<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2000
------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File Number: 1-11956
HEARTLAND TECHNOLOGY, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1487580
------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
330 North Jefferson Court, Chicago, Illinois 60661
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/575-0400
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Former Address: 547 West Jackson Boulevard, Suite 1510, Chicago, Illinois 60661
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
As of August 10, 2000, there were 1,671,238 shares of the registrant's common
stock outstanding.
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets.................................. 2
Consolidated Statements of Operations........................ 3
Consolidated Statements of Cash Flows........................ 4
Notes to Consolidated Financial Statements................... 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.................................. 23
Signatures.................................................................. 24
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, except share amounts)
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
---- ----
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 28 $ 105
Accounts receivable, net of reserves of $197 ($250 at December 31,
1999) 3,034 3,643
Due from affiliate 842 -
Inventories, net 1,146 3,236
Prepaid expenses and other assets 134 335
------- -------
Total current assets 5,184 7,319
Property and equipment:
Machinery and equipment 8,223 10,339
Furniture and fixtures 472 593
Leasehold improvements 441 887
------- -------
Property and equipment at cost 9,136 11,819
Less accumulated depreciation 4,817 4,506
------- -------
Property and equipment, net 4,319 7,313
Other assets:
Goodwill, net of accumulated amortization of $1,761 ($1,422 at
December 31, 1999) 11,090 11,429
Deferred debt issuance costs, net of accumulated amortization of
$116 ($83 at December 31, 1999) 84 118
Other 139 145
Investment in joint venture 744 -
Investment in partnerships 7,703 4,387
------- -------
Total assets $29,263 $30,711
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 510 $ 757
Debt in default 5,382 6,172
Accounts payable, trade 3,406 4,321
Accrued expenses and other liabilities 1,397 1,693
Current portion of long-term debt 4,200 3,867
Current portion of capital lease obligations 116 108
Allowance for claims and liabilities 1,281 1,281
Payable to affiliate 2,539 1,093
Taxes payable 152 -
------- -------
Total current liabilities 18,983 19,292
------- -------
Long-term debt, less current portion 3,501 3,888
Capital lease obligation, less current portion 164 222
Stockholders' equity:
Common stock, $.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding 501 501
Additional paid-in capital 11,215 10,773
Accumulated deficit (5,101) (3,965)
------- -------
Total stockholders' equity 6,615 7,309
------- -------
Total liabilities and stockholders' equity $29,263 $30,711
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 2 of 25
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Operations
(Amounts in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
---------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $5,201 $ 9,209 $ 12,611 $ 17,080
Cost of sales 5,091 8,250 11,876 14,053
------ -------- -------- --------
Gross margin 110 959 735 3,027
Other income (loss):
Management fee from affiliate -- 106 -- 212
Equity in income (loss) from
investment in partnerships 4,235 (1,452) 3,316 (2,386)
Equity in loss from joint venture (203) -- (203)
Miscellaneous, net 14 247 18 248
------ -------- -------- --------
Total other income (loss) 4,046 (1,099) 3,131 (1,926)
Other expenses:
Selling, general and
administrative 1,411 2,239 3,513 4,446
Interest expense 590 373 1,079 642
Amortization expense 186 186 372 370
------ -------- -------- --------
Total other expenses 2,187 2,798 4,964 5,458
------ -------- -------- --------
Income (loss) before income taxes
and extraordinary item 1,969 (2,938) (1,098) (4,357)
Income tax expense 3 18 38 64
------ -------- -------- --------
Income (loss) before extraordinary
loss 1,966 (2,956) (1,136) (4,421)
Extraordinary loss on debt refinancing -- -- -- 509
------ -------- -------- --------
Net income (loss) $1,966 $ (2,956) $ (1,136) $ (4,930)
====== ======== ======== ========
Income (loss) per share before
extraordinary loss $ 1.18 $ (1.77) $ (0.68) $ (2.65)
------ -------- -------- --------
Net income (loss) per share for
extraordinary loss $ -- $ -- $ -- $ (.30)
------ -------- -------- --------
Net income (loss) per share-basic and
diluted $ 1.18 $ (1.77) $ (0.68) $ (2.95)
====== ======== ======== ========
Weighted average number of common
shares outstanding 1,671 1,671 1,671 1,671
====== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 3 of 25
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Operating activities:
Net loss $(1,136) $(4,930)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,463 1,437
Accretion of warrant value 110 --
Equity in (income) loss from investments in partnerships (3,316) 2,386
