the notes to consolidated financial statements for restrictions on payments
and retained earnings. As of March 22, 2000, there were 591 holders of record of
the Company's common stock.
Recent sales of Unregistered Securities
In December 1999, the Company entered into subscription agreements with 5
individuals, two of whom are directors of the company, for the sale of 13%
subordinated debentures aggregating $2 million, which were accompanied by
warrants for an aggregate of 330,000 shares of common stock of the Company. An
aggregate of $450,000 of the
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debentures (and accompanying warrants) were issued in December 1999. These
securities were offered and sold pursuant to Section 4(2) of the Securities Act
of 1933. No underwriting discounts or commissions were paid in connection with
the issuance of these securities.
Item 6. Selected Financial Data.
Operating Company
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The selected financial data set forth below has been derived from our audited
consolidated financial statements and the notes thereto. The selected financial
information should be read in conjunction with the consolidated financial
statements and notes thereto contained elsewhere in this 10-K.
Calendar year 1998 includes results of Solder from April 10, 1998, and Zecal
from April 29, 1998.
(Amounts in Thousands Except for Per Share Amount)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
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<S> <C> <C> <C>
Net sales $ 35,158 $27,668 $15,093
Net income (loss) (10,113) (2,137) 1,975
Net income (loss) per common share (1,671 shares
issued and outstanding) (6.05) (1.28) 1.18
Total assets 30,711 37,363 20,179
Long-term obligations 11,355 10,429 6,756
Stockholders' Equity 7,309 17,422 19,559
</TABLE>
Item 7. Management's' Discussion and Analysis of Financial Conditions and
Results of Operations
Liquidity and Capital Resources
The Company has financed its activities in 1999 through borrowings on its lines
of credit. In January 2000, we received notification from WFBC that demanded
payment in full by May 1, 2000 of all obligations due WFBC which was $6,172,000
at December 31, 1999. Management is seeking sources of credit for PG. It
currently is in discussion with several lending institutions for refinancing of
the WFBC debt.
During 1999, Zecal had a net loss of $3,947,000. The Company expects that Zecal
will continue to lose money and the Company will have to obtain additional
financing to support its operations. The Company has begun the process of
obtaining additional financing or establishing other arrangements, such as a
joint venture, for Zecal's operations.
Management expects that it will be able to procure additional financing to meet
its operating needs. The Company believes that it will have sufficient funds
available for operating expenses, debt service and capital expenditures from the
cash flow expected to be derived from operations and from the financing it is
presently seeking to put in place. The Company will have to obtain financing,
and/or capital infusion, reduce its losses or sell assets to continue to meet
its operating needs. The Company is actively pursuing sources for additional
funds, which may be equity capital, loans or a combination thereof. There is no
assurance, however, that the Company will be able to obtain additional funds.
A significant portion of the $3,232,000 in cash and marketable securities on
hand at December 31, 1997, was used to consummate the acquisition of Solder on
April 10, 1998, and Zecal on April 29, 1998. As of December 31, 1999, $3,329,000
was borrowed under the Company's lines of credit with its lenders. Additional
borrowings of $244,000 were available under the lines of credit at December 31,
1999.
Page 8
<PAGE>
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 (8.5% at December 31,
1999). Borrowings are collateralized by accounts receivable and inventory.
Borrowings under the line of credit at December 31, 1999 were $757,000. The line
of credit matures on April 30, 2001. Solder is in violation of certain financial
covenants with respect to its LSNB term loans for which it has received a
waiver.
Solder has term loans payable to 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% (10.0% at December 31, 1999). The $900,000
loan is for a five year term and bears interest at the prime rate plus 1% (9.5%
at December 31, 1999). LSNB granted Solder a temporary waiver from paying
principal and interest on the $1,200,000 loan for a period of August 31, 1998,
through November 30, 1998. The amounts deferred plus additional interests are
due no later than April 30, 2001. The outstanding balances on these loans at
December 31, 1999, were $607,000 and $585,000, respectively. Solder is in
violation of certain financial covenants with respect to its long term loans,
for which it has received a waiver.
Solder has a $1,700,000 subordinated note payable to the former owners. The note
bears 8% interest. Principal is payable in three semiannual $400,000
installments plus a final $500,000 installment. The first installment was due on
October 10, 1999. Interest is paid quarterly beginning June 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. The Company was in
compliance after the fourth-quarter 1998 and accordingly paid interest on the
note for the first quarter 1999. The Company was out of compliance with the loan
covenants after the first quarter of 1999, and was prohibited from making future
interest payments. Deferred interest in the amount of $227,000 has been added to
the loan balance and is due no later than October 10, 2001. 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 contingent $400,000 note payable to the former owners. The note was
payable April 10, 1999, providing Solder's calendar year 1998 operating income
was greater than $1,508,999. Since Solder did not achieve this level of income,
the note is payable on April 10, 2001, providing Solder's cumulative operating
income for the calendar years 1998, 1999 and 2000 is greater than $6,027,999. If
cumulative operating income of $6,027,999 is not achieved, the note is not
required to be paid. Due to the uncertainty of Solder meeting the income
thresholds, this amount has not been recorded in the Notes Payable at December
31, 1999.
Solder has a $175,000 original principal amount non-interest bearing note in
connection with the Solder transaction. The note is paid out of the collections
of certain accounts receivable. The outstanding balance on this note at December
31, 1999 was $4,000.
Zecal has a note payable to the seller of Zecal's assets in the 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 December 31, 1999, $1,028,000 was outstanding.
Payments due October 20, 1999 and January 20, 2000 have not been made.
In January 1999, the Company refinanced its existing debt of PG and Zecal with
General Electric Capital Corporation ("GECC") by entering into an agreement with
WFBC. The agreement, effective December 31, 1998, provides for a line of credit
with a maximum available amount of $10,500,000, and a term loan of $4,500,000.
The term loan is payable in 60 monthly installments of $75,000 plus accrued
interest. The interest rate on the loans at December 31, 1999 is the lender's
base rate plus 0.25% plus the 3% default rate (11.5% at December 31). At
December 31, 1999, the principal amount outstanding on the line of credit was
$2,572,000, and the amount outstanding on the term loan was $3,600,000.
Origination fees of $136,000 were paid in connection with this transaction. 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 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
Page 9
<PAGE>
off approximately $156,000 in loan origination fees that were being amortized
over the life of the GECC loans. These amounts were recorded as an extraordinary
charge in the first quarter of 1999. The Company is subject to certain financial
covenants per the agreement. As a result of the GECC prepayment penalties, the
Company was in default of certain financial covenants at the end of the first
quarter on 1999. WFBC entered into a second amendment to the loan agreement and
waived those defaults. As a result of the 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. 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. Management is seeking other sources of credit for PG.
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.
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 Ezra Zilkha, chairman, and Edwin Jacobson, chief executive
officer, as well as other shareholders of Heartland Technology.
The Debentures were accompanied by warrants which permit the purchase of 165
Heartland Technology common shares per $1,000 principal amount of the
debentures, or an aggregate of 330,000 common shares 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 units of Heartland Partners, L.P.
which are held by Heartland Technology. In the event that Heartland Partners
enters into a loan agreement with Heartland Technology collateralized by the
Class B units, that security interest will be released.
At December 31, 1999, the principal amount outstanding under the subordinated
debentures was $450,000. At March 17, 2000, all of the $2 million subscriptions
had been funded.
At December 31, 1999, the Company's indebtedness includes $8,265,000 of senior
debt ($6,172,000 payable to WFBC; $1,949,000 payable to LSNB; and $144,000 to
other institutions) and $6,419,000 of subordinated debt ($3,000,000 payable to
the seller of PG Design; $1,028,000 payable to the seller of Zecal, $1,927,000
payable to the seller of Solder; $450,000 payable to debenture holders; $14,000
to other institutions). The Company also has $330,000 of capital lease
obligations.
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.
Results of Operations
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<PAGE>
Net sales in 1999 totaled $35,158,000. Sales totaled $27,668,000 for 1998 and
include the revenues of Solder from April 10, 1998, its date of acquisition, and
Zecal from April 30, 1998, its date of acquisition. Sales for 1997 totaled
$15,093,000, which included only the sales of PG, from the time of its
acquisition on May 30, 1997.
The net loss for 1999 totaled ($10,113.000) or ($6.05) per share compared to a
net loss in 1998 of ($2,137,000) or ($1.28) per share and a net after tax profit
in 1997 of $1,975,000 or $1.18 per share. For 1999 $3,754,000 of the loss is due
to the non-cash allocation of Heartland's losses. Heartland's losses are
allocated to the owners' capital accounts until the accounts have a zero
balance. Losses are then allocated to the remaining partners with positive
balances. HTI, as general partner and owner of the Class B interest, is the only
partner whose capital account remains positive and therefore, receive a higher
allocation of losses than it would have received if other partners' accounts had
positive balances.
Selling, general and administrative (SG&A) expenses for 1999 totaled $9,622,000
compared to $8,124,000 for 1998 and $2,998,000 for 1997. Included in 1999 is a
full year of operations for PG, Zecal and Solder, whereas 1998 includes a full
year of operations for PG as well as the expense of the newly acquired
companies, Zecal and Solder, whereas 1997 contained 7 months of operations for
PG. The additional 5 months of PG operations and the Zecal and Solder
acquisitions account for $2,266,000 of the increase in 1998. As discussed below,
in 1998 and 1997 the Company hired additional personnel to support existing
business and future profitable growth.
Amortization expense for 1999 was $760,000 and included a full year's
amortization for both PG Design and Solder. Amortization expense increased from
$559,000 in 1997 to $885,000 in 1998. $265,000 of the increase relates to a
reduction in the estimate of the expected life of the goodwill from 40 to 20
years. In addition, the Company acquired Solder during 1998 which resulted in
additional amortization of goodwill of $143,000. Offsetting the above increases
in 1998, was a reduction in the deferred compensation amortization resulting
from the elimination of a deferred compensation arrangement relating to an
acquisition.
Accounts Receivable and inventory levels increased by $269,000 and $131,000
respectively from December 31, 1998, levels. The Accounts Receivable increased
at PG and Zecal by $224,000 and $83,000, respectively while decreasing at Solder
by $36,000 and at HTI by $2,000. Inventory increased at all three subsidiaries,
$41,000 for PG, $33,000 for Zecal and $57,000 for Solder.
Other income in 1999 decreased by $3,577,000 to a negative $3,074,000, primarily
due to the non-cash excess loss allocation of $3,701,000 from the investment in
partnership. The Company expects that operations at Heartland will be positive
during the year 2000. If that is the case, the Company will be able to recover
the excess loss allocation. This was offset by an increase in Miscellaneous of
$208,000 that was caused by the recovery of $248,000 of costs from the CMC
shareholder distribution. In 1998, other income decreased by $809,000. The
decrease was primarily the result of a loss of $11,000 in 1998 from the
investment in the partnerships compared to a gain of $587,000 in 1997, and to a
reduction in interest income of $223,000. The reduction in interest income is
attributable to the Company purchasing Solder and Zecal with the monies formerly
invested in interest bearing securities.
Forward - Looking Statements
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section 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.
Electronics Business
- --------------------
Page 11
<PAGE>
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 1999 results are principally attributable to the following factors:
1) operating losses of Zecal; 2) hiring additional personnel for PG Design; 3) a
decline in orders from the Company's largest customers; and 4) the non-cash
allocation of the Partnerships' losses. As a result of these factors, the
Company incurred a $10,113,000 loss after taxes for 1999.
Dependence on Customers. A large percentage (approximately 47%) of sales comes
from two customers. The Company does not have long term contracts with any of
these large customers. Steps are being taken to diversify the product lines and
to reduce customer concentration through the addition of new customers and
acquisitions. However, sales to a few large customers will continue to account
for a significant percentage of revenues. If the Company loses a major customer,
or if a major customer reduces its purchases of products and services, financial
results will be materially affected. Also, economic and other conditions may
cause customers to cancel, reduce or delay orders.
Acquisition Integration. The Company's electronics business operations consist
of PG, Solder and Zecal. The Company acquired all of these businesses within the
past three years. The businesses acquired have different cultures, procedures
and organizational structures. The Company expects future acquisitions to have
the same kinds of differences. The Company may have difficulties managing growth
as it integrates new operations, adds customers and expands. Failure to manage
growth, or to control expenses related to growth, may materially affect the
business and financial results.
Leverage; Access to Financing. The Company is highly leveraged, must maintain
certain minimum ratios, and is prohibited from taking certain actions, under
existing credit arrangements. Throughout 1999, the Company was unable to meet
minimum ratios and other financial covenants required under existing credit
agreements. As a result, the Company sought and received a waiver from LSNB for
such covenants. In January 2000, we received notification from WFBC demanding
payment in full by May 1, 2000 of all obligations due. Management has been
seeking sources of credit for PG. It currently is in discussions with several
lending institutions for refinancing the WFBC debt. 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 continue to 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 affect the business and financial results.
Dependence on Key Employees and Management. The Company has hired additional
management, engineering, manufacturing, sales and finance personnel, and has
restructured operations so that it does not rely significantly on any one
individual. However, the loss of key employees may adversely affect the short
term business or financial results.
Dependence on Computer Industry. The Company provides products and services
principally to the computer segment of the electronics manufacturing industry.
The focus is on the high margin segments in the electronic manufacturing and
printed circuit board industries. A decline in demand for these products or
services will adversely affect the business or financial results. New products
and services are being developed and the Company is pursuing acquisitions, to
diversify business beyond the computer segment of the electronic manufacturing
industry, to keep up with the pace
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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 Design 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 affect the
Company's business and financial results. Also, customers could vertically
integrate or otherwise decide to compete with the Company. Zecal's Z-Strate(R)
patents are licensed to a competitor.
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 affect 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.
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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 December 31, 1999 were $32,770,000. Under credit arrangements for existing
indebtedness, the Partnerships must maintain certain minimum ratios, and are
prohibited from taking certain actions. The restrictions imposed by the
Partnerships' existing debt, may adversely affect the Partnerships' financial
results and ability to operate, which would have a material effect on our
financial results.
Access to Financing. The real estate business is capital intensive and requires
expenditures for land and infrastructure development, housing construction and
working capital. Funds currently available to the Partnerships may not be
sufficient to fund future needs. Accordingly, the Partnerships expect to borrow
additional money to fund their activities. The Partnerships may need additional
funding in the form of equity or debt financing. Additional funding may be
unavailable on terms favorable to the Partnerships, or at all. If the
Partnerships are not successful in funding the implementation of their business
strategy and other expenditures, they may delay or abandon development projects.
Delay or abandonment of development projects may adversely affect our business
or financial results.
Period-to-Period Fluctuations. The Partnerships' real estate projects are long-
term in nature. Sales activity varies from period to period. The ultimate
success of any development cannot be determined from short term results. Short
term results are unpredictable. The timing and amount of revenue varies
considerably from period to period. If the Partnerships fail to manage their
cash flows effectively, it may adversely affect our financial results.
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.
As of December 31, 1999, we successfully completed the Year 2000 plan and
modified or replaced a significant portion of our software and certain hardware
so that those systems would properly recognize dates beyond December 31, 1999.
Through March 20, 2000, we had not encountered any Year 2000 related issues
which would have affected our operations. We will continue to monitor its
software and equipment over the next few months to detect whether any such
problems arise. No future significant expenditures are expected related to year
2000 compliance.
Item 7 A: Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company's earnings are affected by changes in interest rates because
portions of the Company's outstanding indebtedness are at variable rates.
The Company has approximately $4,950,000 of long term debt at variable rates
based on the prime interest rate. For every 1% change in the prime rate, the
Company's annual interest rate would change by approximately $49,000 based on
the outstanding indebtedness as of December 31, 1999.
