<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
547 West Jackson Boulevard, Chicago, Illinois 60661
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312/294-0497
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
As of May 12, 2000, there were 1,671,238 shares of the registrant's common stock
outstanding.
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 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............................................ 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk....... 18
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................. 18
Signatures................................................................... 19
Page 1 of 20
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Heartland Technology, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, except share amounts)
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
-------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 230 $ 105
Accounts receivable, net of reserves of $245 ($250 at December 31, 4,034 3,643
1999)
Inventories, net 2,515 3,236
Prepaid expenses and other assets 205 335
---------- -----------
Total current assets 6,984 7,319
Property and equipment:
Machinery and equipment 10,526 10,339
Furniture and fixtures 581 593
Leasehold improvements 912 887
---------- -----------
Property and equipment at cost 12,019 11,819
Less accumulated depreciation 5,100 4,506
---------- -----------
Property and equipment, net 6,919 7,313
Other assets:
Goodwill, net of accumulated amortization of $1,591 ($1,422 at December
31, 1999) 11,260 11,429
Deferred debt issuance costs, net of accumulated amortization of
$100 ($83 at December 31, 1999) 101 118
Other 142 145
Investment in partnership 3,468 4,387
---------- -----------
Total assets $ 28,874 $ 30,711
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 757 $ 757
Debt in default 4,857 6,172
Accounts payable, trade 4,940 4,321
Accrued expenses and other liabilities 1,628 1,693
Current portion of long-term debt 3,998 3,867
Current portion of capital lease obligations 109 108
Allowance for claims and liabilities 1,281 1,281
Payable to affiliates 1,533 1,093
Taxes Payable 148 -
---------- -----------
Total current liabilities 19,251 19,292
---------- -----------
Long-term debt, less current portion 5,219 3,888
Capital lease obligation, less current portion 197 222
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 10,773 10,773
Accumulated deficit (7,067) (3,965)
---------- -----------
Total stockholders' equity 4,207 7,309
---------- -----------
Total liabilities and stockholders' equity $ 28,874 $ 30,711
========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements Page 2 of 20
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Operations
(Amounts in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 2000 March 31, 1999
-------------- --------------
(as amended
March 29, 2000)
<S> <C> <C>
Net sales $ 7,410 $ 7,872
Cost of sales 6,785 5,804
-------- ----------
Gross margin 625 2,068
Other income (loss):
Management fee from affiliate -- 106
Loss from investment in partnerships (919) (934)
Miscellaneous, net 4 1
-------- ----------
Total other income (loss) (915) (827)
Other expenses:
Selling, general and administrative 2,102 2,207
Interest expense 489 269
Amortization expense 186 184
-------- ----------
Total other expenses 2,777 2,660
-------- ----------
Loss before income taxes and extraordinary item (3,067) (1,419)
Income tax expense 35 46
-------- ----------
Net loss before extraordinary loss (3,102) (1,465)
Extraordinary loss on debt refinancing -- (509)
-------- ----------
Net loss $ (3,102) $ (1,974)
======== ==========
Net loss per share before extraordinary loss $ (1.86) $ (.88)
-------- ----------
Net loss per share for extraordinary loss $ -- $ (.30)
-------- ----------
Net loss per share - basic and diluted $ (1.86) $ (1.18)
======== ==========
Weighted average number of common shares outstanding 1,671 1,671
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements Page 3 of 20
<PAGE>
Heartland Technology, Inc.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
Operating activities: (as amended
March 29, 2000)
<S> <C> <C>
Net loss $ (3,102) $ (1,974)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 780 737
Equity in loss from investments in Partnerships 919 934
Bad debt expense -- 15
Reserve for inventory obsolescence (190) (143)
Changes in operating assets and liabilities
Accounts receivable (391) (1,474)
Due from affiliate -- (106)
Inventories, net 911 325
Prepaid expenses and other assets 67 (92)
Accounts payable and accrued expenses 702 (267)
Due to affiliate 440 349
---------- -----------
Net cash (used in) provided by operating activities 136 (1,696)
Investing activities:
Purchases of property and equipment (134) (98)
---------- -----------
Net cash used in investing activities (134) (98)
Financing activities:
Net payments under lines of credit (1,090) (221)
Proceeds from issuance of long-term debt 1,550 2,358
Payments on capital leases (24) (15)
Principal payments on long-term debt (313) (416)
Debt issuance costs -- 88
---------- -----------
Net cash provided by financing activities 123 1,794
---------- -----------
Increase in cash and cash equivalents 125 -0-
Cash and cash equivalents at beginning of period 105 -0-
---------- -----------
Cash and cash equivalents at end of period $ 230 $ -0-
========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements Page 4 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements of Heartland Technology, Inc. include the
accounts of Heartland Technology, Inc. and its subsidiaries, P.G. Design
Electronics, Inc. ("PG"), Solder Station-One, Inc. ("Solder"), Zecal Corp.