Equity in loss from joint venture 203 --
Bad debt expense (51) 15
Reserve for inventory obsolescence 633 (490)
Loss from sale of equipment 5 --
Changes in operating assets and liabilities
Accounts receivable 340 (2,480)
Due from affiliate -- 284
Inventories, net 1,149 (818)
Prepaid expenses and other assets 183 138
Refundable taxes 18 59
Accounts payable and accrued expenses (180) 1,667
Payable to affiliate 1,446 (151)
Taxes payable 152 --
-------- --------
Net cash provided by (used in) operating activities 1,019 (2,883)
Investing activities:
Purchases of property and equipment (143) (394)
Investment in joint venture (8) --
-------- --------
Net cash used in investing activities (151) (394)
Financing activities:
Net borrowings (payments) under line of credit (1,621) 1,600
Proceeds from issuance of long-term debt 1,550 2,358
Proceeds on capital leases -- 43
Payments on capital leases (51) (33)
Principal payments on long-term debt (823) (757)
Debt issuance costs -- 66
-------- --------
Net cash provided by financing activities (945) 3,277
-------- --------
Decrease in cash and cash equivalents (77) --
Cash and cash equivalents at beginning of period 105 --
-------- --------
Cash and cash equivalents at end of period $ 28 $ --
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 4 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements of Heartland Technology, Inc. (the
"Company" or "HTI") include the accounts of the Company and its subsidiaries,
P.G. Design Electronics, Inc. ("PG"), Solder Station-One, Inc. ("Solder"), HTI Z
Corp. (formerly Zecal Corp.), Zecal Technology, LLC ("ZTLLC"), and HTI
Interests, LLC ("HTII"). The investment in Zecal Technology, LLC, which is 50%
owned and where the Company exercises significant influence over operations, is
accounted for using the equity method. Significant intercompany transactions and
accounts have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Sales to a few large customers continue to account for a significant percentage
of the Company's revenues. The Company does not have long term contracts with
any of these large customers. If the Company loses a major customer, or if a
major customer materially reduces its purchases of products and services,
financial results will be materially affected.
In the opinion of management, the consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, operating results, and cash flows for
the periods presented. Operating results for the three and the six month periods
ended June 30, 2000, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. The interim statements should be
read in conjunction with the consolidated financial statements and notes
thereto, for the year ended December 31, 1999, as presented in the Company's
Annual Report on Form 10-K.
2. Nature of Business and Organization
The Company is engaged in the electronic contract manufacturing business. On a
contract basis, the Company designs, manufactures and tests electronic
assemblies, designs and tests Z-Strate(R) circuit boards, and provides services
to the printed circuit board industry. While the customer base is diverse, the
primary customers are Original Equipment Manufacturers "(OEM's") in the computer
and computer printer industry. The Company works either on a turnkey or
consignment basis. Turnkey involves procurement of materials as well as product
assembly, whereas the customer provides the components for consignment orders.
Through its partnership interests in Heartland Partners, L.P. ("Heartland") and
CMC Heartland Partners ("CMC Heartland"), the Company is also engaged in the
business of development of real estate, including the properties formerly owned
by the Company. This real estate development business consists of the leasing,
development and sale of various commercial, residential and recreational
properties in Illinois, Georgia, Wisconsin, Montana, Minnesota and
Page 5 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Washington. The investments in Heartland and CMC Heartland (collectively, the
"Partnerships") are accounted for using the equity method since the Company has
significant influence over the Partnerships' operations.
In May 1997, HTI purchased substantially all of the assets, and assumed certain
liabilities of PG Design Electronics. PG Design Electronics was engaged in the
business of contract design and manufacture of electronics assemblies for
computer and computer printer OEM's.
On April 10, 1998, HTI acquired 100% of the outstanding common stock of Solder,
a provider of specialty services to the printed circuit board industry.
On April 29, 1998, PG acquired certain assets and assumed certain liabilities
of Zecal, which owns patented "Z-Strate"(R) technology for plating fine line
copper circuits on a ceramic substrate.
On May 5, 2000, HTI Z and LZ Partners funded a newly organized entity Zecal
Technology, LLC. HTI Z contributed all assets and certain liabilities of Zecal
Corp. with a net book value of $947,000 to ZTLLC in exchange for a 50% interest.
LZ Partners contributed $4 million cash to ZTLLC. The name of Zecal Corp. was
changed to HTI Z Corp.