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<PAGE>
The Company has approximately $5,955,000 of long term debt at a fixed rate of 8%
and $450,000 of Long Term Debt at a fixed rate of 13%. The Company is subject to
interest rate risk on this fixed rate debt because market rates may decrease,
which would be unfavorable to the Company.
The Company does not have any other financial instruments for which there is a
significant exposure to interest rate changes.
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<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Heartland Technology, Inc.
We have audited the accompanying consolidated balance sheets of Heartland
Technology, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Heartland Technology, Inc. as
of December 31, 1999 and 1998, and the results of its operations, and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with auditing standards generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that Heartland
Technology, Inc. will continue as a going concern. As more fully described in
Note 3, Heartland Technology, Inc. has incurred ongoing operating losses and
does not currently have financing commitments in place to meet
expected cash requirements through 2000. These conditions raise substantial
doubt about Heartland Technology, Inc.'s ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Chicago, Illinois
March 3, 2000, except for Notes 3, 8 and 16 for
which the date is March 17, 2000
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<PAGE>
Heartland Technology, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION> December 31, December 31,
1999 1998
------------- ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 105 $ --
Accounts receivable, net reserves of $250 in 1999 and $173 in 1998 3,643 3,374
Due from affiliate -- 286
Inventories, net 3,236 3,105
Prepaid Expenses 294 310
Refundable taxes 41 794
------- -------
Total current assets 7,319 7,869
Property equipment:
Machinery and equipment 10,339 9,719
Furniture and fixtures 593 473
Leasehold improvements 887 985
------- -------
11,819 11,177
Less accumulated depreciation 4,506 2,328
------- -------
7,313 8,849
------- -------
Other assets:
Goodwill, net of accumulated amortization of $1,422 in 1999 and $811 in 1998 11,429 12,069
Deferred debt issuance costs net of accumulated amortization of $82 in 1999 and
$100 in 1998 118 248
Other 145 187
Investment in partnerships 4,387 8,141
------- -------
Total assets $30,711 $37,363
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 757 $ 3,603
Debt in default 6,172 --
Accounts payable, trade 4,321 2,837
Accrued expenses and other liabilities 1,693 1,393
Current portion of long-term debt 3,867 2,236
Current portion of capital lease obligations 108 61
Allowance for claims and liabilities 1,281 1,281
Payable to affiliates 1,093 398
------- -------
Total current liabilities 19,292 11,809
------- -------
Long-term debt, less current portion 3,888 7,940
Capital lease obligation, less current portion 222 192
Stockholders' equity:
Common stock, $.30 par value per share, authorized 10,000,000 shares, 501 501
1,671,238 shares issued and outstanding
Additional paid-in capital 10,773 10,773
Retained earnings (accumulated deficit) (3,965) 6,148
------- -------
Total stockholders' equity 7,309 17,422
------- -------
Total liabilities and stockholders' equity $30,711 $37,363
======= =======
</TABLE>
See accompanying notes.
Page 17
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Net sales $ 35,158 $27,668 $15,093
Cost of sales 29,875 20,861 9,684
-------- ------- -------
Gross margin 5,283 6,807 5,409
Other income (loss):
Interest income 7 49 272
Management fee from affiliate 425 425 425
Income (loss) from investment in partnerships (3,754) (11) 587
Miscellaneous, net 248 40 28
-------- ------- -------
Total other income (loss) (3,074) 503 1,312
Other expenses:
Selling, general and administrative 9,622 8,124 2,998
Interest expense 1,589 1,018 416
Special compensation amortization -- 188 438
Amortization expense 760 697 121
-------- ------- -------
Total other expenses 11,971 10,027 3,973
-------- ------- -------
Income (loss) before income taxes and extraordinary item (9,762) (2,717) 2,748
Income tax expense (benefit) (158) (580) 773
-------- ------- -------
Net income (loss) before extraordinary item (9,604) (2,137) 1,975
Extraordinary loss on debt refinancing (509) -- --
-------- ------- -------
Net income (loss) $(10,113) $(2,137) $ 1,975
======== ======= =======
Basic and diluted income (loss) per share before extraordinary item $(5.75) $ (1.28) $1.18
-------- ------- -------
Extraordinary item debt refinancing (0.30) -- --
-------- ------- -------
Basic and diluted income (loss) per share $(6.05) $ (1,28) $1.18
======== ======= =======
Weighted average number of common shares outstanding 1,671 1,671 1,671
======== ======= =======
</TABLE>
See accompanying notes.
Page 18
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $501 $10,773 $ 6,310 $ 17,584
Net income 1,975 1,975
---- ------- -------- --------
Balance at December 31, 1997 $501 $10,773 $ 8,285 $ 19,559
Net loss (2,137) (2,137)
---- ------- -------- --------
Balance at December 31, 1998 501 10,773 6,148 17,422
Net loss (10,113) (10,113)
---- ------- -------- --------
Balance at December 31, 1999 $501 $10,773 $ (3,965) $ 7,309
==== ======= ======== ========
</TABLE>
See accompanying notes.
Page 19
<PAGE>
<TABLE>
<CAPTION>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows
(Amounts in thousands)
Years ended December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) $(10,113) $(2,137) $ 1,975
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Activities:
Depreciation 2,417 1,643 217
Amortization 760 885 559
Special compensation amortization -- 188 438
Equity in loss (income) from investments in Partnerships 3,754 11 (587)
Bad debt expense 96 85 73
Deferred income taxes -- 262 (262)
Reserve for inventory obsolescence/(reversal of obsolescence) (184) 453 475
Realized loss on sale of investments -- -- 110
Realized loss on sale of equipment 23 -- --
Accretion discount on securities -- -- (79)
Change in operating assets and liabilities:
Accounts receivable (365) 438 661
Due from affiliate 286 164 25
Inventories, net 53 (1,684) (61)
Prepaid expenses and other assets 58 (12) (151)
Refundable taxes 753 (794) --
Accounts payable and accrued expenses 1,784 552 (332)
Increase in due to affiliates 695 398
Payment on claims and liabilities -- -- (30)
-------- ------- --------
Net cash provided by (used in) operating activities 17 452 3,031
Investing activities:
Purchases of property and equipment (682) (1,397) (966)
Proceeds from sale of fixed assets 126 -- --
Net proceeds from sale of securities -- -- 9,505
Acquisitions of businesses, net of cash acquired -- (6,049) (11,896)
-------- ------- --------
Net cash used in investing activities (556) (7,446) (3,357)
Financing activities:
Net borrowings (payments) under line of credit (274) 3,456 (1,223)
Proceeds from issuance of long-term debt 4,960 2,387 4,675
Payments on capital leases (126) 237 --
Principal payments on long-term debt (3,781) (2,165) (919)
Debt issuance costs (135) (153) (167)
-------- ------- --------
Net cash provided by financing activities 644 3,762 2,366
-------- ------- --------
Increase (decrease) in cash and cash equivalents 105 (3,232) 2,040
Cash and cash equivalents at beginning of year -- 3,232 1,192
-------- ------- --------
Cash and cash equivalents at end of year $ 105 $ -- $ 3,232
======== ======= ========
</TABLE>
See accompanying notes.
Page 20
<PAGE>
Heartland Technology, Inc.
Consolidated Statement of Cash Flows (continued)
(Amount in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Supplemental cash flow information:
$1,533 $ 889 $ 403
Cash paid for interest ====== ===== ======
Cash paid (refunds received) for income taxes, net $ (922) $ (34) $1,000
====== ===== ======
</TABLE>
See accompanying notes
Page 21
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. Basis of Presentation
The consolidated financial statements of Heartland Technology, Inc. include the
accounts of Heartland Technology, Inc. and its subsidiaries ("HTI" or the
"Company"), P.G. Design Electronics, Inc. ("PG"), Solder Station-One, Inc.
("Solder") and Zecal Corp. ("Zecal"), a subsidiary of PG. All significant
intercompany transactions and accounts have been eliminated.
On December 13, 1999, the Company formed HTI Interests, L.C.C. ("HTII"). The
Company holds a 99.9% ownership in HTII while HTI Principal, Inc. holds the
remaining .1%. The Company's interest in the Heartland Partners, L.P.
("Heartland") will be held in HTII.
2. Nature of Business
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 OEMs 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.
Through its partnership interests in 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 and Washington. The investments in Heartland and
CMC Heartland (the "Partnerships") are accounted for using the equity method
since the Company has significant influence over the Partnerships' operations.
The difference in the cost of the Company's investment in the Partnerships and
the underlying equity in net assets of $2,057,000 at January 1, 1997, is being
amortized as CMC Heartland's assets are sold. For the years ended December 31,
1999, 1998 and 1997, $89,000, $82,000 and $620,000 were amortized to income.
3. Going Concern and Management's Plans
The Company has incurred, and continues to incur, losses from operations. For
the years ended December 31, 1999 and 1998, the Company incurred losses of
$10,113,000 and $2,137,000, respectively. In addition, as of December 31, 1999,
the Company is in violation of certain loan covenants with respect to its loan
agreements with Wells Fargo Business Credit (WFBC). As a result of these
violations, the Company received notification from WFBC in January 2000 that
demands payment in full by May 1, 2000 of all obligations due WFBC ($6,172,000
as of December 31, 1999). As of December 31, 1999, the available resources of
the Company are not presently sufficient to fund its expected cash requirements
through the end of 2000. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has implemented a strategy to reduce its losses and obtain
additional financing. In January 2000, the Company reduced the workforce at PG
which is expected to result in annual savings of approximately $2,000,000 to
$3,000,000. The Company has also issued $450,000 of subordinated debentures in
December 1999 and an additional $1,550,000 of subordinated debentures by March
17, 2000. Despite the issuance of the subordinated debentures, the Company
believes that during the second quarter of 2000 it will require substantial
additional funding to finance its operations and debt repayment obligations.
Management is actively seeking additional financing, and is currently in
discussions with several lending institutions.
In the event the Company is unable to obtain adequate funds when required in the
future, the Company would be required to substantially scale back operations or
obtain funds through arrangements with joint ventures, additional equity
financing, or divestiture of certain of its assets, which may materially and
adversely affect the Company's business, financial condition, results of
operations and cash flows.
4. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits in banks and
investments with original maturities of three months or less when purchased. The
Company maintains cash balances with financial institutions which at times may
be in excess of the FDIC insurance limit.
Inventories
are stated at the lower of cost or market, on a first-in, first-out
basis (FIFO method).
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the assets which range
from five to seven years for equipment and the lesser of the lease term or the
estimated useful life for leasehold improvements. Property and equipment
includes $480,000 of assets acquired through capitalized leases.
Debt Issuance Costs
The cost to acquire debt is being amortized on a straight-line basis over the
terms of the related loan (3-5 years).
Revenue Recognition
Revenue from manufacture of electronic products is recognized upon shipment of
such products. Revenue from contract services provided are recognized as the
services are performed.
Page 22
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Use of Estimates
In the preparation of the Company's financial statements in conformity with
general accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
For cash and cash equivalents, the carrying amounts approximate fair value. For
variable rate debt that reprices frequently, fair values approximated carrying
values. For all remaining financial instruments, carrying value approximate
fair value due to the relatively short maturity of these instruments.
Net Income (Loss) Per Share
Basic earnings per share is based on weighted average shares outstanding for the
respective periods. Dilutive earnings per share includes the dilutive effects of
options, warrants and convertible securities. Due to the net loss for the years
ended December 31, 1998 and 1999, the inclusion of any additional shares from
outstanding stock options (Note 15) would be antidilutive. Therefore, no options
have been included in the calculation of diluted earnings per share in 1998 and
1999. During the year ended December 31, 1997, there were no items outstanding
that would have a dilutive effect on earnings per share.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board (FASB) Statement No. 109 "Accounting for Income Taxes". Under
FASB 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Goodwill
Goodwill is amortized using the straight-line method over 20 years. The Company
reviews the recoverability of intangible assets whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If this
review indicates that goodwill assets will not be recoverable, as determined
based on future expected cash flows or other fair value determinations, the
Company's carrying value would be reduced.
Long-lived Assets
The Company reviews the recoverability of its long-lived assets whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If this review indicates that its long-lived assets will not be
recoverable, as determined based on future expected cash flows or other fair
value determinations, the Company's carrying value would be reduced.
5. Acquisitions
In May 1997, HTI and PG Newco Corp ("PG Newco"), a wholly owned subsidiary of
HTI, purchased substantially all of the assets, and assumed certain liabilities
of, PG Design Electronics, Inc. for $16,048,000. PG Design Electronics, Inc. was
engaged in the business of contract design and manufacture of electronics
assemblies for computer and computer printer original equipment manufacturers
("OEM"). PG Newco's name was then changed to PG Design Electronics, Inc. ("PG
Design").
The purchase price consisted of cash paid of $12,325,000, the issuance of notes
totaling $3,000,000 and acquisition related costs of $723,000. The notes are
payable $1,500,000 in September 2000 and $1,500,000 in May 2002 and bear
interest at 8% per year; however, no amounts were due in the event that the
president at the time of the purchase of PG Design Electronics, Inc. voluntarily
left the employment of PG Design prior to the scheduled maturity of the notes.
Because the contingency in the notes linking the payment of the notes and the
continued employment of Peter G. Van Heusden, $3,000,000 was recorded as
deferred compensation of which $1,500,000 was being amortized over 40
Page 23
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
months and $1,500,000 was being amortized over 60 months, on a straight line
basis. The amortization of deferred compensation amounted to $438,000 for 1997
and $188,000 for the quarter ended March 31, 1998 and is reported as special
compensation on the consolidated statement of operations.
The contingency related to the continued employment of Peter G. VanHeusden was
removed from the notes on March 30, 1998. The unamortized deferred compensation
remaining of $2,374,000 was added to goodwill and is being amortized on a
straight line basis over 20 years, the remaining period over which the goodwill
resulting from the purchase of PG assets is being amortized.
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 for
$7,394,000. The acquisition was accounted for as a purchase. The purchase price
consisted of cash of $5,185,000, the issuance of notes payable of $1,700,000 and
$175,000, and acquisition expenses of $334,000. A contingent note payable of
$400,000 was also issued, the payment of which is dependent on Solder reaching
certain operating goals. Because it is uncertain at this time whether the amount
will be paid, the amount has not been recorded as purchase price. The excess of
the purchase price over the fair value of the assets acquired was $4,294,000,
has been recorded as goodwill.
On April 29, 1998 PG Design acquired certain assets and assumed certain
liabilities of Zecal, for a total purchase price of $2,187,000. The purchase
price consisted of a note payable to the seller of $1,100,000, pre-acquisition
operating advances of $900,000, and acquisition expenses of $187,000. The fair
value of the net assets acquired was $2,642,000, which exceeded the cost of the
acquisition by approximately $455,000. The excess fair value was allocated
proportionately to long term assets. The acquisition has been accounted for as a
purchase.
The consolidated financial statements include the results of the acquired
businesses from their respective dates of acquisition. All significant
intercompany balances and transactions have been eliminated.
Unaudited proforma results of operations for the Company for the years ended
December 31, 1998 and 1997, assuming the acquisitions had occurred on January 1,
1998 and January 1, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $30,289,000 $39,648,000
Net income $(2,951,000) $(1,636,000)
Basic loss per share $ (1.77) $ (.98)
</TABLE>
Page 24
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
6. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
1999 1998
<S> <C> <C>
Raw material $3,826 $3,667
Work-in-process 140 110
Finished goods 188 256
------ ------
4,154 4,033
Less: reserve for obsolescence ------ ------
918 928
------ ------
$3,236 $3,105
====== ======
</TABLE>
7. 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 which entitles the Company to .01% of CMC'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
(see Note 12), 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 were allocated 100% of the Partnership losses for 1999. In addition,
items of deduction, loss, credit and expense attributable to the satisfaction of
Plan Liabilities 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.