("Zecal"), a subsidiary of PG, and HTI Interests, LLC ("HTII"). 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 month period ended March
31, 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 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.
Page 5 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 original equipment manufacturers ("OEM").
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 9, 2000, HTI and LZ Partners funded a newly organized entity Zecal
Technology, LLC. HTI contributed the assets of Zecal Corp. to Zecal Technology.
LZ Partners contributed $4 million cash to Zecal Technology. HTI and LZ Partners
each own 50% of Zecal Technology.
3. Inventories
The components of inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Raw materials $3,208 $3,826
Work-in-process 182 140
Finished goods 233 188
------ ------
3,624 4,154
Less: Allowance for Obsolescence 1,108 918
------ ------
Inventories, net $2,515 $3,236
====== ======
</TABLE>
4. Investment in Partnerships and Related Party Transactions
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and allocation
of taxable income and loss. The Company also has a .01% general partnership
interest in CMC Heartland which entitles the Company to .01% of CMC Heartland's
available cash for distribution and an allocation of taxable income and loss
before distributions. The Company also owns the Class B limited partnership
interest in Heartland (the "Class B Interest"). In general, the Class B Interest
entitles the holder to .5% of Heartland's available cash for distribution and
allocation of taxable income and loss. The Partnership Agreement provides
generally that the Partnership's losses, other than those attributable to the
satisfaction of Plan Liabilities, will be allocated 1% to the General
Page 6 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 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 March 31, 2000 and December 31, 1999 and the
summarized income statement for Heartland for the three month periods ended
March 31, 2000 and 1999 for Heartland are as follows (amounts in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31,
(unaudited) 1999
<S> <C> <C>
Assets: $ 4,567 $ 4,412
Cash and marketable securities 412 373
Receivables, net 1,831 1,310
Other assets 57,319 51,161
------- -------
Net properties and investment in joint venture
Total assets 64,129 57,256
======= =======
Liabilities:
Accounts payable, accrued expenses and other liabilities 15,816 16,030
Allowed for claims and liabilities 2,851 2,804
Loans payable 40,729 32,770
------- -------
Total liabilities 59,396 51,604
Partners' capital:
General partner -- --
Class A partners -- --
Class B partner 4,733 5,652
------- -------
Total partners' capital 4,733 5,652
------- -------
Total liabilities and partners' capital $64,129 $57,256
======= =======
</TABLE>
Page 7 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
2000 1999
<S> <C> <C>
Revenues:
Property sales $2,650 $2,042
Less: cost of property sales 2,594 1,945
------ ------
Gross profit on property sales 56 97
------ ------
Rental and other income 245 383
------ ------
Total net revenues 301 480
Expenses:
Selling, general and administrative 1,121 1,237
Real estate taxes 22 60
Environmental expenses 77 30
------ ------
Total expense 1,220 1,327
------ ------
Net loss $ (919) $ (847)
====== ======
</TABLE>
5. Lines of Credit
The Company's lines of credit are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands)
March 31, 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 (12.25% at March 31, 2000) (included in
debt in default) $ 1,482 $ 2,572
Line of credit with LaSalle National Bank bearing
interest at the base rate plus 2% (11% at March 31,
2000) 757 757
---------- ----------
Total lines of credit $ 2,239 $ 3,329
========== ==========
</TABLE>
Page 8 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long Term Debt
The Company's debt obligations consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
March 31, December 31,
2000 1999
-------- ---------
<S> <C> <C>
Term loan payable to LaSalle National Bank in original
principal amount of $1,200,000. Interest is at prime
plus 1.5% (10.5% at March 31, 2000) and is paid monthly.