On May 19, 2000 PG transferred 100% of its outstanding common stock of HTI Z
Corp. to HTI.
3. Inventories
The components of inventories consist of the following (amounts in thousands):
June 30, 2000 December 31, 1999
------------- -----------------
Raw materials $2,240 $3,826
Work-in-process 72 140
Finished goods 180 188
------ ------
2,492 4,154
Less: Allowance for obsolescence 1,346 918
------ ------
Inventories, net $1,146 $3,236
====== ======
4. Investment in Partnerships and Related Party Transactions
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and allocation
of taxable income and loss. The Company also has a .01% general partnership
interest in CMC Heartland which entitles the Company to .01% of CMC Heartland's
available cash for distribution and an allocation of taxable income and loss
before distributions. The Company also owns the Class B limited partnership
interest in Heartland (the "Class B Interest"). In general, the Class B Interest
entitles the holder to .5% of Heartland's available cash for distribution and
allocation of taxable income and loss. The Partnership Agreement provides
generally that the Partnership's losses, other than those attributable to the
satisfaction of Plan Liabilities (hereafter defined), will be allocated 1% to
the General
Page 6 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Partner, 98.5% to the Class A limited partners, and 0.5% to the Class B limited
partner. If the allocation of a net loss to a partner would cause that partner
to have a negative balance in their capital account, such net loss shall be
allocated only among partners having positive balances in their capital
accounts. As of January 1, 1999, the Class B partner was the only partner with a
positive capital balance remaining and as such was allocated 100% of the
Partnership losses since that date. In addition, items of deduction, loss,
credit and expense attributable to the satisfaction of Plan Liabilities 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 condensed balance sheets as of June 30, 2000 and December 31, 1999 and the
summarized income statement for Heartland for the three and six month periods
ended June 30, 2000 and 1999 for Heartland are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
June 30 December 31,
2000 1999
---------- -----------
(unaudited)
<S> <C> <C>
Assets:
Cash and marketable securities $ 4,329 $ 4,412
Receivables, net 158 373
Other assets 2,869 1,310
Net properties and investment in joint venture 50,881 51,161
------- -------
Total assets $58,237 $57,256
======= =======
Liabilities:
Accounts payable, accrued expenses and other liabilities $13,424 $16,030
Allowance for claims and liabilities 2,851 2,804
Loans payable 32,993 32,770
------- -------
Total liabilities $49,268 $51,604
======= =======
Partners' capital:
General partner $ -- $ --
Class A partners -- --
Class B partner 8,969 5,652
------- -------
Total partners' capital 8,969 5,652
------- -------
Total liabilities and partners' capital $58,237 $57,256
======= =======
</TABLE>
Page 7 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June Ended June
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Property sales $19,844 $ 2,520 $22,494 $ 4,562
Less: cost of
property sales 14,384 2,019 16,978 3,964
------- ------- ------- -------
Gross profit
on property sales 5,460 501 5,516 598
------- ------- ------- -------
Rental and other income 512 272 804 795
------- ------- ------- -------
Total net revenues 5,972 773 6,320 1,393
Expenses:
Selling, general
and administrative 1,658 1,904 2,826 3,281
Real estate taxes 23 81 45 141
Environmental expenses 56 240 133 270
------- ------- ------- -------
Total expense 1,737 2,225 3,004 3,692
======= ======= ======= =======
Net income (loss) $ 4,235 $(1,452) $ 3,316 $(2,299)
======= ======= ======= =======
</TABLE>
5. Lines of Credit
The Company's lines of credit are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands)
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Line of credit with Wells Fargo Business Credit, Inc.
(formerly Norwest Business Credit, Inc.), bearing
interest at the base rate plus 0.25% plus the 3%
default rate (12.75% at June 30, 2000) (included in
debt in default) $1,198 $2,572
Line of credit with LaSalle National Bank bearing
interest at the base rate plus 2% (11.50% at June 30, 2000) 510 757
------ ------
Total lines of credit $1,708 $3,329
====== ======
</TABLE>
Page 8 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long Term Debt
The Company's debt obligations consist of the following:
(Amounts in thousands)
June 30, December 31,
2000 1999
--------- ---------
Term loan payable to LaSalle National
Bank in original principal amount of
$1,200,000. Interest is at prime plus 1.5%
(11% at June 30, 2000) and is paid monthly.