The Company has a management agreement with CMC, pursuant to which CMC is
required to pay HTI an annual management fee in the amount of $425,000 through
1999. The unpaid management fees of $286,000 are included in due from affiliate
at December 31, 1998. The Company reimburses Heartland for certain staff salary,
office and operating allocations. Total expense incurred for 1999, 1998 and 1997
was $1,028,000, $332,000 and $228,000, respectively.
Page 25
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
The condensed financial statements of Heartland as of December 31, 1999 and 1998
and for the years then ended, December 31, 1999, 1998 and 1997 are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Assets:
Cash and marketable securities $ 4,412 $ 3,828
Receivables, net 373 353
Other assets 1,310 720
Net properties and investment in joint venture 51,161 28,330
------- -------
Total assets $57,256 $33,231
======= =======
Liabilities:
Accounts payable, accrued expenses and other liabilities $16,030 $ 7,568
Allowed for claims and liabilities 2,804 2,762
Distribution payable -- --
Loans payable 32,770 13,492
------- -------
Total liabilities $51,604 $23,822
------- -------
Partners' Capital:
General partner -- --
Class A partners -- --
Class B partner 5,652 9,409
------- -------
Unrealized holding loss -- --
Total partners' capital 5,652 9,409
------- -------
Total liabilities and partners' capital $57,256 $33,231
======= =======
</TABLE>
Page 26
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
Revenues:
<S> <C> <C> <C>
Property sales $11,548 $ 6,231 $ 7,127
Less: cost of property sales 9,772 4,405 3,407
------- ------- -------
Gross profit on property sales 1,776 1,826 3,720
Rental and other income 1,812 1,463 1,452
------- ------- -------
Total net revenues 3,588 3,289 5,172
Expenses:
Selling, general and administrative 6,607 8,425 6,113
Real estate taxes 179 399 703
Management fee 425 425 425
Depreciation and amortization 134 124 94
------- ------- -------
Total expenses 7,345 9,373 7,335
------- ------- -------
Net income (loss) $ 3,757 $(6,084) $(2,163)
======= ======= =======
</TABLE>
8. Lines of Credit
At December 31, 1998, PG had a line of credit with General Electric Capital
Corporation ("GECC") under which it could borrow $7,000,000. Interest was based
on a floating index rate plus 2.75% (7.65% at December 31, 1998). Borrowings
were collateralized by accounts receivable and inventory and cross
collateralized with the term loan described in Note 8. On September 28, 1998,
GECC placed a limitation on additional Zecal Borrowings to a maximum of $200,000
per month until Zecal returned to profitability. The amount outstanding under
the line of credit at December 31, 1998 was $2,173,000.
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, Inc. ("WFBC"). The agreement, effective December
31, 1998, provides for a line of credit with a maximum available amount of
$10,500,000, and a term loan of $4,500,000 described in Note 8. Borrowings are
collateralized by accounts receivable and inventory. The interest rate on the
loans at December 31, 1999 is the lender's base rate plus 0.25% plus the 3%
default rate (11.5% at December 31, 1999). At December 31, 1999, the principal
amount outstanding on the line of credit was $2,572,000. The line of credit is
subject to certain covenants as described in Note 8 which are in violation as of
December 31, 1999 for which a waiver has not been obtained. Therefore the
balance of $2,572,000 is classified as debt in default.
Solder has a line of credit with LaSalle National Bank ("LSNB") under which it
may borrow up to a maximum of $1,500,000, not to exceed 85% of eligible accounts
receivable plus the lesser of $200,000 or fifty percent of eligible inventory.
Interest is at the base rate (8.5% at December 31, 1999). Borrowings are
collateralized by accounts receivable and inventory. Borrowings under the line
of credit at December 31, 1999 and 1998 were $757,000 and $679,000,
respectively. The line of credit matures on April 30, 2001. The line is subject
to an unused line fee of .25% of the average quarterly unused balance.
Page 27
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
9. Long Term Debt
The Company's debt obligations consist of the following;
<TABLE>
<CAPTION>
(amounts in thousands)
Dec. 31, 1999 Dec. 31, 1998
<S> <C> <C>
Term loan payable to LaSalle National Bank in $ 607 $ 1,007
original principal amount of $1,200,000.
Interest is at prime plus 1.5% (10% at
December 31, 1999) and is paid monthly. The loan
has level monthly principal payments over three
years respectively
Term loan payable to LaSalle National Bank in 585 765
original principal amount of $900,000. Interest
is at prime plus 1.0% (9.50% at December 31, 1999)
and is paid monthly. The loan has level monthly
principal payments over five years respectively
Term loan payable to Wells Fargo Business Credit in 3,600 --
an original amount of $4,500,000. Principal payments
of $75,000 plus interest is payable over a 60 month
period. Interest accrues at the base rate plus the
3.25% default rate (11.5% at December 31, 1999)
Term loan with G.E. Capital Corporation -- 2,142
Other notes payable 158 350
Subordinated note to related partners bearing 450 --
interest at 13%. Interest payable quarterly.
Principle is payable December 2002
Subordinated note to the sellers of Solder 1,927 1,812
bearing 8% interest payable quarterly and having
three semiannual principal payments of $400,000
plus a final payment of principal and accrued
interest. The first installment was due on
October 10, 1999. Interest payments are deferred
and added to the note balance until Solder
achieves certain financial ratios
Subordinated note to the seller of Zecal Corp. 1,028 1,100
with 8% interest beginning on April 29, 1999.
Interest, with principal payments of $91,667
are due quarterly beginning July 30, 1999
Subordinated notes to the seller of P.G. Design
bearing 8% interest, paid quarterly. The notes
are payable $1,500,000 in September 2000 and
$1,500,000 in May 2002 3,000 3,000
------- -------
Long term debt 11,355 10,176
Less current portion of long-term debt, including
debt in default 7,467 2,236
------- -------
Long term debt, less current portion $ 3,888 $7,940
======= ======
</TABLE>
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 Ezra Zilkha, chairman, and Edwin Jacobson, chief executive
officer, as well as other 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 units of Heartland, which are held by the
Company. In the event that Heartland enters into a loan agreement with the
Company collateralized by the Class B units, that security interest will be
released. At December 31, 1999, the principal amount outstanding on the
debenture was $450,000. As of March 17, 2000, the remaining $1,550,000 has been
received.
On December 31, 1998, PG had a term loan payable to GECC that bore interest at
one month at LIBOR plus 3.62% (9.24% at December 31, 1998) and required monthly
principal and interest payments. The loans were secured by machinery and
equipment and were cross collateralized with the line of credit described in
Note 7. PG was limited in incurring additional indebtedness and in making
capital expenditures, and was restricted from making certain payments.
Page 28
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The outstanding balances on this loan at December 31, 1998 was $2,142,000.
In January 1999, the Company refinanced the existing debt of PG and Zecal with
GECC by entering into an agreement with WFBC. The agreement, effective December
31, 1998, provides for a line of credit with a maximum available amount of
$10,500,000, and a term loan of $4,500,000. The term loan is payable in 60
monthly installments of $75,000 plus accrued interest. The interest rate on the
loans at December 31, 1999 is the lender's base rate plus 0.25% plus the 3%
default rate (11.5% at December 31, 1999). At December 31, 1999, the amount
outstanding on the term loan was $3,600,000. 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 also carries
certain prepayment penalties. 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. The Company is subject to certain financial covenants per the agreement.
As a result of the GECC prepayment penalties, the Company was in default of
certain financial covenants at the end of the first quarter 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.
Management has been seeking other sources of credit for PG.
Solder has term loans payable to 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% (10.0% at December 31, 1999). The $900,000
loan is for a five year term and bears interest at the prime rate plus 1% (9.5%
at December 31, 1999). LSNB granted Solder a temporary waiver from paying
principal and interest on the $1,200,000 loan for a period of 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
December 31, 1999, were $607,000 and $585,000, respectively. The outstanding
balance in these loans at December 31, 1998 were $1,007,000 and $765,000,
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 Company
incurred approximately $64,000 in transaction fees which have been capitalized
and will be amortized over the term of the agreement. The loans are guaranteed
by HTI which has pledged 100% of its stock in Solder.
Solder is in violation of certain financial covenants with respect to its long
term loans, for which it has yet to receive a waiver.
Solder has a $1,700,000 subordinated note payable to the former owners. The note
bears 8% interest. Principal is payable in three semiannual $400,000
installments plus a final $500,000 installment. The first installment was due on
October 10, 1999. Interest is paid quarterly beginning June 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. The Company was in
compliance after the fourth quarter of 1998 and accordingly paid interest on
the note for the first quarter of 1999. The Company was out of compliance with
the loan covenants after the first quarter of 1999, and was prohibited from
making future interest payments. Deferred interest in the amount of $227,000 has
been added to the loan balance and is due no later than October 10, 2001. 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 contingent $400,000 note payable to the former owners. The note was
payable April 10, 1999, if Solder's calendar year 1998 operating income was
greater than $1,508,999. Since Solder did not achieve this level of income, the
note is payable on April 10, 2001, if Solder's cumulative operating income for
the calendar years 1998, 1999 and 2000 is greater than $6,027,999. If cumulative
operating income of $6,027,999 is not achieved, the loan is not required
Page 29
<PAGE>
HEARTLAND TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
to be paid. Due to the uncertainty of Solder meeting the income thresholds, this
amount has not been recorded in notes payable at December 31, 1999.
Zecal has a note payable to the seller of Zecal's assets in the 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 December 31, 1999, $1,028,000 was outstanding.
Payments due October 20, 1999 and January 20, 2000 have not been made. The
seller has not notified the Company that it is in default, but may do so.
Page 30
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Maturities of long term debt subsequent to December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
2000 7,467
2001 1,960
2002 1,883
2003 45
2004 --
----------------------
Total $ 11,355
======================
</TABLE>
10. Lease Obligations
HTI shares its offices with Heartland. The lease provides for an annual base
rent of $108,000 through May 31, 2000 and is allocated between HTI and
Heartland. The lease is subject to operating expense and tax escalations.
PG leases its office and plant facility under an operating lease at a monthly
rental of $18,000. The lease expires January 31, 2004 with an option to purchase
the building and property at the end of the term. In addition, the Company is
currently leasing office equipment under a non-cancellable lease expiring in
2000.
Zecal's facilities are leased for approximately $9,000 per month through
February 2000, and thereafter, on a month-to-month basis. The Company is
currently negotiating a new lease.
Solder's facilities are leased for a monthly rate of approximately $24,000
through January 2, 2002. Additionally, Solder incurs operating expense and tax
escalations.
Rent expense for 1999, 1998 and 1997 was $546,000, $590,000 and $104,000,
respectively.
Page 31
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
10. Lease Obligations (continued)
The Company leases certain equipment under capital leases which expire at
various times through 2003. Total future minimum lease payments under these
capital leases and the present value of the minimum lease payments as of
December 31 is shown below:
<TABLE>
<CAPTION>
Future minimum lease payments
under capital lease obligations: (Amounts in thousands)
<S> <C>
2000 $ 132
2001 133
2002 98
2003 11
----------------------
Total minimum lease payments 374
Less amount representing interest 44
----------------------
Present value of minimum
lease payments 330
Less current portion 108
----------------------
Long term portion $ 222
======================
Future minimum lease payments
under operating lease obligations
as of December 31 is as follows:
2000 $ 935
2001 946
2002 943
2003 943
2004 457
----------------------
Total $ 4,224
======================
</TABLE>
Page 32
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
11. Income Taxes
Income tax expense (benefit) attributable to income (loss) from continuing
operations differs from the amounts computed by applying the U.S. federal income
tax rate of 35 percent to pretax income from operations as a result of the
following at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense $(3,478) $(950) $ 962
Change in valuation allowance 3,218 265 (217)
State income taxes, net of federal benefits 15 93 --
Other, net 87 12 28
------- ----- -----
Income tax (benefit) expense $ (158) $(580) $ 773
======= ===== =====
</TABLE>
The deferred tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
reported for income tax purposes at December 31 are as follows:
<TABLE>
<CAPTION>
(Amount in thousands)
1999 1998
-------- --------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 4,131 $ 672
Basis differences in investment in partnerships 431 480
AMT credit carryforward 919 919
Inventory reserves 317 377
Reserve for discontinued operations 110 110
Reserve for claims, liabilities and reorganization 130 130
Compensation and benefits 136 257
Other, net 145 124
------- -------
Total deferred tax assets 6,319 3,069
Less valuation allowance (5,993) (2,495)
------- -------
Net deferred tax assets 326 574
Deferred tax liabilities:
Excess tax depreciation (363) (426)
Excess tax goodwill amortization 37 (148)
------- -------
Total deferred tax liabilities (326) (574)
------- -------
Deferred tax asset, net $ -- $ --
======= =======
</TABLE>
Page 33
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
The provision (benefit) for income taxes is comprised of the following:
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ------
Current
<S> <C> <C> <C>
Federal $(181) $(983) $1,035
State 23 141 --
----- ----- ------
(158) (842) 1,035
Deferred
Federal -- 262 (262)
State -- -- --
262 (262)
----- ----- ------
Total $(158) $(580) $ 773
===== ===== ======
</TABLE>
Included in the Company's deferred tax assets are AMT carryforwards of
approximately $919,000 which have no expiration date. At December 31, 1999, the
Company has net operating less carryforwards of approximately $12,151,000 which
expire in 2018 and 2019.
12. Major Customers
Sales to two major customers totaled $16,606,000 in 1999, down from $19,742,000
in 1998. The accounts receivable balance for these customers at December 31,
4,000. The company also has two significant suppliers whose
accounts payable balance totals $647,000 at December 31,1999. The loss of any
one of these customers or suppliers could have a material adverse effect on the
Company
13. Contingent Liabilities
The Company, by reason of its serving 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
Corporation ("CMCRE"), 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 lessees 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 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 CMC, its former parent corporation,
any obligations for which CMC was or might become liable 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.
Page 34
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
In the opinion of management, reasonably possible losses from these matters
should not be material to the Company's results of operations or financial
condition.
PG Design 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 Design infringe the patent. PG Design 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
Design 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. The Company
believes that it is entitled to indemnification from the sellers of PG Design
for any losses the Company ultimately incurs as a result of the asserted claim
of infringement.
14. Allowance for Claims and Liabilities
The Company assumed certain share redemption liabilities from CMCRE, then a
majority owned subsidiary of CMC. Preferred shares are redeemable at $100 per
share and common shares at $153.43 per share. At December 31, 1999, 2,409
preferred shares and 4,668 common shares are still outstanding for a liability
of approximately $957,000. The liability is being reduced as the minority
shareholders submit their shares for redemption.
The Company has a $323,000 liability related to workers' compensation claims
incurred while operating under Milwaukee Land Company. This liability is being
reduced as payments are being made to the insurance provider.
15. 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 $3,611,000 and $3,036,000 of product was
shipped to Europe in 1999 and 1998, respectively. As of and for the years ended
December 31, 1999, 1998 and 1997, certain information relating to the Company's
business segments are set forth in the table below:
Page 35
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
Selected Financial Data for 1999
(Amounts in thousands)
Loss before Depreciation
taxes and and
Identifiable Sales and extraordinary amortization Capital
Business segment assets other income item expense expenditures
- ---------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Manufacturing $26,069 $35,158 $(5,587) $3,177 $ 682
Real estate 4,387 (3,754) (3,754) -- --
Corporate 255 680 (421) -- --
------- ------- ------- ------ ------
Total Company $30,711 $32,084 $(9,762) $3,177 $ 682
======= ======= ======= ====== ======
<CAPTION>
Selected Financial Data for 1998
Depreciation
and
Identifiable Sales and Income (loss) amortization Capital
Business segment assets other income before taxes expense expenditures
- ---------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Manufacturing (1) $28,184 $27,668 $(1,530) $2,528 $1,397
Real estate 8,427 414 414 -- --
Corporate 752 89 (1,601) -- --
------- ------- ------- ------ ------
Total Company $37,363 $28,171 $(2,717) $2,528 $1,397
======= ======= ======= ====== ======
(1) Includes Solder from April 10, 1998 and Zecal from April 29, 1998.