The loan has level monthly principal payments over three
years respectively $ 507 $ 607
Term loan payable to LaSalle National Bank in original
principal amount of $900,000. Interest is at prime plus
1.0% (10% at March 31, 2000) and is paid monthly. The
loan has level monthly principal payments over five
years respectively 540 585
Term loan payable to Wells Fargo Business Credit in an
original amount of $4,500,000. Principal payments of
$75,000 plus interest is payable over a 60 month period.
Interest accrues at the base rate plus 0.25% plus the 3% default
rate (12.25% at March 31, 2000) (included in debt in
default) 3,375 3,600
Other notes payable 146 158
Subordinated notes related parties bearing interest at
13%. Interest payable quarterly 2,000 450
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 principal 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 1,966 1,927
</TABLE>
Page 9 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<S> <C> <C>
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 1,058 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 12,592 11,355
Less current portion of long-term debt, including debt in
default 7,373 7,467
----------- ---------
Long term debt, less current portion $ 5,219 $ 3,888
=========== =========
</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 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.
At March 31, 2000, all $2 million subscriptions had been funded.
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 (12.25% at March 31, 2000). At March 31, 2000, the principal amount
outstanding of the line of credit was $1,482,000 and the amount outstanding on
the term loan was $3,375,000. 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
Page 10 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Credit and Security Agreement
and Amendment of 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.
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% (10.5% at March 31, 2000). The $900,000
loan is for a five year term and bears interest at the prime rate plus 1% (10%
at March 31, 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 March 31,
2000, were $507,000 and $540,000, 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. The bank has not notified the Company that it is in default but may
do so.
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 March 31, 2000, $1,058,000 was outstanding. Payments
due October 30, 1999, January 30, 2000 and April 30, 2000 have not been made.
The seller has not notified the Company that it is in default, but may do so.
7. Year 2000
Through May 15, 2000, we had not encountered any Year 2000 related issues.
8. 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 $1,353,000 and $1,450,000 of product was
shipped to Europe in the first quarters of
Page 11 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2000 and 1999, respectively. As of and for the quarter ended March 31, 2000,
certain information relating to the Company's business segments are set forth in
the table below:
Selected Financial Data for the quarter ended March 31, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands)
Sales and other Loss before taxes Depreciation and
Business segment Identifiable income and extraordinary amortization Capital
assets item expense expenditures
<S> <C> <C> <C> <C> <C>
Manufacturing $25,257 $7,410 $(1,965) $780 $134
Real estate 3,468 (919) (919) -- --
Corporate 339 4 (218) -- --
------- ------ ------- ---- ----
Total Company $29,064 $6,495 $(3,102) $780 $134
======= ====== ======= ==== ====
</TABLE>
Selected Financial Data for 1999
<TABLE>
<CAPTION>
December
31, 1999 For the Quarter Ended March 31, 1999
-------- ------------------------------------
Sales and other Loss before taxes Depreciation and
Business segment Identifiable income and extraordinary amortization Capital
assets item expense expenditures
<S> <C> <C> <C> <C> <C>
Manufacturing $26,069 $7,872 $ (895) $737 $98
Real estate 4,387 (934) (934) -- --
Corporate 255 107 (145) -- --
------- ------ ------- ---- ---
Total Company $30,711 $7,045 $(1,974) $737 $98
======= ====== ======= ==== ===
</TABLE>
Page 12 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operation section and elsewhere
in this Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
not guarantees of future performance. They involve risks, uncertainties and
other important factors, including the risks discussed below. The Company's
actual future results, performance or achievement of results and the value of
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.
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.
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(R). The Company has introduced refinements to the Z-Strate(R) process to
improve its application in the radio frequency
Page 13 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
("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.
RESULTS OF OPERATIONS
Net sales totaled $7,410,000 in the first quarter of 2000 compared to $7,872,000
in the first quarter 1999. The decrease was caused primarily by lower than
expected sales of memory modules offset by an increase in sales of ceramic and
printed circuit boards.
The net loss for the first quarter of 2000 totaled $3,102,000 or $1.86 per share
compared to a net loss in the first quarter 1999, prior to the extraordinary
charge of $509,000 for debt financing, of $1,465,000 or $.88 per share. For the
first quarter of 2000, $919,000 of the loss is due to the non-cash allocation of
the 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, was allocated 100% of Heartland's losses for the first
quarter of 2000. The change from the first quarter 1999 was caused primarily by
a decrease in gross margin of $1,443,000 and an increase in interest expense
increased by $220,000.