The loan has level monthly principal
payments over three years $ 407 $ 607
Term loan payable to LaSalle National
Bank in original principal amount of
$900,000. Interest is at prime plus 1.0%
(10.50% at June 30, 2000) and is paid
monthly. The loan has level monthly
principal payments over five years 495 585
Term loan payable to Wells Fargo Business
Credit in original amount of $4,500,000.
Principal payments of $75,000 plus interest
are payable over a 60 month period. Interest
accrues at the base rate plus 0.25% plus the
3% default rate (12.75% at June 30, 2000)
(included in debt in default) 3,100 3,600
Other notes payable 126 158
Subordinated notes to related parties
bearing interest at 13%. Interest payable
quarterly 1,668 450
Subordinated note to the sellers of Solder
bearing 8% interest payable quarterly and
having three semiannual principal payments
of $400,000 plus a final payment of
$500,000 plus accrued interest. The first
installment was due on October 10, 1999.
Interest payments are deferred and added to
the note balance until Solder achieves
certain financial ratios 2,005 1,927
Page 9 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Subordinated note to the seller of Zecal
Corp. with 8% interest beginning on April
29, 1999. Interest, with principal payments
of $91,667 are due quarterly beginning July
30, 1999 (included in debt in default) 1,084 1,028
Subordinated notes to the seller of P.G.
Design bearing 8% interest, paid quarterly.
The notes are payable $1,500,000 in
September 2000 and $1,500,000 in May
2002 3,000 3,000
-------- --------
Total long term debt 11,885 11,355
-------- --------
Less current portion of long-term debt,
including debt in default 8,384 4,720
-------- --------
Long term debt, less current portion $ 3,501 $ 6,635
======== ========
On December 23, 1999, the Company received subscriptions for $2 million in
subordinated debentures at an interest rate of 13% for a two-year term. The
subscribers were shareholders of the Company. The debentures were accompanied by
warrants which permit the purchase of 165 HTI common shares per $1,000 principal
amount of the debentures, for a total of 330,000 warrants for the entire $2
million subscribed. The warrants are exercisable at any time during their four-
year duration at an exercise price of $2-3/8 per share. The debentures are
secured by the Class B interest in Heartland, which is held by the Company. In
the event that Heartland enters into a loan agreement with the Company
collateralized by the Class B interest, that security interest will be released.
By the end of the first quarter 2000, all $2 million subscriptions had been
funded.
In January 1999, the Company refinanced the existing debt of PG and Zecal with
General Electric Capital Corporation ("GECC") by entering into an agreement with
Wells Fargo Business Credit ("WFBC"). The agreement, effective December 31,
1998, provides for a line of credit with a maximum available amount of
$10,500,000, and a term loan of $4,500,000. The term loan is payable in 60
monthly installments of $75,000 plus accrued interest. The interest rate on the
loans is the lender's base rate plus 0.25% plus the 3% default rate (12.75% at
June 30, 2000). At June 30, 2000, the principal amount outstanding of the line
of credit was $1,198,000 and the amount outstanding on the term loan was
$3,100,000. The agreement carries an unused line fee of 0.25% per annum, payable
monthly, based on the average daily unused amount. A facility fee of .25% per
annum is payable on the total facility on the first day of April, July, October
and January. The agreement carries certain prepayment penalties and requires the
Company to maintain certain financial covenants. On January 8, 1999, the Company
was advanced $5,260,000 from the WFBC line of credit and the term loan, the
proceeds of which were used to repay all the loans outstanding with GECC. In
connection with this refinancing, PG incurred approximately $353,000 of
prepayment penalties from GECC. PG was also required to write off approximately
$156,000 in loan origination fees that were being amortized over the life of the
GECC loans. These amounts were recorded as an extraordinary charge in the first
quarter of 1999. As a result of the GECC prepayment penalties, the
Page 10 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company was in default of certain financial covenants at the end of the first
quarter of 1999. WFBC entered into a second amendment to the loan agreement and
waived those defaults. As a result of the default, WFBC has assessed the default
rate of interest beginning May 1, 1999 (the point at which the default
commenced) and reduced the allowable inventory borrowing base. Subsequently, PG
failed to achieve certain profit levels in the second and third quarters of 1999
and WFBC entered into a third amendment to the loan agreement that reduced the
allowable borrowing base and waived the defaults. In January 2000, the Company
received notification from WFBC that demanded payment in full, by May 1, 2000 of
all obligations due. On April 21, 2000, WFBC entered into a fourth amendment to
the loan agreement and an amendment to the default letter that increased the
amounts of monthly payments to the term note from $75,000 a month to $25,000 a
week, waived the $10,000 monthly accommodation fee, and extended the final date
for payment to August 1, 2000. Management has been seeking other sources of
credit for PG. On July 28, 2000, WFBC entered into a sixth amendment of the loan
agreement that increases the amount of the weekly reduction of the term loan
from $25,000 to $35,000 effective August 7, 2000. Also included in the amendment
is one-percentage point per week reduction of the receivable accounts borrowing
base from its current level of 85%, effective September 8, 2000 and extended the
final date for payment to November 30, 2000.