<CAPTION>
Selected Financial Data for 1997
Depreciation
and
Identifiable Sales and Income (loss) amortization Capital
Business segment assets other income before taxes expense expenditures
- ---------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Manufacturing (1) $21,297 $15,093 $ 2,885 $776 $966
Real estate 8,602 1,012 1,012 -- --
Corporate 280 300 (1,149) -- --
------- ------- ------- ------ ------
Total Company $30,179 $16,405 $ 2,748 $ 776 $ 966
======= ======= ======= ====== ======
(1) Includes PG from May 31, 1997 through December 31, 1997.
</TABLE>
16. Non-qualified Stock Option and Stock Appreciation Rights
On May 27, 1997, HTI stockholders approved the 1997 Incentive and Capital
Accumulation Plan (the "Plan") that provides for the granting of stock options,
stock appreciation rights, stock awards, performance awards, and stock units for
the purchase of up to an aggregate of 175,000 shares of common stock, at the
discretion of the Compensation Committee.
Stock options granted under the plan have an exercise price equal to the market
price of the underlying stock at the date of grant and are exercisable for a
period determined by the Compensation Committee but not to exceed ten years from
the date of grant and the vesting period is determined at the discretion of the
Compensation Committee.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), in accounting for its
employee stock options, because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation (Statement 123)," requires the use
of option-valuation models that were not developed for use in
Page 36
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options approximates the market price of the underlying
stock on the date of the grant, no compensation expense is recognized.
During the year ended December 31, 1998, the Company granted 100,000 stock
options with an exercise price of $16.625 per option, which remain outstanding
as of December 31, 1999. As of December 31, 1999, 75,000 of the stock options
outstanding are exercisable.
Pro forma information regarding net income and earnings per share is required by
Statement 123 as if the Company has accounted for its employees stock options
granted subsequent to December 31, 1994, under the fair value method of
Statement 123. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period. Had the
provisions of Statement 123 been used in the calculation of compensation expense
(using the Black Scholes Method), pro forma net loss and pro forma net loss per
share would have been $10,216,000 and $6.11 for the year ended December 31,
1999, and $2,524 and $1.51 for the year ended December 31, 1998, respectively.
The fair value of each option grant is estimated on the day of the grant using
the Black Scholes option valuation model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Expected dividend yield 0 0
Expected stock price volatility .397 .231
Risk-free interest rate 6.0% 5.0%
Weighted-average expected life of options 7 years 7 years
</TABLE>
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company also has stock appreciation rights (SAR's) outstanding of 75,000 as
of December 31, 1999 and 1998. The SAR's have an exercise price of $16.625,
which was the market value on the date of grant. The SAR's have a contractual
life of 10 years and expire on January 2, 2008. 25,000 of the SAR's are
exercisable as of December 31, 1999.
As of December 31, 1999, no options or other awards are available for grant
under the plan.
17. 401(k) Plan
On February 1, 1998, PG established a 401(k) savings plan covering substantially
all of the employees of PG and Zecal. PG may make contributions up to a maximum
of 2% of the employees compensation and participants fully vest in employer
contributions after 5 years. Employees are permitted to make contributions into
the plan after one year of employment. Contributions made during 1999 and 1998
were $80,000 and $49,000, respectively.
On February 1, 1998, PG also established a Money Purchase Plan ("MPP") covering
the PG and Zecal employees with a minimum one year of service. Benefits are
calculated at 5% of each participant's total compensation, plus 3% of such
compensation in excess of 58% of the taxable wage base of the individual.
Benefits start accruing after 1,000 hours of service each year and vest ratably
over a five year period. PG and Zecal contributed $175,000 to the plan for the
1998 year of service. On March 14, 2000, the Company filed with the Commissioner
of the Internal Revenue Service for an approval to amend the money purchase plan
retroactive to January 1, 1999. If approved, the amendment would eliminate the
benefits due of $220,000 for the 1999 year of service. If the commissioner does
not approve the adoption of the retroactive amendment, PG and Zecal will be
required to contribute approximately $220,000 to the plan by September 2000. Due
to the uncertainty of the amendment being approved, the Company has accrued for
a 1999 contribution of $220,000 as of December 31, 1999.
Page 37
<PAGE>
Heartland Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
18. 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.
As of December 31, 1999 we successfully completed the Year 2000 plan and
modified or replaced a significant portion of our software and certain hardware
so that those systems would properly recognize dates beyond December 31, 1999.
Through March 20, 2000, we had not encountered any Year 2000 related issues
which would have affected its operations. We will continue to monitor the
software and equipment over the next few months to detect whether any such
problems arise. No future significant expenditures are expected related to Year
2000 compliance.
Page 38
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required to be furnished pursuant to this item with respect to
Directors and Executive Officers of the Company will be set forth under the
captions "Election of Directors" and "Executive Officers" in the Company's
definitive proxy statement, which involves the election of directors (the "Proxy
Statement"), to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report, and
is incorporated herein by reference, or if such Proxy Statement is not filed
with the Commission on or before 120 days after the end of the fiscal year
covered by this Report, such information will be included in an amendment to
this Report filed no later than the end of such 120-day period.
The information required to be furnished pursuant to this item with respect to
compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement, and is incorporated herein by reference, or
if such Proxy Statement is not filed with the Commission on or before 120 days
after the end of the fiscal year covered by this Report, such information will
be included in an amendment to this Report filed no later than the end of such
120-day period.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item will be set forth
under the captions "Director Compensation" and "Executive Compensation" in the
Proxy Statement, and is incorporated herein by reference, or if such Proxy
Statement is not filed with the Commission on or before 120 days after the end
of the fiscal year covered by this Report, such information will be included in
an amendment to this Report filed no later than the end of such 120-day period.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item will be set forth
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement, and is incorporated herein by reference, or
if such Proxy Statement is not filed with the Commission on or before 120 days
after the end of the fiscal year covered by this Report, such information will
be included in an amendment to this Report filed no later than the end of such
120-day period.
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item will be set forth
under the caption "Certain Relationships and Related Transaction" in the Proxy
Statement, and is incorporated herein by reference, or if such Proxy Statement
is not filed with the Commission on or before 120 days after the end of the
fiscal year covered by this Report, such information will be included in an
amendment to this Report filed no later than the end of such 120-day period.
Page 39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed or incorporated by reference as part of
this report:
1. Financial statements
The financial statements of Heartland Technology, Inc. are included in Part II,
Item 8:
Report of Independent Auditors...........................................Page 16
Consolidated Balance Sheets at December 31, 1999 and 1998..............Page 17
Consolidated Statements of Operations for the year ended December 31, 1999,
1998 and 1997..........................................................Page 18
Consolidated Statements of Stockholders' Equity for the year ended December
31, 1999, 1998 and 1997................................................Page 19
Consolidated Statements of Cash Flows year ended December 31, 1999, 1998 and
1997...................................................................Page 21
Notes to Consolidated Financial Statements.............................Page 22
Schedule II-Valuation Allowance..........................................Page 46
2. Financial statement schedules
The financial statements and financial statement schedules of Heartland
Partners, L.P. are included in Item 8 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, of Heartland Partners, L.P. (File No. 1-
10520).
3. Exhibits
2.1 Agreement and Plan of Reorganization, dated as of April 10, 1998, by and
among Solder Station-One, Inc. Odilon Cardenas, Enedina Cardenas,
Heartland Technology, and SS Acquisition Corporation (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated April 24, 1998 (the "Registrant's Form 8-K" dated April 1998)). +
2.2 Acquisition Agreement, dated as of April 29, 1998, by and between Zecal,
Inc., as seller, and Zecal Corp., as buyer (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated May 13,
1998 (the "Registrant's Form 8-K" dated May 1998)). +
3.1 Certificate of Incorporation, dated as of June 2, 1993 incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
3.2 Certificate of Amendment of Certificate of Incorporation, dated October
29, 1997 incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
3.3 By-laws, incorporated by reference to Exhibit 3.2 to the Registrant's Form
10/A (Amendment No. 1), dated June 24, 1993.
10.1 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by reference to
Exhibit 3.2 to Heartland Partners, L.P.'s Current Report on Form 8-K dated
January 5, 1998 (File No. 1-10520).
10.2 Amended and Restated Partnership Agreement of CMC Heartland Partners,
dated as of June 27, 1990, between Heartland Partners L.P. and Milwaukee
Land Company, incorporated by reference to Exhibit 10.3 to Heartland
Partners, L.P.'s Annual Report on Form 10-K for the year ended December
31, 1990 (File No. 1-10520).
Page 40
<PAGE>
10.3 Conveyance Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Milwaukee Land Company, CMC Heartland Partners and
Heartland Partners, L.P., incorporated by reference to Exhibit 10.1 to
Heartland Partners, L.P.'s Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 1-10520).
10.4 Conveyance Agreement, dated June 29, 1993 by and among Chicago Milwaukee
Corporation and Milwaukee Land Company incorporated by reference to
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.5 Facilities Agreement, dated June 29, 1993, by and between Milwaukee Land
Company and Heartland Partners, L.P. incorporated by reference to Exhibit
10.5 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.6 Employment Agreement, dated June 29, 1993, between Milwaukee Land Company
and Edwin Jacobson incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.*
10.7 First Amendment, dated August 7, 1996, to Employment Agreement, dated
June 29, 1993, between Milwaukee Land Company and Edwin Jacobson
incorporated by reference to Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.8 Asset Purchase Agreement, dated as of April 4, 1997, by and among
Milwaukee Land Company, PG Newco Corp., PG Design Electronics, Inc. and
named shareholder indemnitors incorporated by reference to Exhibit 10.8
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.9 Milwaukee Land Company 1997 Incentive and Capital Accumulation Plan
incorporated by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.10 Loan and Security Agreement, dated May 29, 1997, by and between PG Newco
Corp. and General Electric Capital Corporation incorporated by reference
to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.11 Promissory Note, dated May 29, 1997, in the principal amount of
$4,000,000, and related Security Agreement by and between PG Newco Corp.
and General Electric Capital Corporation incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.12 Promissory Note, dated May 29, 1997, in the principal amount of
$674,757.27, and related Security Agreement by and between PG Newco Corp.
and General Electric Capital Corporation incorporated by reference to
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.13 Employment Agreement, dated May 30, 1997, by and between PG Newco Corp.
and Peter G. VanHeusden incorporated by reference to Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.*
10.14 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due September 30, 2000, and payable to PG
Design Electronics, Inc. incorporated by reference to Exhibit 10.14 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1997.
10.15 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due May 30, 2002, and payable to PG Design
Electronics, Inc. incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
10.16 Second Amendment, dated June 1, 1997, to Employment Agreement, dated June
29, 1993, between Milwaukee Land Company and Edwin Jacobson incorporated
by reference to Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.*
10.17 Stock Appreciation Right Agreement, dated January 2, 1998, between
Heartland Technology, Inc. and Edwin Jacobson incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.*
Page 41
<PAGE>
10.18 Nonqualified Stock Option Agreement, dated January 2, 1998 between
Heartland Technology, Inc. and Edwin Jacobson incorporated by reference
to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.*
10.19 First Amendment and Waiver, dated January 26, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp.) and General Electric
Capital Corporation, to the Loan and Security Agreement, dated May 29,
1997 incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.20 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
September 30, 2000, and payable to PG Design Electronics, Inc. (now PG
Oldco), amended and restated on March 30, 1998 incorporated by reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.21 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
May 30, 2002, and payable to PG Design Electronics, Inc. (now PG Oldco),
amended and restated on March 30, 1998 incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.22 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $1,700,000, and
payable to Odilon Cardenas and Enedina Cardenas (incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated April 1998).
10.23 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $400,000, and payable
to Odilon Cardenas and Enedina Cardenas (incorporated by reference to
Exhibit 99.2 to the Registrant's Form 8-K dated April 1998).
10.24 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $175,000, and payable
to Corporate Finance Associates (incorporated by reference to Exhibit
99.3 to the Registrant's Form 8-K dated April 1998).
10.25 Continuing Guaranty, dated as of April 10, 1998, by Heartland Technology,
Inc. in favor of Odilon Cardenas and Enedina Cardenas (incorporated by
reference to Exhibit 99.4 to the Registrant's Form 8-K dated April 1998).
10.26 Loan and Security Agreement, dated as of April 10, 1998, by and between
Solder Station-One, Inc., SS Acquisition Corporation, and LaSalle
National Bank (incorporated by reference to Exhibit 99.5 to the
Registrant's Form 8-K dated April 1998).
10.27 Guaranty, dated as of April 10, 1998, from Heartland Technology, Inc. to
LaSalle National Bank (incorporated by reference to Exhibit 99.6 to the
Registrant's Form 8-K dated April 1998).
10.28 Promissory Note, dated April 29, 1998, of Zecal Corp., in the principal
amount of $1,100,000, and payable to Zecal, Inc. (incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated May 1998).
10.29 Guaranty, dated April 29, 1998, by Heartland Technology, Inc. in favor of
Zecal, Inc. (incorporated by reference to Exhibit 99.2 to the
Registrant's Form 8-K dated May 1998).
10.30 Loan and Security Agreement, dated as of April 29, 1998, by and between
Zecal Corp., any other Credit Party executing the agreement, and General
Electric Capital Corporation Inc. (incorporated by reference to Exhibit
99.3 to the Registrant's Form 8-K dated May 1998).
10.31 Second Amendment and Consent, dated April 29, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp.) and General Electric
Capital Corporation, to the Loan and Security Agreement, dated May 29,
1997 (incorporated by reference to Exhibit 99.4 to the Registrant's form
8-K dated May 1998).
10.32 Third Amendment dated July 13, 1998, between P.G. Design Electronics,
Inc. (formerly known as P G Newco Corp) and General Electric Capital
Corporation, to the Loan Security Agreement, dated May 29, 1997
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
Page 42
<PAGE>
10.33 Waiver of Payment under Term Credit Commitment, dated September 1, 1998,
by and among LaSalle National Bank, Solder Station-One and SS Acquisition
Corporation, to the Loan and Security Agreement dated April 10, 1998
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.34 Fourth Amendment dated September 28, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp) and General Electric
Capital Corporation to the Loan and Security Agreement dated May 29, 1997
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.35 First Amendment and Waiver, dated September 28, 1998, between Zecal Corp
and General Electric Capital Corporation to the Loan and Security
Agreement dated April 29, 1998 incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.36 Credit and Security Agreement by and between PG Design Electronics, Inc.
and Norwest Business Credit, Inc. dated as of December 31, 1998,
incorporated by reference to Exhibit 10.36 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
10.37 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, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
10.38 1998 Covenant Waiver between Solder Station-One, Inc. and LaSalle
National Bank dated March 31, 1999, incorporated by reference to Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.39 1998 Covenant Waiver between Solder Station-One, Inc. and LaSalle
National Bank dated May 14, 1999, incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.40 Default letter of June 30, 1999 on the Credit and Security Agreement
between P.G. Design Electronics, Inc. and Wells Fargo Business Credit,
Inc., incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
10.41 Default letter of July 28, 1999 on the Credit and Security Agreement
between P.G. Design Electronics, Inc. and Wells Fargo Business Credit,
Inc., incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
10.42 Form of Subscription Agreement with a form of: 13% Subordinated Note,
Series A Warrant, Security Agreement, Control Agreement, and Collateral
Agent Agreement, incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated March 9, 2000.
10.43 Third Amendment to Credit and Security Agreement dated November 17, 1999,
incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K dated March 9, 2000.
10.44 Letter from Wells Fargo Business Credit, Inc. dated January 27, 2000,
incorporated by reference to Exhibit 99.3 to the Registrant's Current
Report on Form 8-K dated March 9, 2000.