Solder has term loans payable to LaSalle National Bank ("LSNB") in original
principal amounts of $1,200,000 and $900,000. The loans have level monthly
principal payments. Interest is paid monthly. The $1,200,000 loan is for a three
year term and bears interest at the prime rate plus 1.5% (11% at June 30, 2000).
The $900,000 loan is for a five year term and bears interest at the prime rate
plus 1% (10.5% at June 30, 2000). 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
June 30, 2000, were $407,000 and $495,000, respectively. An early termination
fee of 1% to 3% of the outstanding balance of either note will be charged if the
loan is repaid prior to maturity. The loans are guaranteed by HTI which has
pledged 100% of its stock in Solder.
Solder is in violation of certain financial covenants with respect to its long
term loans. The bank has not notified the Company that it is in default but may
do so.
HTI Z has a note payable to the seller of Zecal's assets in the original
principal amount of $1,100,000. The note bears 8% interest, beginning one year
(April 29, 1999) after issuance. Interest and principal payments of $91,667 are
due quarterly beginning July 30, 1999. At June 30, 2000, $1,084,000 was
outstanding including accrued interest. Payments due October 30, 1999, January
30, 2000 April 30, 2000 and July 31, 2000 have not been made. The seller has not
notified the Company that it is in default, but may do so. Under the Asset
Purchase Agreement, dated May 5, 2000, ZTLLC is obligated to reimburse HTI for
all future payments on the note to the seller of Zecal's assets. The
reimbursements to be received total $842,000, and are included in Due from
affiliate in the accompanying balance sheet.
Page 11 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Industry Segments
The Company currently is engaged in two lines of business: (1) electronic
manufacturing and (2) real estate. The manufacturing business segment covers the
Company's manufacture of electronics assemblies on a contract basis, primarily
for the computer and computer printer industries, the manufacturing of ceramic
circuit boards and the providing of services for the printed circuit board
industry. The real estate business segment covers the Company's investment in
real estate partnerships. Approximately $2,127,000 and $2,030,000 of product was
shipped to Europe in the first six months of 2000 and 1999, respectively. As of
and for the quarters and six months ended June 30, 2000 and 1999, certain
information relating to the Company's business segments are set forth in the
table below:
Selected Financial Data for the three months June 30, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands)
Sales and Income (loss) Depreciation
Business segment Identifiable other income before taxes and
assets and amortization Capital
extraordinary expense expenditures
item
<S> <C> <C> <C> <C> <C>
Manufacturing $21,439 $5,012 $(2,001) $683 $9
Real estate 7,703 4,235 4,235 -- --
Corporate 121 -- (268) -- --
------- ------ ------- ---- --
Total Company $29,263 $9,247 $ 1,966 $683 $9
======= ====== ======= ==== ==
</TABLE>
Selected Financial Data for the six months ended June 30, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands)
Sales and Income (loss) Depreciation
Business segment other income before taxes and
and amortization Capital
extraordinary expense expenditures
item
<S> <C> <C> <C> <C>
Manufacturing $12,422 $(3,966) $1,463 $143
Real estate 3,316 3,316 -- --
Corporate 4 (486) -- --
------- ------- ------ ----
Total Company $15,742 $ 1,136 $1,463 $143
======= ======= ====== ====
</TABLE>
Page 12 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Selected Financial Data for 1999
<TABLE>
<CAPTION>
For the three months ended June 30, 1999
----------------------------------------
Sales and Income (loss) Depreciation
Business segment Identifiable other income before taxes and
assets and amortization Capital
as of extraordinary expense expenditures
December item
31, 1999
<S> <C> <C> <C> <C> <C>
Manufacturing $26,069 $ 9,254 $(1,534) $700 $296
Real estate 4,387 (1,452) (1,452) -- --
Corporate 255 294 48 -- --
------- ------- ------- ---- ----
Total Company $30,711 $ 8,110 $(2,938) $700 $296
======= ======= ======= ==== ====
</TABLE>
Selected Financial Data for 1999
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
--------------------------------------
Sales and Income (loss) Depreciation
Business segment other income before taxes and
and amortization Capital
extraordinary expense expenditures
item
<S> <C> <C> <C> <C>
Manufacturing $16,902 $(1,874) $1,437 $394
Real estate (2,386) (2,386) -- --
Corporate 638 (97) -- --
------- ------- ------ ----
Total Company $15,154 $(4,357) $1,437 $394
======= ======= ====== ====
</TABLE>
8. Earnings Per Share
Net income per share for the second quarter of 2000 was $1.18. The net loss for
the comparable period of 1999 was $1.77 per share. Net loss per share for the
six months ended June 30, 2000 was $0.68 compared to $2.95 for the comparable
period 1999. Calculations of earnings per common share are based on 1,671,238
shares outstanding. Warrants and options to purchase common stock were
outstanding during the first six months of 2000 but were not included in the
computation of diluted earnings per share because the exercise prices of the
warrants and options were greater than the average market price of the common
shares.
Page 13 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section and elsewhere
in this Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
not guarantees of future performance. They involve risks, uncertainties and
other important factors, including the risks discussed below. The Company's
actual future results, performance or achievement of results and the value of
the Company's stock, may differ materially from any such results, performance,
achievement or value implied by these statements. We caution you not to put
undue reliance on any forward-looking statements. In addition, we do not have
any intention or obligation to update the forward-looking statements in this
document. The Company claims the protection of the safe harbor for forward-
looking statements contained in Section 21E of the Securities Exchange Act of
1934.
ELECTRONICS BUSINESS
The Company has two lines of business. It is engaged in electronic contract
manufacturing through its subsidiaries, PG, HTI Z (formerly Zecal Corp.),
Solder, and Zecal Technology, LLC. The investment in Zecal Technology, LLC,
which is 50% owned and where the Company exercises significant influence over
operations, is accounted for using the equity method. The Company also holds
general partner interests in partnerships which are engaged in real estate
sales, leasing and development.
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 and chip-on-board technologies in the manufacture
of electronic assemblies. Electronic devices are soldered directly to the
circuits on the surface of a printed circuit board. The Company also produces
electronic circuits on ceramic substrates using its proprietary Z-Strate(R)
process, and provides services to the printed circuit board industry. The
Company's largest customers purchase memory modules. A memory module is a
printed circuit board containing one or more memory chips and associated
electronic devices and circuitry. While the Company does produce standard memory
modules of the type used in typical desktop computers, it specializes in the
design,
Page 14 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
production and testing of "custom" memory modules for high-end workstations,
servers and for computer printers. The Company designs and manufactures, for
computer printer OEMs, a product which is used in retail stores to demonstrate
the capabilities of computer printers ("PODs"). The Company has introduced
refinements to the Z-Strate(R) process to improve its application in the radio
frequency ("RF") wireless and broadband telecommunications markets. RF
applications include wireless communication products such as cellular phone
handsets, cellular phone stations, satellite phones and coaxial and fiber-optic
cable television ("CATV") distribution systems. Services provided to printed
circuit board manufacturers include hot air solder leveling, solder mask, and
precious metal plating.
The products manufactured by the Company are complex, generally involve low
volume production runs and require the use of modern technology, production
techniques and equipment.
Customer Base. The majority of the Company's customers are located in the United
States; however, their products are shipped internationally. In the first six
months of 2000, NEC accounted for approximately 25% and Hewlett Packard
accounted for approximately 16% of the Company's business. The Company believes
that it has strong relationships with its major customers which have been
established over the years. However, the Company is likely to lose one and could
lose others of these customers and the loss of one or more of them could have a
material adverse effect on the Company's results. The Company does not have any
long-term contractual relationships with any of its customers.
Zecal's marketing operations are supervised by its Vice President of Marketing.
PG and Solder's marketing and sales are performed by senior management and
technical personnel of the Company. In addition, the Company uses outside sales
representatives.