21 Subsidiaries of Heartland Technology, Inc. (filed herewith).
27 Financial Data Schedule (filed herewith).
99.1 Item 8 of the Annual Report on Form 10-K for the fiscal ended December
31, 1998, of Heartland Partners, L.P. (filed herewith).
____________________________
* Management contract or compensatory plan or arrangement.
+ Certain schedules and similar attachments have been omitted. The Registrant
agrees to furnish supplementally a copy of any omitted schedule or attachment
to the Commission upon request.
Page 43
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended December 31,
1999.
Page 44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Edwin Jacobson
--------------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Richard P. Brandstatter
--------------------------------
Richard P. Brandstatter
Vice President-Finance, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and dated as indicated.
/s/ Robert S. Davis /s/ Edwin Jacobson
- -------------------------------------- --------------------------------------
Robert S. Davis Edwin Jacobson
(Director of Heartland Technology, Inc.)(Director of Heartland Technology, Inc.)
March 30, 2000 March 30, 2000
/s/ Gordon E. Newman /s/ Ezra K. Zilkha
- -------------------------------------- --------------------------------------
Gordon E. Newman Ezra K. Zilkha
(Director of Heartland Technology, Inc.)(Director of Heartland Technology, Inc.)
March 30, 2000 March 30, 2000
/s/ John R. Torell, III
- --------------------------------------
John R. Torell, III
(Director of Heartland Technology, Inc.)
March 30, 2000
Page 45
<PAGE>
Heartland Technology
Schedule II-Valuation Resources
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Year Ended December 31
(in Thousands)
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year $ 173 $ 73 $ -
Additions through current year acquisitions - 102 -
Provisions 96 85 73
Write offs (19) (87) -
----- ----- -----
Balance at end of year $ 250 $ 173 $ 73
===== ===== =====
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
Inventory Obsolescence Reserve
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
------ ------ ------
(in Thousands)
<S> <C> <C> <C>
Balance beginning of year $ 928 $ 475 $ --
Provision (Recovery) (184) 453 475
Write offs 189 -- --
Other -- -- --
----- ----- -----
Balance at the end of year $(918) $ 928 $ 475
===== ===== =====
</TABLE>
Income Tax Valuation Allowance
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
------ ------ ------
(in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $2,495 $1,639 $2,178
Additions 3,498 856 --
Deduction -- -- (539)
------ ------ ------
Balance at the end of year $5,993 $2,495 $1,639
====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 46
<PAGE>
HEARTLAND TECHNOLOGY, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
2.1 Agreement and Plan of Reorganization, dated as of April 10, 1998, by and
among Solder Station-One, Inc. Odilon Cardenas, Enedina Cardenas,
Heartland Technology, and SS Acquisition Corporation (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated April 24, 1998 (the "Registrant's Form 8-K" dated April 1998)). +
2.2 Acquisition Agreement, dated as of April 29, 1998, by and between Zecal,
Inc., as seller, and Zecal Corp., as buyer (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated May 13,
1998 (the "Registrant's Form 8-K" dated May 1998)). +
3.1 Certificate of Incorporation, dated as of June 2, 1993 incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
3.2 Certificate of Amendment of Certificate of Incorporation, dated October
29, 1997 incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
3.3 By-laws, incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10/A (Amendment No. 1), dated June 24, 1993.
10.1 Amended and Restated Agreement of Limited Partnership of Heartland
Partners, L.P., dated as of June 27, 1990, incorporated by reference to
Exhibit 3.2 to Heartland Partners, L.P.'s Current Report on Form 8-K
dated January 5, 1998 (File No. 1-10520).
10.2 Amended and Restated Partnership Agreement of CMC Heartland Partners,
dated as of June 27, 1990, between Heartland Partners L.P. and Milwaukee
Land Company, incorporated by reference to Exhibit 10.3 to Heartland
Partners, L.P.'s Annual Report on Form 10-K for the year ended December
31, 1990 (File No. 1-10520).
10.3 Conveyance Agreement, dated as of June 27, 1990, by and among Chicago
Milwaukee Corporation, Milwaukee Land Company, CMC Heartland Partners and
Heartland Partners, L.P., incorporated by reference to Exhibit 10.1 to
Heartland Partners, L.P.'s Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 1-10520).
10.4 Conveyance Agreement, dated June 29, 1993 by and among Chicago Milwaukee
Corporation and Milwaukee Land Company incorporated by reference to
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.5 Facilities Agreement, dated June 29, 1993, by and between Milwaukee Land
Company and Heartland Partners, L.P. incorporated by reference to Exhibit
10.5 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.6 Employment Agreement, dated June 29, 1993, between Milwaukee Land Company
and Edwin Jacobson incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.*
10.7 First Amendment, dated August 7, 1996, to Employment Agreement, dated
June 29, 1993, between Milwaukee Land Company and Edwin Jacobson
incorporated by reference to Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.8 Asset Purchase Agreement, dated as of April 4, 1997, by and among
Milwaukee Land Company, PG Newco Corp., PG Design Electronics, Inc. and
named shareholder indemnitors incorporated by reference to Exhibit 10.8
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.9 Milwaukee Land Company 1997 Incentive and Capital Accumulation Plan
incorporated by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.*
10.10 Loan and Security Agreement, dated May 29, 1997, by and between PG Newco
Corp. and General Electric Capital Corporation incorporated by reference
to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.11 Promissory Note, dated May 29, 1997, in the principal amount of
$4,000,000, and related Security Agreement by and between PG Newco Corp.
and General Electric Capital Corporation incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.12 Promissory Note, dated May 29, 1997, in the principal amount of
$674,757.27, and related Security Agreement by and between PG Newco Corp.
and General Electric Capital Corporation incorporated by reference to
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
Page 47
<PAGE>
10.13 Employment Agreement, dated May 30, 1997, by and between PG Newco Corp.
and Peter G. VanHeusden incorporated by reference to Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.*
10.14 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due September 30, 2000, and payable to PG
Design Electronics, Inc. incorporated by reference to Exhibit 10.14 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1997.
10.15 Promissory Note, dated May 30, 1997, of Milwaukee Land Company, in the
principal amount of $1,500,000 due May 30, 2002, and payable to PG Design
Electronics, Inc. incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
10.16 Second Amendment, dated June 1, 1997, to Employment Agreement, dated June
29, 1993, between Milwaukee Land Company and Edwin Jacobson incorporated
by reference to Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.*
10.17 Stock Appreciation Right Agreement, dated January 2, 1998, between
Heartland Technology, Inc. and Edwin Jacobson incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.*
10.18 Nonqualified Stock Option Agreement, dated January 2, 1998 between
Heartland Technology, Inc. and Edwin Jacobson incorporated by reference
to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.*
10.19 First Amendment and Waiver, dated January 26, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp.) and General Electric
Capital Corporation, to the Loan and Security Agreement, dated May 29,
1997 incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.20 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
September 30, 2000, and payable to PG Design Electronics, Inc. (now PG
Oldco), amended and restated on March 30, 1998 incorporated by reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.21 Promissory Note, dated May 30, 1997, of Milwaukee Land Company (now
Heartland Technology, Inc.), in the principal amount of $1,500,000 due
May 30, 2002, and payable to PG Design Electronics, Inc. (now PG Oldco),
amended and restated on March 30, 1998 incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.22 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $1,700,000, and
payable to Odilon Cardenas and Enedina Cardenas (incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated April 1998).
10.23 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $400,000, and payable
to Odilon Cardenas and Enedina Cardenas (incorporated by reference to
Exhibit 99.2 to the Registrant's Form 8-K dated April 1998).
10.24 Promissory Note, dated April 10, 1998, of Solder Station-One, Inc. and SS
Acquisition Corporation, in the principal amount of $175,000, and payable
to Corporate Finance Associates (incorporated by reference to Exhibit
99.3 to the Registrant's Form 8-K dated April 1998).
10.25 Continuing Guaranty, dated as of April 10, 1998, by Heartland Technology,
Inc. in favor of Odilon Cardenas and Enedina Cardenas (incorporated by
reference to Exhibit 99.4 to the Registrant's Form 8-K dated April 1998).
10.26 Loan and Security Agreement, dated as of April 10, 1998, by and between
Solder Station-One, Inc., SS Acquisition Corporation, and LaSalle
National Bank (incorporated by reference to Exhibit 99.5 to the
Registrant's Form 8-K dated April 1998).
10.27 Guaranty, dated as of April 10, 1998, from Heartland Technology, Inc. to
LaSalle National Bank (incorporated by reference to Exhibit 99.6 to the
Registrant's Form 8-K dated April 1998).
10.28 Promissory Note, dated April 29, 1998, of Zecal Corp., in the principal
amount of $1,100,000, and payable to Zecal, Inc. (incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated May 1998).
10.29 Guaranty, dated April 29, 1998, by Heartland Technology, Inc. in favor of
Zecal, Inc. (incorporated by reference to Exhibit 99.2 to the
Registrant's Form 8-K dated May 1998).
10.30 Loan and Security Agreement, dated as of April 29, 1998, by and between
Zecal Corp., any other Credit Party executing the agreement, and General
Electric Capital Corporation Inc. (incorporated by reference to Exhibit
99.3 to the Registrant's Form 8-K dated May 1998).
Page 48
<PAGE>
10.31 Second Amendment and Consent, dated April 29, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp.) and General Electric
Capital Corporation, to the Loan and Security Agreement, dated May 29,
1997 (incorporated by reference to Exhibit 99.4 to the Registrant's form
8-K dated May 1998).
10.32 Third Amendment dated July 13, 1998, between P.G. Design Electronics,
Inc. (formerly known as PG Newco Corp) and General Electric Capital
Corporation, to the Loan Security Agreement, dated May 29, 1997
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.33 Waiver of Payment under Term Credit Commitment, dated September 1, 1998,
by and among LaSalle National Bank, Solder Station-One and SS Acquisition
Corporation, to the Loan and Security Agreement dated April 10, 1998
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.34 Fourth Amendment dated September 28, 1998, between P.G. Design
Electronics, Inc. (formerly known as PG Newco Corp) and General Electric
Capital Corporation to the Loan and Security Agreement dated May 29, 1997
incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998.
10.35 First Amendment and Waiver, dated September 28, 1998, between Zecal Corp
and General Electric Capital Corporation to the Loan and Security
Agreement dated April 29, 1998 incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.36 Credit and Security Agreement by and between PG Design Electronics, Inc.
and Norwest Business Credit, Inc. dated as of December 31, 1998,
incorporated by reference to Exhibit 10.36 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
10.37 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, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
10.38 1998 Covenant Waiver between Solder Station-One, Inc. and LaSalle
National Bank dated March 31, 1999, incorporated by reference to Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.39 1998 Covenant Waiver between Solder Station-One, Inc. and LaSalle
National Bank dated May 14, 1999, incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.40 Default letter of June 30, 1999 on the Credit and Security Agreement
between P.G. Design Electronics, Inc. and Wells Fargo Business Credit,
Inc., incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
10.41 Default letter of July 28, 1999 on the Credit and Security Agreement
between P.G. Design Electronics, Inc. and Wells Fargo Business Credit,
Inc., incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
10.42 Form of Subscription Agreement with a form of: 13% Subordinated Note,
Series A Warrant, Security Agreement, Control Agreement, and Collateral
Agent Agreement, incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated March 9, 2000.
10.43 Third Amendment to Credit and Security Agreement dated November 17, 1999,
incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K dated March 9, 2000.
10.44 Letter from Wells Fargo Business Credit, Inc. dated January 27, 2000,
incorporated by reference to Exhibit 99.3 to the Registrant's Current
Report on Form 8-K dated March 9, 2000.
21 Subsidiaries of Heartland Technology, Inc. (filed herewith).
27 Financial Data Schedule (filed herewith).
99.1 Item 8 of the Annual Report on Form 10-K for the fiscal ended
December 31, 1997, of Heartland Partners, L.P. (filed herewith).
- --------------------
* Management contract or compensatory plan or arrangement.
+ Certain schedules and similar attachments have been omitted. The Registrant
agrees to furnish supplementally a copy of any omitted schedule or attachment
to the Commission upon request.
Page 49
<PAGE>
Exhibit 21
Subsidiaries of Heartland Technology, Inc.
The following is a list of all of the registrant's direct and indirect
subsidiaries, state of incorporation or organization and the percentage of
ownership of each.
Name of subsidiary State Ownership
- --------------------------- ---------- ---------
PG Design Electronics, Inc. Delaware 100%
Zecal Corp. Delaware (a)
Solder Station-One California 100%
HTI Interests, LLC Delaware 99.9%
(a) Wholly owned by PG Design Electronics, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 105
<SECURITIES> 0
<RECEIVABLES> 3,893
<ALLOWANCES> 250
<INVENTORY> 3,236
<CURRENT-ASSETS> 7,319
<PP&E> 11,819
<DEPRECIATION> 4,506
<TOTAL-ASSETS> 30,711
<CURRENT-LIABILITIES> 19,292
<BONDS> 0
0
0
<COMMON> 501
<OTHER-SE> 6,808
<TOTAL-LIABILITY-AND-EQUITY> 30,711
<SALES> 35,158
<TOTAL-REVENUES> 35,158
<CGS> 29,875
<TOTAL-COSTS> 29,875
<OTHER-EXPENSES> 10,382
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,589
<INCOME-PRETAX> (9,762)
<INCOME-TAX> (158)
<INCOME-CONTINUING> (9,604)
<DISCONTINUED> 0
<EXTRAORDINARY> (509)
<CHANGES> 0
<NET-INCOME> (10,113)
<EPS-BASIC> (6.05)
<EPS-DILUTED> (6.05)
</TABLE>
<PAGE>
Item 8. Financial Statement and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Partners and Unitholders of Heartland Partners, L.P.
We have audited the accompanying consolidated balance sheets of Heartland
Partners, L.P. (the "Partnership") as of December 31, 1999 and 1998 and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heartland Partners, L.P. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
March 17, 2000, except as to
the second paragraph of Note 12,
as to which the date is March 20, 2000
and except as to the third paragraph
of Note 12, as to which the date is
March 24, 2000.