Strategy. The Company's strategy is to focus on high margin segments of the
electronics manufacturing business. The Company does accept lower margin
business in certain instances to develop or maintain relationships with
companies and to utilize its capacity. While the Company seeks to increase sales
to existing customers, it also plans to diversify products, as well as the
customers and industries to which it sells. The Company is looking for
opportunities for growth by acquisition or joint venture, as well as by
expanding its existing business. The Company aims to grow its business within
its niche of technically advanced design and manufacturing, which it believes is
appropriate for its strengths and long-term objectives. The Company has added
manufacturing capacity, is adding testing equipment and is working on the design
and prototyping of new products. To realize this strategy, the Company may
require the allocation of substantial resources, some or all of which may be
unavailable to the Company.
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
Page 15 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
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 201 employees at the three subsidiary companies.
Page 16 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
Raw Materials. The raw materials required for electronics contract
manufacturing, including printed circuit boards, ceramic substrate, chemicals,
memory chips, bare semiconductor dice, electronic components such as resistors,
diodes and capacitors, and solder are generally readily available from outside
suppliers, with lead times ranging from a couple of days to fourteen weeks for
some components. Memory chips for the memory modules are typically provided by
the contract purchaser. The Company has at times experienced delays in its
supply of memory chips. The Company purchases other components from a number of
outside suppliers and is not dependent on any particular supplier.
Cyclical Demand. The Company does not believe that its business is subject to
seasonal variations, but it may be subject to cyclical demand associated with
orders received. The Company is largely dependent on its ability to deliver
short runs and quick turnarounds, requiring the maintenance of sufficient
inventory to meet these demands. The Company does receive monthly forecasts from
its major customers of anticipated needs for long lead components, enabling it
to maintain continuous allotments and shipments of goods from suppliers as
required.
Backlog. The Company has not historically tracked backlog orders because orders
are often received with short lead times and all orders are subject to
cancellation or postponement.
Operations. The Company believes that it made progress on a number of fronts in
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 first six
months of 2000 it has reduced its staffing by 91 employees and expects an
approximate annual saving of $3,554,000 in staffing expenses. At Zecal, LLC 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 its current customers
and is seeking to add additional semiconductor manufacturers as custom memory
module customers.
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, and has received production orders, for a
new POD to address the PC industry's introduction of Universal Serial Bus (USB)
computers and printers.
Solder Station-One's performance continued its rebound in the second quarter.
Solder Station is also adding several promising new processes to its product
lines. New Offerings at Solder Station will include automated conformal coating
for increasingly miniaturized printed circuit boards; immersion silver plating,
a coating approved by such major companies as Intel, Lucent and Hewlett Packard;
and an epoxy via plug process. Solder Station will be the only company in North
America offering this solution to via hole contamination.
HTI has devoted a great deal of time and attention to the future of Zecal Corp.
and Zecal Technology, LLC (both referred to as "Zecal"). The Company continues
to believe that Zecal can be profitable by pursuing the emerging market for
cellular phones and CATV, as well as its historical markets of power supplies
and control devices. There is also a potential market for Z-Strate(R) in
applications involving extreme environmental
Page 17 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
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.
Zecal has entered into a strategic alliance with Amkor Technology, Inc., the
world's largest provider of contract microelectronics manufacturing solutions.
Zecal is Amkor's preferred supplier for directly plated copper on ceramic
substrates.
Zecal's production customers include Texas Instruments Power Trends Products,
Danfoss, Artesyn Technologies, and a broadband power amplifier manufacturer.
Prototypes and prototype customers include a semiconductor package for a major
telecom manufacturer, a down hole (oil drilling) equipment manufacturer, a
manufacturer of RF semiconductor devices for use in cell tower radios, a
manufacturer of SAW filter devices for cell phones, a manufacturer of cell phone
911 GPS modules, a RF ball grid array for telecommunications application, a
manufacturer of CATV set top boxes, and a high power amplifier substrate for
cell tower application for use in CDMA systems.
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.
Real Estate Development
-----------------------
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.
Page 18 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
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.
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 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 19 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
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 June 30,
2000, the Partnerships' total consolidated indebtedness was $32,993,000. 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.
Page 20 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
RESULTS OF OPERATIONS
Net sales of electronic assemblies, computer printer products, ceramic circuit
boards and printed circuit boards services totaled $5,201,000 in the second
quarter of 2000 compared to $9,209,000 in the second quarter 1999. Sales for the
first six months of 2000 were $12,611,000 compared to $17,080,000 for the
comparable period in 1999. Sales for the three and six month periods ended June
30, 2000 decreased from similar periods of 1999 due to lower than expected sales
of memory modules offset by an increase in sales at HTI Z and Solder.
The loss from joint venture of $203,000 reflects the results of Zecal
Technology, LLC's net loss on an equity basis from May 6, 2000.
Net income for the second quarter of 2000 totaled $1,966,000 or $1.18 per share
compared to a net loss in the second quarter 1999 of $2,956,000 or $1.77 per
share. The net loss for the six month period was $1,136,000, compared to a net
loss of $4,930,000 for the comparable period in 1999. The results for the
quarter and six months ended June 30, 2000 are positively affected by a
$4,235,000 income allocation from Heartland. HTI, as general partner and owner
of the Class B interest, had been allocated excess loses from Heartland in prior
quarters. Heartland, in generating a net income in the quarter, allocated 100%
of its net income to HTI's Class B Interest to recoup from the excess loss
allocations. If Heartland continues to report net income, HTI will be allocated
the net income up to the amount of excess losses absorbed, at which time, future
net income from Heartland will be allocated to all unitholders based on their
ownership interest in Heartland. The net income results are negatively impacted
by increased net losses at both PG and HTI Z (formerly Zecal Corp.) while Solder
reported net income for both the quarter and six months ended June 30, 2000.
Selling, general and administrative expenses for the second quarter of 2000
totaled $1,411,000 compared to $2,239,000 for the second quarter of 1999. For
the six month period ended June 30, 2000, SG&A expenses were $3,513,000 compared
to $4,446,000 in the similar period of 1999. SG&A expenses for the second
quarter and for the six months ended June 30, 2000 decreased in comparison to
similar periods in 1999 reflecting a reduction in expenses at both PG and HTI
corporate. For the same periods, Solder's SG&A was level, while HTI Z's
increased.
Interest expense for the three months ended June 30, 2000 was $590,000 compared
to $373,000 for the same period in 1999. Interest expense for the six months
ended June 30, 2000 was $1,079,000 compared to $642,000 a year ago. The increase
in interest expense, with a relatively stable interest bearing debt balance for
the periods reflects the increase in prime over the last year as well as the
additional default interest rates charged by WFBC. Internet expense also
includes a $110,000 six-month amortization of the value of warrants issued in
fourth quarter 1999 and first quarter 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities in the first quarter of 2000 through
borrowings on its lines of credit.
Solder has a line of credit with LSNB under which it may borrow up to
$1,500,000. Interest is based on
Page 21 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
a base rate plus 2% (11.5% at June 30, 2000). Borrowings are collateralized by
accounts receivable and inventory. Borrowings under the line of credit at June
30, 2000 was $510,000 and was $757,000 at December 31, 1999. The line of credit
matures on April 30, 2001. Solder is in violation of certain financial covenants
with respect to its LSNB term loans. The bank has not notified the Company that
it is in default, but may do so.
Solder has a subordinated note payable to the former owners in the original
principal amount of $1,700,000. The note bears 8% interest. Principal is payable
in three semiannual $400,000 installments plus a final $500,000 installment.
Installments were due on October 10, 1999 and April 10, 2000. Interest is paid
quarterly beginning 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. Deferred interest in the amount of $305,000 has been added to
the loan balance and is due no later than October 10, 2001. The Company did not
make payments of $400,000 each to the seller that were due on October 20, 1999
and on April 20, 2000. The seller has not notified the Company that it is in
default, but may do so.
HTI has notes payable to the seller of PG in the principal amount of $3,000,000.
The notes are payable $1,500,000 in September 2000 and $1,500,000 in May 2002.
The notes bear interest at 8% per year, which is paid quarterly.
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.
Page 22 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Sixth Amendment to Credit and Security Agreement and Amendment of
Default Letter between P.G. Design Electronics, Inc. and Wells Fargo
Business Credit, Inc. dated July 28, 2000. (filed herewith)
27.1 Financial Data Schedule - (filed herewith)
b) Reports on Form 8-K
A report on Form 8-K was filed on May 24, 2000 to report the formation of Zecal
Technology, LLC.
Page 23 of 25
<PAGE>
HEARTLAND TECHNOLOGY, INC.
JUNE 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
Date: August 11, 2000 BY: /s/ Edwin Jacobson
----------------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 BY: /s/ Richard P. Brandstatter
----------------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
Page 24 of 25
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
10.1 Sixth Amendment to Credit and Security Agreement and Amendment of
Default Letter between P.G. Design Electronics, Inc. and Wells Fargo
Business Credit, Inc. dated July 28, 2000. (filed herewith)
27.1 Financial Data Schedule - (filed herewith)
Page 25 of 25