16
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS:
- ------
<S> <C> <C>
Cash............................................................................ $ 230 $ 1,115
Restricted cash................................................................. 4,182 2,564
Marketable securities (amortized cost of $149 in 1998).......................... -0- 149
Accounts receivable (net of allowance of $416 in 1999 and 1998)................. 373 353
Due from affiliate.............................................................. 1,093 442
Prepaid and other assets........................................................ 217 278
Investment in joint venture..................................................... 410 278
------- -------
Total....................................................................... 6,505 5,179
------- -------
Property:
Land, buildings and other....................................................... 4,049 3,563
Less accumulated depreciation.................................................. 1,065 931
------- -------
Net Land, buildings and other......................................................... 2,984 2,632
Land held for sale.............................................................. 766 930
Housing inventories............................................................. 34,263 13,978
Land held for development....................................................... 5,287 5,490
Capitalized predevelopment costs................................................ 7,451 5,022
------- -------
Net Properties................................................................. 50,751 28,052
------- -------
Total Assets.................................................................... $57,256 $33,231
======= =======
LIABILITIES:
- -----------
Notes payable................................................................... $32,770 $13,492
Accounts payable and accrued expenses........................................... 10,330 2,636
Management fee due affiliate.................................................... -- 283
Accrued real estate taxes....................................................... 893 1,075
Allowance for claims and liabilities............................................ 2,804 2,762
Unearned rents and deferred income.............................................. 1,733 1,862
Other liabilities............................................................... 3,074 1,712
------- -------
Total Liabilities........................................................... $51,604 $23,822
------- -------
PARTNERS' CAPITAL:
- -----------------
General Partner................................................................. -- --
Class A Limited Partners - 2,142 units authorized, issued and outstanding....... -- --
Class B Limited Partner......................................................... 5,652 9,409
------- -------
Total Partners' Capital..................................................... 5,652 9,409
------- -------
Total Liabilities and Partners' Capital......................................... $57,256 $33,231
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
17
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1999, 1998, and 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
Holding Gain
Class A Class B (Loss) on
General Limited Limited Marketable
Partner Partners Partner Securities Total
------- -------- ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997.......................... $ 66 $ 9,639 $ 9,582 $ (2) $19,285
Net loss............................................. (22) (2,130) (11) -- (2,163)
Distribution......................................... (16) (1,607) (8) -- (1,631)
------- ------- ------- ----------- -------
Balances at December 31, 1997........................ 28 5,902 9,563 (2) 15,491
Net Loss............................................. (28) (5,902) (154) -- (6,084)
Marketable securities fair value adjustment.......... -- -- -- 2 2
------- ------- ------- ----------- -------
Balances at December 31, 1998........................ $ -- $ -- 9,409 -- 9,409
Net loss............................................. -- -- (3,757) -- (3,757)
------- ------- ------- ----------- -------
Balances at December 31, 1999........................ $ -- $ -- $ 5,652 $ -- $ 5,652
======= ======= ======= =========== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
18
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
(amounts in thousands, except for per unit data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income:
- -------
Property sales........................................................ $ 11,548 $ 6,231 $ 7,127
Less: Cost of property sales.......................................... 9,772 4,405 3,407
---------- ---------- ----------
Gross profit on property sales........................................... 1,776 1,826 3,720
---------- ---------- ----------
Operating Expenses:
- -------------------
Selling expenses...................................................... 3,570 3,845 2,465
General and administrative expenses................................... 2,659 3,119 3,570
Real estate taxes..................................................... 179 399 703
Environmental expense................................................. 378 1,461 78
---------- ---------- ----------
Total operating expenses................................................. 6,786 8,824 6,816
---------- ---------- ----------
Net operating (loss)..................................................... (5,010) (6,998) (3,096)
Other Income and (Expense):
- ---------------------------
Portfolio income...................................................... 123 63 62
Rental income......................................................... 772 886 1,104
Other income.......................................................... 917 514 286
Depreciation.......................................................... (134) (124) (94)
Management fee........................................................ (425) (425) (425)
---------- ---------- ----------
Total other income and (expense)......................................... 1,253 914 933
---------- ---------- ----------
Net (loss)............................................................... $ (3,757) $ (6,084) $ (2,163)
========== ========== ==========
Net (loss) allocated to General Partner.................................. $ -- $ (28) $ (22)
========== ========== ==========
Net (loss) allocated to Class B limited partner.......................... $ (3,757) $ (154) $ (11)
========== ========== ==========
Net (loss) allocated to Class A limited partners......................... $ -- $ (5,902) $ (2,130)
========== ========== ==========
Net (loss) per Class A limited partnership unit.......................... $ -- $ (2.76) $ (0.99)
========== ========== ==========
Average number of Class A limited partnership units outstanding.......... 2,142 2,142 2,142
========== ========== ==========
Distributions declared per Class A limited partnership unit.............. $ -- $ -- $ 0.75
========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
19
<PAGE>
HEARTLAND PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998, and 1997
(amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flow from Operating Activities:
- ------------------------------------
Net (loss)................................................................... $ (3,757) $ (6,084) $ (2,163)
Adjustments reconciling net (loss) to net cash used in operating
activities:
Bad debt expense.............................................................. -- 211 98
Depreciation.................................................................. 134 124 94
Accretion of discount on securities........................................... -- -- (21)
Loss (Gain) on sale of securities............................................. -- -- 3
Net change in allowance for claims and liabilities............................ 42 593 (491)
Net change in assets and liabilities:
Decrease (increase) in accounts receivable............................... (671) (313) 181
Increase in housing inventories.......................................... (20,285) (4,852) (3,486)
Decrease in land held for sale........................................... 164 233 123
Decrease in land held for development.................................... 203 790 158
(Increase) decrease in capitalized development costs..................... (2,429) (818) 1,369
Increase (decrease) in accounts payable and accrued liabilities.......... 7,694 1,895 476
(Decrease) increase in management fee due affiliate...................... (283) (142) --
Net change in other assets and liabilities............................... 980 1,656 759
---------- ---------- ----------
Net cash used in operating activities......................................... (18,208) (6,707) (2,900)
---------- ---------- ----------
Cash Flow from Investing Activities:
- -----------------------------------
Additions to land, buildings and other........................................ (486) (333) (645)
Net (purchases) sales and maturities of marketable securities................. 149 (6) 4,636
---------- ---------- ----------
Net cash (used in) provided by investing activities........................... (337) (339) 3,991
---------- ---------- ----------
Cash Flow from Financing Activities:
- -----------------------------------
Advances on notes payable, net................................................ 19,278 9,742 3,011
Increase in restricted cash................................................... (1,618) (1,840) (424)
Distribution paid to unitholders.............................................. -- (1,631) (2,719)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... 17,660 6,271 (132)
---------- ---------- ----------
Net (decrease) increase in cash............................................... (885) (775) 959
Cash at beginning of year..................................................... 1,115 1,890 931
---------- ---------- ----------
Cash at end of year........................................................... $ 230 $ 1,115 $ 1,890
========== ========== ==========
Supplemental Disclosure of Non Cash Operating Activities:
- --------------------------------------------------------
Net land held for development and capitalized development costs transferred
to housing inventories........................................................ $ -- $ 5,034 $ --
========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
20
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
Organization
Heartland Partners, L.P. ("Heartland" or the "Company"), a Delaware limited
partnership, was formed on October 6, 1988. Heartland's existence will continue
until December 31, 2065, unless extended or dissolved pursuant to the provisions
of Heartland's partnership agreement.
Heartland was organized to engage in the ownership, purchasing, development,
leasing, marketing, construction and sale of real estate properties. CMC
Heartland Partners ("CMC") is an operating general partnership owned 99.99% by
Heartland and .01% by Heartland Technology, Inc. ("HTI"), formerly known as
Milwaukee Land Company ("MLC"). HTI is the general partner of Heartland (in
such capacity, the "General Partner"). In July 1993, Heartland Development
Corporation ("HDC"), a Delaware corporation, wholly-owned by Heartland and CMC,
formed CMC Heartland Partners I, Limited Partnership ("CMCI"), a Delaware
limited partnership, to undertake a planned housing development in Rosemount,
Minnesota ("Bloomfield or Rosemount"). CMC has a 100% membership interest in
CMC Heartland Partners II ("CMCII"), CMC Heartland Partners III ("CMCIII"), CMC
Heartland Partners IV ("CMCIV"), CMC Heartland Partners V ("CMCV"), CMC
Heartland Partners VI ("CMCVI"), CMC Heartland Partners VII ("CMCVII") and CMC
Heartland Partners VIII ("CMCVIII"). CMCII was formed to participate in the
Goose Island Industrial Park joint venture in Chicago, Illinois. CMCIII was
formed in 1997 to develop a portion of the Kinzie Station property in Chicago,
IL. CMC IV was formed in 1998 and is developing approximately 177 acres in Fife,
Washington. CMCV was formed in 1996 to acquire finished lots, sell and to
construct homes in Osprey Cove ("Osprey"), a master-planned residential
community in St. Marys, GA. CMCVII was formed in 1998 to acquire and engage in
sales, marketing and construction of homes in the Longleaf Country Club,
Southern Pines, NC ("Southern Pines or Longleaf"). CMCVI and CMCVIII were formed
at various times to acquire and hold future acquisitions. CMC also owns 100% of
the common stock of Lifestyle Communities, Ltd. ("LCL") which serves as the
exclusive sales agent in the St. Marys, Southern Pines and Kinzie Station
developments. LCL is also the general contractor in the St. Marys development.
CMC owns 100% of the stock of Lifestyle Construction Company, Inc. ("LCC") which
serves as the general contractor in North Carolina. Except as otherwise noted
herein, references herein to "Heartland" or the "Company" include CMC, HDC,
CMCI, CMCII, CMCIII, CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC.
Heartland's partnership agreement provides generally that Heartland's net income
(loss) will be allocated 1% to the General Partner, 98.5% to the Class A limited
partners (the "Unitholders") and 0.5% to the Class B limited partner. In
addition, the partnership agreement provides that certain items of deduction,
loss, income and gain may be specially allocated to the Class A Unitholders or
to the holder of the Class B Interest or the General Partner. Also, the
partnership agreement provides that if an allocation of a net loss to a partner
would cause that partner to have a negative balance in its capital account at a
time when one or more partners would have a positive balance in their capital
account such net loss shall be allocated only among partners having positive
balances in their capital account.
The General Partner has the discretion to cause Heartland to make distributions
of Heartland's available cash in an amount equal to 98.5% to the Unitholders,
0.5% to the holder of the Class B Interest and 1% to the General Partner. There
can be no assurance as to the amount or timing of Heartland's cash distributions
or whether the General Partner will cause Heartland to make a cash distribution
if cash is available. On November 24, 1997, Heartland declared a cash
distribution in the amount of $1.6 million to Unitholders and Partners of record
on December 29, 1997, that was paid on January 7, 1998. On December 4, 1997,
Heartland's partnership agreement was amended to allow the General Partner in
its discretion to establish a record date for distributions of the last day of
any calendar month.
21
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
At December 31, 1999, land held for sale consisted of approximately 14,458 acres
of scattered land parcels. States in which large land holdings are located are
Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota, Washington, and
Wisconsin. The remaining acreage is located in Idaho, Indiana, Michigan and
Missouri.
Most of the properties are former railroad rights-of-way, located in rural
areas, comprised of long strips of land approximately 100 feet in width. Also
included are former station grounds and rail yards. Certain air rights and fiber
optics development rights are also owned.
The land is typically unimproved. Some of the properties are improved with
structures (such as grain elevators and sheds) erected and owned by lessees.
Other properties are improved with Heartland-owned buildings that are of little
or no value.
Improved properties of value to Heartland include a three-story office building
with 60,000 square feet of space in Milwaukee, Wisconsin and a two-story
warehouse/office building in northwestern Chicago used for the storage of
partnership records.
At December 31, 1999, property available for development, including housing
inventories, consisted of 15 sites comprising approximately 890 acres. The book
value of this land is $10 million or an average of $11,200 per acre. Heartland
reviews these properties to determine whether to hold, develop, either solely or
with a third party joint venturer, or sell them. Heartland's objective for
these properties is to maximize unitholder value over a period of years.
Heartland has a 3.88 acre site in Chicago, Illinois known as Kinzie Station
under development. Phase I consists of 163 units in a Tower Building, 24 units
in a Plaza Building and 5 Townhomes. CMC is also selling and building single
family homes in Osprey Cove located in St. Marys, Georgia, Longleaf Country Club
in Southern Pines, North Carolina and the Bloomfield community in Rosemount,
Minnesota. These sites are classified as housing inventories. Heartland has
decided to cease operations in Osprey Cove and Bloomfield. The homes and lot
inventories will be sold in the ordinary course of business.
2. Summary of Significant Accounting Policies
Consolidation
- -------------
The consolidated financial statements include the accounts of Heartland; CMC,
its 99.99% owned operating partnership; HDC, 100% owned by Heartland; CMCI, 1%
general partnership interest owned by HDC and 99% owned by CMC; CMCII, CMCIII,
CMCIV, CMCV, CMCVI, CMCVII, CMCVIII, LCL and LCC, each 100% owned by CMC. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues from housing and land sales are recognized in the period in which title
passes and cash is received.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
22
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Marketable Securities
- ---------------------
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such classification as of each balance sheet
date. Debt securities that the Company does not have the positive intent or
ability to hold to maturity, and all marketable equity securities are classified
as available-for-sale and are carried at fair value. All of Heartland's
marketable securities held at December 31, 1998 were classified as available-
for-sale. Unrealized holding gains and losses on securities classified as
available-for-sale are reported as a separate component of partner's capital.
Realized gains and losses, and declines in value judged to be other than
temporary, are included in net securities gains (losses). Premiums and discounts
on marketable securities are amortized on a straight-line basis using the
maturity date of the security to determine the amortization period and such
amortization is included in interest income. The cost of securities sold is
based on the specific identification method.
Properties
- ----------
Properties are carried at their historical cost. Expenditures which
significantly improve the values or extend useful lives of the properties are
capitalized. Predevelopment costs including interest, financing fees, and real
estate taxes that are directly identified with a specific development project
are capitalized. Repairs and maintenance are charged to expense as incurred.
Depreciation is provided for financial statement purposes over the estimated
useful life of the respective assets ranging from 7 years for office equipment
and fixtures to 40 years for building and improvements primarily using the
straight-line method. Depreciation expense for the years ended December 31,
1999, 1998 and 1997 was $134,000, $124,000, $94,000, respectively.
Properties held for development, including capitalized predevelopment costs, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the particular development property may not be
recoverable. If these events or changes in circumstances are present, the
Company estimates the sum of the expected future cash flows (undiscounted) to
result from the development operations and eventual disposition of the
particular development property, and if less than the carrying amount of the
development property, the Company will recognize an impairment loss based on
discounted cash flows. Upon recognition of any impairment loss the Company would
measure that loss based on the amount by which the carrying amount of the
property exceeds the estimated fair value of the property.
For properties held for sale, an impairment loss is recognized when the fair
value of the property, less the estimated cost to sell, is less than the
carrying amount of the property.
Housing inventories, (including completed model homes), consisting of land, land
development, direct and indirect construction costs and related interest, are
recorded at cost which is not in excess of fair value. Land, land development,
and indirect costs are allocated to cost of sales on the basis of units sold in
relation to the total anticipated units in the related development project; such
allocation approximates the relative sales value method. Direct construction
costs are allocated to the specific units sold for purposes of determining costs
of sales. Selling and marketing costs, not including those costs incurred
related to furnishing and developing the models and sales office, are expensed
in the period incurred. Costs incurred in the construction of the model units
and related furnishings are capitalized at cost. The Company intends to offer
these units for sale at the completion of a project and, accordingly, no
amortization of direct construction costs is provided. Housing inventories are
reviewed for impairment whenever events or circumstances indicate the fair value
is less than the cost. If these events or changes in circumstances are present,
the Company then writes down the inventory to its fair value.
As of December 31, 1999 and 1998, management is not aware of any impairment
losses in the Company's real estate assets. Accordingly, no impairment losses
were recognized during any of the years presented.
23
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
Housing inventories consisted of the following at December 31, 1999, and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land under development................................... $ 4,690 $ 4,568
Direct construction costs................................ 19,381 2,109
Capitalized project costs................................ 10,192 7,301
------- -------
$34,263 $13,978
======= =======
</TABLE>
Interest, financing fees, and real estate taxes relating to land and
construction in progress are capitalized and, accordingly, are included in the
aggregate cost of housing inventories. These costs are amortized to cost of
sales on a per unit basis in relationship to the total units of the related
development based upon the total estimated budget to be incurred for the
development. This accounting treatment approximates the relative sales value
method. Additionally, the Company provides each home purchaser with a one-year
warranty covering the major components of the unit. The costs associated with
these warranties are immaterial and therefore, expensed as incurred.
Fair Value of Financial Instruments
- -----------------------------------
Management has considered fair value information relating to its financial
instruments at December 31, 1999. For cash and marketable securities, the
carrying amounts approximate fair value. For variable rate debt that reprices
frequently, fair values approximate carrying values. For all remaining financial
instruments, carrying value approximates fair value due to the relatively short
maturity of these instruments.
Income Taxes
- ------------
A publicly-traded partnership generally is not liable for Federal income taxes,
provided that for each taxable year at least 90% of its gross income consists of
certain passive types of income. In such case, each partner includes its
proportionate share of partnership income or loss in its own tax return.
Accordingly, no provision for income taxes is reflected in Heartland's financial
statements.
Heartland's assets are carried at historical cost. At December 31, 1999, the tax
basis of the properties and improvements for Federal income tax purposes was
greater than their carrying value for financial reporting purposes.
Segment Reporting
- -----------------
During the fourth quarter of 1998, Heartland adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement No. 131"). Statement No. 131 superseded FASB
Statement of Financial Accounting Standards No. 14, Financial Reporting for
Segments of a Business Enterprise ("Statement No. 14"). Statement No. 131
establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of Statement
No. 131 did not affect Heartland's results of operations or financial position.
24
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
The Company has two primary reportable business segments, which consist of land
sales and property development (See Note 11 to the Consolidated Financial
Statements).
Reclassification
- ----------------
Certain reclassifications have been made to the previously reported 1998 and
1997 statements in order to provide comparability with the 1999 statements.
These reclassifications have not changed the 1998 and 1997 results.
3. Restricted Cash
On May 14, 1997, CMC established a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB") pursuant to which CMC pledged cash in
the amount of $500,000 as an interest reserve. During 1998, LNB increased the
line of credit to $8.5 million and extended the maturity date of the loan to
April 30, 1999, pursuant to which CMC pledged additional cash in the amount of
$350,000 as an interest reserve. In April 1999, LNB increased the credit
facility to $11,500,000 and extended the maturity date of the loan to April 29,
2000. At that time, CMC pledged an additional $300,000 as an interest reserve.
On November 30, 1998, CMCI executed an agreement for a $2,500,000 loan with Bank
One relating to the Bloomfield project pursuant to which CMCI has pledged
$500,000 in cash as an interest reserve. Restricted cash also includes
purchasers' earnest money escrow deposits of $2,522,000 and $1,204,000 at
December 31, 1999, and 1998, respectively and a $10,000 construction improvement
bond held by the Osprey Cove Homeowners Association. The total restricted cash
at December 31, 1999 and 1998 was $4,182,000 and $2,564,000, respectively.
4. Notes Payable
On May 14, 1997, CMC signed a line of credit agreement in the amount of $5
million with LaSalle National Bank ("LNB"), pursuant to which CMC granted LNB a
first lien on certain parcels of land in Chicago, IL which had a carrying value
of $6,065,000 and $5,278,000 as of December 31, 1999, and 1998, respectively.
Also, pursuant to the line of credit agreement, CMC pledged cash in the amount
of $500,000 as an interest reserve. The agreement terminated on May 1, 1998, but
was extended through June 30, 1998. On June 30, 1998, the loan was amended
extending the maturity date to April 30, 1999, and increasing the line to $8.5
million. The Company has subsequently pledged additional cash in the amount of
$350,000 bringing the total interest reserve to $850,000. On October 23, 1998,
CMC amended the loan temporarily increasing the line to $9,500,000 and reducing
net worth requirements to $8,500,000. The $1,000,000 temporary increase was
paid back in December 1998. In April of 1999, the Company extended the maturity
of the loan to April 29, 2000, increased the amount of the credit facility from
$8,500,000 to $11,500,000, reduced the net worth requirement form $8,500,000 to
$5,500,000 and granted LNB a first lien on a property in Milwaukee, Wisconsin
which had a carrying value of $3,035,000 at December 31, 1999.The Company has
subsequently pledged additional cash in the amount of $300,000 bringing the
total interest reserve to $1,150,000. In November 1999, the Company increased
the amount of the credit facility to $13,300,000 and pledged as additional
collateral its interest in the Goose Island Joint Venture which had a carrying
value of $410,000 as of December 31, 1999. Advances against the line of credit
bear interest at the prime rate of LNB plus 1.0% (9.5% at December 31, 1999). At
December 31, 1999, and 1998, $11,800,000 and $8,321,000 respectively, had been
advanced to the Company by LNB against the line of credit. On March 20, 2000 the
Company executed documents with LNB that increased the credit facility to
$15,300,000 and extended the maturity date of the loan to December 31, 2000.
Heartland also granted LNB a first lien on 177 acres, located in Fife,
Washington which had a carrying value of $3,891,000 at December 31, 1999.
On December 30, 1996, CMCV signed a revolving line of credit agreement in the
amount of $3 million with Bank of America ("B of A"), formerly NationsBank,
N.A., to acquire lots and construct houses in the Osprey Cove subdivision, St.
Marys, Georgia, pursuant to which CMC granted a first mortgage to B of A on
specific lots in said subdivision with
25
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
a carrying value of $1,803,000 and $5,138,000 at December 31, 1999, and 1998,
respectively. On December 30, 1999, Heartland entered into a modification
agreement to its December 30, 1996, revolving line of credit agreement in the
amount of $3 million for Osprey Cove to extend the maturity date to June 30,
2000. The line of credit with B of A bears interest at the prime rate of B of A
plus 1% (9.5% at December 31, 1999). At maturity, all outstanding advances and
any accrued interest must be paid. B of A had advanced against the revolving
line of credit at December 31, 1999, and 1998, $1,514,000 and $2,288,000,
respectively. Under the terms of the agreement, CMCV is required to maintain a
minimum net worth of $500,000 and a minimum leverage ratio not to exceed 4:1.
In the fourth quarter of 1999, First National Bank of St. Mary's ("FNB") in
Georgia made two loans totaling $588,374 to build two unsold homes in Osprey
Cove. The carrying value of these two homes is $557,000 at December 31, 1999.
The loan terms are for one year and bear interest at the prime rate plus 1%
(9.5% at December 31, 1999). At December 31, 1999, FNB had advanced $463,000 to
the Company on the two loans.
In December, 1998, the Company signed a commitment letter for a $3,000,000 line
of credit with B of A to construct homes in the Longleaf community. B of A
provided individual loans on each home as it is started. The developer
subordinated its lot to B of A's construction loan. The term of each loan was
one year and interest accrued at the B of A prime rate plus 1%. On December 9,
1999, Heartland executed an agreement for a $5,000,000 revolving credit line for
the construction of homes in Longleaf with Bank One of Illinois ("Bank One").
The first draw from Bank One on December 9, 1999 was used to purchase 22 lots
(of which 3 closed in 1999) from the developer for $690,500 and repaid B of A
all outstanding principal and accrued interest. As new homes to be built are
added to the revolving credit line, the developer will subordinate its lot to
Bank One's revolving credit line. The carrying value of the collateral at
December 31, 1999 is $1,815,000. The revolving credit line is for a term of 1
year and bears interest at the prime rate (8.5% at December 31, 1999). At
December 31, 1999, $1,441,000 had been advanced by Bank One to the Company. At
December 31, 1998, $383,000 had been advanced by B of A to the Company.
On November 30, 1998, Heartland executed an agreement for a $2,500,000 loan from
Bank One relating to the Bloomfield project. The loan has a two year term and
bears interest at the prime rate (8.5% at December 31, 1999). The outstanding
loan balance is $2,470,000 at December 31, 1999. As a condition of the loan,
$500,000 was placed in an interest reserve. In addition, Bank One is providing
a $1,750,000 development loan, letters of credit for $204,500 to the City of
Rosemount and a $4,000,000 revolving credit line for the construction of homes;
these credit facilities were executed on February 1, 1999. The loans bear
interest at the prime rate (8.5% at December 31, 1999). The loans mature on
January 31, 2001 and January 31, 2000, respectively. At December 31, 1999,
$506,000 had been advanced against the development loan and $1,175,000 against
the revolving line of credit. The Company believes no additional financing will
be needed for Phase I. The carrying value of the collateral for these loans is
$4,302,000 at December 31, 1999. The Company is currently in negotiations with
Bank One to extend the maturity date of the $4,000,000 revolving line of credit
to December 1, 2000. While the Company has no reason to believe the extension
of the credit facility will not be approved by Bank One, there can be no
assurance the contemplated extension will be given. The consolidated financial
statements do not contain any adjustments to reflect the ultimate outcome of
this uncertainty.
On January 6, 1999, the Kinzie Station 2.5 year loan agreement in the amount of
$29,812,000 was signed with Corus Bank N.A ("CB"). The loan bears interest at
the prime rate plus 1% (9.5% at December 31, 1999). This loan is collateralized
by the real estate contained in the project. In conjunction with the loan, a
Construction Contract with the guaranteed maximum price of $24,710,000 which
increased to $24,972,282 due to subsequent change orders was entered into with a
general contractor. At December 31, 1999 $13,287,000 had been advanced by CB to
the Company.
On October 20, 1999, the Company executed loan documents with Bank One for a
loan of $5,250,000 to construct the Kinzie Station Plaza building. The loan is
for a term of 3 years and bears interest at the prime rate (8.5% at December 31,
1999). The loan is collateralized by real estate contained in the project. On
September 7, 1999, a construction
26
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
contract with the guaranteed maximum price of $4,864,022 was entered into with a
general contractor. At December 31, 1999, $114,000 had been advanced by Bank One
to the Company.
During the years ended December 31, 1999, 1998, and 1997, the Company incurred
and paid interest on loans in the amount of $2,062,000, $802,000 and $189,000,
respectively, of which $2,062,000, $802,000 and $189,000 was capitalized.
5. Recognition and Measurement of Environmental Liabilities
It is Heartland's practice to evaluate environmental liabilities associated with
its properties on a regular basis. An allowance is provided with regard to
potential environmental liabilities, including remediation, legal and consulting
fees, when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated. The amount of any liability is
evaluated independently from any claim for recovery. If the amount of the
liability cannot be reasonably estimated but management is able to determine
that the amount of the liability is likely to fall within a range, and no amount
within that range can be determined to be the better estimate, then an allowance
in the minimum amount of the range is established. Environmental costs which are
incurred in connection with Heartland's development activities are expensed or
capitalized as appropriate. (See Note 8.)
Estimates which are used as the basis for allowances for the remediation of a
particular site are taken from evaluations of the range of potential costs for
that site made by independent consultants. These evaluations are estimates based
on professional experience but necessarily rely on certain significant
assumptions including the specific remediation standards and technologies which
may be required by an environmental agency as well as the availability and cost
of subcontractors and disposal alternatives.
There is not sufficient information to reasonably estimate all the environmental
liabilities of which management is aware. Accordingly, management is unable to
determine whether environmental liabilities which management is unable to
reasonably estimate will or will not have a material effect on Heartland's
results of operations or financial condition.
6. Related Party Transactions
CMC has a management agreement with HTI, pursuant to which CMC is required to
pay HTI an annual management fee in the amount of $425,000 until the year ended
December 31, 1999. In February 1998, CMC paid HTI the $425,000 1997 deferred
management fee. $142,000 of the 1998 management was paid in 1998. In 1999, the
balance of the 1998 fee of $283,000 was paid as well as 100% of the 1999 fee.
Under a management services agreement, HTI reimburses Heartland for reasonable
and necessary costs and expenses for services totaling $368,000 for the year
ended December 31, 1999, $300,000 for the year ended December 31, 1998 and
$228,000 for the year ended December 31, 1997. HTI owes CMC $1,093,000 as of
December 31, 1999, related to these expenses. Included in this amount owed CMC
is $56,000 of interest accrued on past due amounts owed during the year 1999.
Interest was computed using the prime rate plus 2 1/4% (10.75% at December 31,
1999).
7. Leases
Heartland is a lessor under numerous property lease arrangements with varying
lease terms. The majority of the leases are cancelable by either party upon
thirty to sixty days notice and provide nominal rental income to Heartland. The
leases generally require the lessee to construct, maintain and remove any
improvements, pay property taxes, maintain insurance and maintain the condition
of the property. Heartland has several major leases on buildings and land in
Chicago, Illinois and Milwaukee, Wisconsin which account for over half of
Heartland's annual rental income. The land,
27
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
buildings and other improvements had a net carrying value of $2,984,000 and
$2,632,000 at December 31, 1999 and 1998, respectively. These amounts are net of
depreciation and include corporate furniture and fixtures as well as other
buildings and improvements.
Heartland has one non-cancellable operating lease for $114,401 per year that
will continue as long as the lessee operates its railroad line.
Heartland leases its office premises as well as offices at certain development
sites and certain equipment under various operating leases. Future minimum lease
commitments under non-cancellable operating leases are as follows:
<TABLE>
<S> <C>
2000............................................................................... $194,000
2001............................................................................... 90,000
2002............................................................................... 50,000
2003............................................................................... 24,000
--------
Total............................................................................ $358,000
========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998, and 1997 was $213,000,
$294,000, and $133,000, respectively.
8. Legal Proceedings and Contingencies
At December 31, 1999, and 1998, Heartland's allowance for claims and liabilities
was approximately $2.8 million in each year. During the years ended December 31,
1999, 1998, and 1997, $378,000, $1,461,000 and $78,000, respectively, was
recorded in respect to environmental matters. Significant legal matters are
discussed below.
Soo Line Matters
- ----------------
The Soo Line Railroad Company (the "Soo") has asserted that the Company is
liable for certain occupational injury claims filed after the consummation of an
Asset Purchase Agreement and related agreements ("APA") by former employees now
employed by the Soo. The Company has denied liability for each of these claims
based on a prior settlement with the Soo. The Soo has also asserted that the
Company is liable for the remediation of releases of petroleum or other
regulated materials at six different sites acquired from the Company located in
Iowa, Minnesota and Wisconsin. The Company has denied liability based on the
APA.
The occupational and environmental claims are all currently being handled by the
Soo, and the Company understands the Soo has paid settlements on many of these
claims. As a result of Soo's exclusive handling of these matters, the Company
has made no determination as to the merits of the claims and is unable to
determine the materiality of these claims.
Tacoma, Washington
- ------------------
In June 1997, the Port of Tacoma ("Port") filed a complaint in the United States
District Court for the Western District of Washington alleging that the Company
was liable under Washington state law for the cost of the Port's remediation of
a railyard sold in 1980 by the bankruptcy trustee for the Company's predecessor
to the Port's predecessor in interest.
On October 1, 1998, the Company entered into a Settlement Agreement with the
Port, subsequently modified effective June 1999, in which the Port released all
claims and the Company agreed either to (a) pay $1.1 million on or before
December 31, 2000, plus interest from January 1, 1999, or (b) to convey to the
Port real property to be agreed upon at
28
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
a later date. At December 31, 1999, and 1998, Heartland's allowance for claims
and liabilities for this site was $1,100,000 for each year.
The Company will not make a claim on its insurance carriers in this matter
because the settlement amount does not exceed the self insured retention under
the applicable insurance policies.
Wheeler Pit, Janesville, Wisconsin
- ----------------------------------
In November 1995 the Company settled an environmental claim with respect to the
Wheeler Pit site near Janesville, Wisconsin. The settlement calls for the
Company to pay General Motors $800,000 at $200,000 annually for four years, 32%
of the monitoring costs for twenty-five years beginning in 1997 and 32% of
governmental oversight costs; the oversight costs not to exceed $50,000.
Payments of $200,000 were made in 1995, 1996, 1997 and 1998. A payment of
$50,000 for past government oversight costs was made in October 1998. At
December 31, 1999, and 1998, Heartland's allowance for claims and liabilities
for this site was $189,000 and $184,000, respectively.
Miscellaneous Environmental Matters
- -----------------------------------
Under environmental laws, liability for hazardous substance contamination is
imposed on the current owners and operators of the contaminated site, as well as
the owner or the operator of the site at the time the hazardous substance were
disposed or otherwise released. In most cases, this liability is imposed
without regard to fault. Currently, the Company has known environmental
liabilities associated with certain of its properties arising out of the
activities of its predecessor or certain of its predecessor's lessees and may
have further material environmental liabilities as yet unknown. The majority of
the Company's known environmental liabilities stem from the use of petroleum
products, such as motor oil and diesel fuel, in the operation of a railroad or
in operations conducted by its predecessor's lessees. The following is a summary
of material known environmental matters, in addition to those described above.
The Montana Department of Environmental Quality ("DEQ") has asserted that the
Company is liable for some or all of the investigation and remediation of
certain properties in Montana sold by its predecessor's reorganization trustee
prior to the consummation of its predecessor's reorganization. The Company has
denied liability at certain of these sites based on the reorganization bar of
the Company's predecessors. The Company's potential liability for the
investigation and remediation of these sites was discussed in detail at a
meeting with DEQ in April 1997. While DEQ has not formally changed its position,
DEQ has not elected to file suit. Management is not able to express an opinion
at this time whether the cost of the defense of this liability or the
environmental exposure in the event of the Company's liability will or will not
be material.
At twelve separate sites, the Company has been notified that releases arising
out of the operations of a lessee, former lessee or other third party have been
reported to government agencies. At each of these sites, the third party is
voluntarily cooperating with the appropriate agency by investigating the extent
of any such contamination and performing the appropriate remediation, if any.
The Company has petroleum groundwater remediation projects or long term
monitoring programs at Austin, Minnesota, Farmington, Minnesota, and Miles City,
Montana. At December 31, 1999, and 1998, Heartland's aggregate allowance for
claims and liabilities for these sites were $32,000 and $41,000, respectively.
In December 1989, the Minnesota Pollution Control Agency ("MPCA") added a site
which includes the Company's Pig's Eye Yard site in St. Paul, Minnesota to its
Permanent List of Priorities based on historical records and an initial
investigation of soil and groundwater conditions adjacent to Pig's Eye Yard.
Portions of this site had been leased to the City of St. Paul for a landfill and
to the Metropolitan Waste Control Commission for disposal of incinerator ash.
The
29
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
site, which includes portions of the adjacent municipal wastewater treatment
plant, was placed on the Superfund Accelerated Clean Up Model list in 1993. No
potentially responsible parties ("PRPs") have been formally named at this site.
The Company sold its interest in this property to the City of St. Paul on April
30, 1999, with the City agreeing to indemnify the Company against certain
environmental liabilities.
The Company has an interest in property at Moses Lake, Washington previously
owned and used by the United States government as an Air Force base. A portion
of the Company's property is located over a well field which was placed on the
national priority list in October 1992. Sampling by the Army Corps of Engineers
has indicated the presence of various regulated materials, primarily in the
groundwater, which were most likely released as a result of military or other
third party operations. The Company has not been named as a PRP.
In July 1999, suit was filed against the Company in Minnesota District Court by
a buyer under an expired real estate sale contract originally entered into in
1995, and extended to June 30, 1999. The plaintiff in the suit is demanding
specific performance by conveyance to it of the vacant 5.95 acre parcel in
Minneapolis, Minnesota originally to be sold to the buyer for $562,000 pursuant
to the real estate contract. Environmental sampling in 1995 disclosed that the
parcel was impacted by releases of regulated materials from the 1960s operations
of a former lessee. The Company continues to investigate the environmental
condition of the property on a voluntary basis under the direction of the
Minnesota Department of Agriculture. At December 31, 1999 and 1998, Heartland's
aggregate allowance for claims and liabilities for the Moses Lake, Washington
and the 5.95 acre parcel in Minneapolis, Minnesota sites were $653,000 and
$524,000, respectively.
In addition to the environmental matters set forth above, there may be other
properties, i), with environmental liabilities not yet known to the Company, or
ii), with potential environmental liabilities for which the Company has no
reasonable basis to estimate or, iii), which the Company believes the Company is
not reasonably likely to ultimately bear the liability, but the investigation or
remediation of which may require future expenditures. Management is not able to
express an opinion at this time whether the environmental expenditures for these
properties will or will not be material.
The Company has given notice to its insurers of certain of the Company's
environmental liabilities. Due to the high deductibles on these policies, the
Company has not yet demanded that any insurer indemnify or defend the Company.
Consequently, management has not formed an opinion regarding the legal
sufficiency of the Company's claims for insurance coverage.
The Company is also subject to other suits and claims which have arisen in the
ordinary course of business. In the opinion of management, reasonably possible
losses from these matters should not be material to the Company's results of
operations or financial condition.
9. Compensation and Benefits
Heartland sponsors a Group Savings Plan, which is a salary reduction plan
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986.
All full-time permanent employees of Heartland are eligible to participate in
the plan. A participating employee can authorize contributions to the plan in
the form of salary reductions of up to the maximum allowed by the Internal
Revenue Code in any plan year. In 1999 Heartland made matching contributions of
25% of each participant's contribution to the plan. Participating 1998
employees were fully vested with respect to salary reduction and Heartland's
contributions. For all future participants, they are fully vested with respect
to salary reduction immediately but the matching contribution vests at 20% per
year. Benefits are normally distributed upon retirement (on or after age 65),
death or termination of employment, but may be distributed prior to termination
of employment upon showing of financial hardship. Heartland contributed to the
plan approximately $58,000 in 1999, $80,000 in 1998, and $60,000 in 1997 on
behalf of all employees.
30
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
10. Marketable Securities
At December 31, 1998 and 1997 all marketable securities were classified as
available-for-sale. Proceeds from sale and maturities of debt securities during
1999, 1998, and 1997, were $149,000, $297,000, and $9,015,000, respectively.
Purchases of debt securities during 1998 and 1997 were $303,000 and $4,379,000,
respectively. The gain on sale of securities in 1997 was approximately $3,000.
Proceeds from sales in 1999 and 1998 approximated cost for all securities at the
date of sale.
31
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
11. Reportable Segments
The following tables set forth the reconciliation of net income and total assets
for Heartland's reportable segments for the years ended December 31, 1999, 1998
and 1997 (See Note 2 to the Consolidated Financial Statements).
<TABLE>
<CAPTION>
Property
1999 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- -------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
- --------
Property sales $ 1,485 $ 10,063 $ 0 $ 11,548
Less: cost of property sales.......... 261 9,511 0 9,772
----------------- ----------------- ----------------- -----------------
Gross profit on property sales...... 1,224 552 0 1,776
----------------- ----------------- ----------------- -----------------
Operating Expenses:
- ------------------
Selling expenses...................... 806 2,764 0 3,570
General and administrative expenses... 0 480 2,179 2,659
Real estate taxes..................... 164 15 0 179
Environmental Expense................. 94 284 0 378
----------------- ----------------- ----------------- -----------------
Total Operating Expenses 1,064 3,543 2,179 6,786
----------------- ----------------- ----------------- -----------------
Net Operating Income (loss) 160 (2,991) (2,179) (5,010)
Other Income and (Expenses):
- ---------------------------
Portfolio income...................... 0 0 123 123
Rental income......................... 772 0 0 772
Other income.......................... 0 917 0 917
Depreciation.......................... 0 (89) (45) (134)
Management fee........................ 0 0 (425) (425)
----------------- ----------------- ----------------- -----------------
Total Other Income and (Expense).... 772 828 (347) 1,253
----------------- ----------------- ----------------- -----------------
Net Income (Loss)..................... $ 932 $ (2,163) $ (2,526) $ (3,757)
================= ================= ================= =================
Properties, net of accumulated
Depreciation........................ $ 783 $ 49,171 $ 797 $ 50,751
================= ================= ================= =================
Total assets........................ $ 1,156 $ 52,650 $ 3,450 $ 57,256
================= ================= ================= =================
</TABLE>
32
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Property
1998 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- -------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
- --------
Property sales $ 1,814 $ 4,417 $ 0 $ 6,231
Less: cost of property sales.......... 215 4,190 0 4,405
----------------- ----------------- ----------------- -----------------
Gross profit on property sales...... 1,599 227 0 1,826
----------------- ----------------- ----------------- -----------------
Operating Expenses:
- ------------------
Selling expenses...................... 969 2,876 0 3,845
General and administrative expenses 0 327 2,792 3,119
Real estate taxes..................... 209 190 0 399
Environmental Expense................. 248 25 1,188 1,461
----------------- ----------------- ----------------- -----------------
Total Operating Expenses 1,426 3,418 3,980 8,824
----------------- ----------------- ----------------- -----------------
Net Operating Income (loss) 173 (3,191) (3,980) (6,998)
Other Income and (Expenses):
- ---------------------------
Portfolio income...................... 0 0 63 63
Rental income......................... 886 0 0 886
Other income.......................... 0 514 0 514
Depreciation.......................... 0 (84) (40) (124)
Management fee........................ 0 0 (425) (425)
----------------- ----------------- ----------------- -----------------
Total Other Income and (Expense).... 886 430 (402) 914
----------------- ----------------- ----------------- -----------------
Net Income (Loss)..................... $ 1,059 $ (2,761) $ (4,382) $ (6,084)
================= ================= ================= =================
Properties, net of accumulated
depreciation........................ $ 937 $ 26,296 $ 819 $ 28,052
================= ================= ================= =================
Total assets........................ $ 1,290 $ 29,403 $ 2,538 $ 33,231
================= ================= ================= =================
</TABLE>
33
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Property
1997 (amounts in thousands) Land Sales (1) Development (2) Corporate (3) Consolidated
- -------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
- --------
Property sales $ 1,708 $ 5,419 $ 0 $ 7,127
Less: cost of property sales.......... 125 3,282 0 3,407
----------------- ----------------- ----------------- -----------------
Gross profit on property sales...... 1,583 2,137 0 3,720
----------------- ----------------- ----------------- -----------------
Operating Expenses:
- ------------------
Selling expenses...................... 562 1,903 0 2,465
General and administrative expenses... 0 50 3,520 3,570
Real estate taxes..................... 182 521 0 703
Environmental Expense................. 0 78 0 78
----------------- ----------------- ----------------- -----------------
Total Operating Expenses 744 2,552 3,520 6,816
----------------- ----------------- ----------------- -----------------
Net Operating Income (loss) 839 (415) (3,520) (3,096)
Other Income and (Expenses):
- ---------------------------
Portfolio income...................... 0 0 62 62
Rental income......................... 1,104 0 0 1,104
Other income.......................... 0 286 0 286
Depreciation.......................... 0 (67) (27) (94)
Management fee........................ 0 0 (425) (425)
----------------- ----------------- ----------------- -----------------
Total Other Income and (Expense).... 1,104 219 (390) 933
----------------- ----------------- ----------------- -----------------
Net Income (Loss)..................... $ 1,943 $ (196) $ (3,910) $ (2,163)
================= ================= ================= =================
</TABLE>
(1) The Land Sales business segment consists of approximately 14,458 acres of
land located throughout 12 states for sale as of December 31, 1999, and
related sales and marketing and general and administrative expenses.
(2) The Property Development business segment consists of approximately 890
acres representing 15 sites that Heartland is in the process of developing
or homebuilding communities in which the Company is currently acquiring
finished lots, selling and building homes. The related selling and
operating expenses are also reported for this business segment.
(3) The Corporate level consist of portfolio income from investments, salaries
and general and administrative expenses for the employees and occupied
office space in Chicago, Illinois.
34
<PAGE>
Heartland Partners, L.P.
Notes to Consolidated Financial Statements (Continued)
12. Subsequent Events
In January 2000, the Company executed a sales contract on 103 acres located in
Rosemount, Minnesota for $4,000,000. This parcel of land is located adjacent to
the Company's 226 acre Bloomfield development. The sale is projected to close by
September 29, 2000. While the Company has no reason to believe the above-
described sale will not close, the contract contains contingencies typical of
such contracts and there can be no assurance the transaction will be completed.
On March 20, 2000, the Company executed documents with LNB that increased the
credit facility to $15,300,000 and extended the maturity date of the loan to
December 31, 2000. Heartland also granted LNB a first lien on 177 acres located
in Fife, Washington which had a carrying value of $3,891,000 at December 31,
1999.
On March 24, 2000, a sales contract was executed by the Company to sell its
Galewood property located in Chicago, Illinois for $7,750,000. The sale is
projected to close by June 30, 2000. While the Company has no reason to believe
the above-described sale will not close, the contract contains contingencies
typical of such contracts and there can be no assurance the transaction will be
completed.
35
<PAGE>
SCHEDULE II
HEARTLAND PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1999, 1998 AND 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
Beginning costs and at end
Description Of year expenses Payments of year
----------- ------- -------- -------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Allowance for claims and liabilities............... $2,762 $ 378 $(336) $2,804
====== ====== ===== ======
Year Ended December 31, 1998:
Allowance for claims and liabilities............... $2,169 $1,461 $(868) $2,762
====== ====== ===== ======
Year Ended December 31, 1997:
Allowance for claims and liabilities............... $2,660 $ 78 $(569) $2,169
====== ====== ===== ======
</TABLE>
36
<PAGE>
SCHEDULE III
HEARTLAND PARTNERS, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
Description Cost Capitalized Gross Amount at Which
- ----------- Initial Cost to Subsequent Carried
Land, Buildings and Other Heartland to Acquisition (1) at Close of Period (1)
--------- ------------------ ----------------------
Building,
Buildings & Carrying Improvement and
Land Improvements Improvements (3) Costs(4) Land Carrying Costs Total
---- ------------ ---------------- -------- ---- ---------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Chicago, IL............... (6) $661 $ -- $ 142 $ 269 $661 $ 411 $1,072
Milwaukee, WI............. 61 816 177 149 61 1,142 1,203
Corporate and other....... (5) -- -- 1,774 -- -- 1,774 1,774
---- ------------ ---------- -------- ---- ------- ------
TOTAL $722 $ 816 $ 2,093 $ 418 $722 $ 3,327 $4,049
==== ============ ========== ======== ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Life on
Which
Depreciation
In Latest
Description Date of Income
- ----------- Accumulated Completion of Date Statement
Land, Buildings and Other Depreciation Construction Acquired Is Computed
------------ -------------- --------- -----------
<S> <C> <C> <C> <C>
Chicago, IL (6) $ -- Various Various (2)
Milwaukee, WI 509 Various Various (2)
Corporate and other 556 Various Various (2)
------------
TOTAL $ 1,065
============
</TABLE>
(1) See Attachment A to Schedule III for reconciliation of beginning of period
total to total at end of period.
(2) Reference is made to Note 2 to the Consolidated Financial Statements for
information related to depreciation.
(3) Improvements include all costs which increase the net realizable value of
the property except carrying costs.
(4) Carrying costs consists primarily of legal fees, real estate taxes and
interest.
(5) This amount includes furniture, equipment and other fixed assets that are
included in Land, buildings and other on the Consolidated Balance Sheet.
(6) Includes a parcel of land encumbered by a $11,800,000 short-term loan (See
Note 4 to the Consolidated Financial Statements).
37
<PAGE>
HEARTLAND PARTNERS, L.P.
ATTACHMENT A TO SCHEDULE III
RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING
OF YEAR WITH TOTAL AT END OF YEAR
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1................................. $ 3,563 $ 3,230 $ 2,585
------------- ------------- -------------
Additions during year:
Other acquisitions.................................. 357 229 370
Improvements......................................... 129 104 415
------------- ------------- -------------
Total Additions..................................... 486 333 785
------------- ------------- -------------
Deductions during year:
Cost of real estate sold............................ -- -- 140
------------- ------------- -------------
Total deductions.................................. -- -- 140
------------- ------------- -------------
Balance at December 31............................... $ 4,049 $ 3,563 $ 3,230
============= ============= =============
</TABLE>
Reconciliation Of Real Estate Accumulated Depreciation
At Beginning of Year with Total At End of Year
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1................................. $ 931 $ 807 $ 853
------------- ------------- -------------
Additions during year:
Charged to Expense................................. 134 124 94
------------- ------------- -------------
Total Additions.................................. 134 124 94
------------- ------------- -------------
Deductions during year:
Cost of real estate sold........................... --- --- 140
------------- ------------- -------------
Total deductions................................. --- --- 140
------------- ------------- -------------
Balance at December 31............................... $ 1,065 $ 931 $ 807
============= ============= =============
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
38