Selling, general and administrative expenses for the first quarter of 2000
totaled $2,102,000 compared to $2,207,000 for the first quarter of 1999.
Other income (loss) in the first quarter of 2000 was ($915,000) compared to
($827,000) in 1999. The loss is primarily due to the non-cash excess loss
allocation of $919,000 and $934,000 from the investment in partnerships at March
31, 2000, and March 31, 1999, respectively. The Company expects that operations
at Heartland will be positive later in the year 2000. If that is the case, the
Company will be able to recover the excess loss allocation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities in the first quarter of 2000 through
borrowings on its lines of credit.
Solder has a line of credit with LSNB under which it may borrow up to
$1,500,000. Interest is based on a base rate (9% at March 31, 2000). Borrowings
are collateralized by accounts receivable and inventory. Borrowings under the
line of credit at March 31, 2000 and December 31, 1999 were both $757,000. The
line of credit matures on April 30, 2001.
Page 14 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $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. Deferred interest in the
amount of $266,000 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.
Page 15 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Net loss per share
Net loss per share for the first quarter of 2000 was $1.86. The net loss for the
comparable period of 1999 was $1.18 per share. Calculations of earnings per
common share are based on 1,671,238 shares outstanding.
Page 16 of 20
<PAGE>
HEARTLAND TECHNOLOGY, INC.
MARCH 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Year 2000
- ---------
Through May 15, 2000, we had not encountered any Year 2000 related issues.
Page 17 of 20
<PAGE>
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Fourth Amendment To Credit and Security Agreement and Amendment of
Default Letter 2000 Covenant Waiver between P.G. Design
Electronics, Inc. and Wells Fargo Business Credit, Inc. dated
April 21, 2000. (filed herewith)
10.2 2000 Covenant Waiver between Solder Station One, Inc. and LaSalle
Bank, N.A. dated March 30, 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 March 9, 2000 regarding the receipt of
subscriptions for $2,000,000 in subordinated debentures and the receipt of a
letter from Wells Fargo Business Credit, Inc., that demanded payment in full, by
May 1, 2000, of all obligations due under the Credit and Security Agreement
dated as of December 31, 1998.
Page 18 of 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND TECHNOLOGY, INC.
(Registrant)
Date: May 15, 2000 BY: /s/ Edwin Jacobson
-----------------------------------
Edwin Jacobson
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2000 BY: /s/ Richard P. Brandstatter
-----------------------------------
Richard P. Brandstatter
Vice-President-Finance, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
Page 19 of 20
<PAGE>
Heartland Technology, Inc.
Index to Exhibits
a) Exhibits
10.1 Fourth Amendment To Credit and Security Agreement and Amendment of
Default Letter 2000 Covenant Waiver between P.G. Design Electronics,
Inc. and Wells Fargo Business Credit, Inc. dated April 21, 2000.
(filed herewith)
10.2 2000 Covenant Waiver between Solder Station One, Inc. and LaSalle
Bank, N.A. dated March 30, 2000. (filed herewith)
27.1 Financial Data Schedule (filed herewith)
Page 20 of 20
<PAGE>
EXHIBIT 10.1
FOURTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT
AND AMENDMENT OF DEFAULT LETTER
This Fourth Amendment to Credit And Security Agreement and Amendment of
Default Letter, dated as of April 21, 2000, is made by and between P. G. DESIGN
ELECTRONICS, INC., a Delaware corporation (the "Borrower"), and WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation formerly known as Norwest
Business Credit, Inc. (the "Lender").
R E C I T A L S:
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of December 31, 1998, as amended (the "Credit Agreement").
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement unless otherwise specified.
Pursuant to a letter dated January 27, 2000 (the "Default Letter"), the
Lender demanded payment of the Obligations by no later than May 1, 2000. The
Borrower has requested that the Lender agree to an extension of the time for
payment of the Obligations in full, which the Lender is willing to do pursuant
to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are
-------------
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein.
2. Amendment to Section 2.3. Section 2.3 of the Credit Agreement is
------------------------
amended to read as follows:
Section 2.3. Payment of Term Note. The outstanding principal balance
--------------------
of the Term Note shall be due and payable as follows:
(a) Beginning on February 1, 1999, and on the first day of each month
thereafter through May 1, 2000, in equal monthly installments of Seventy
Five Thousand Dollars ($75,000) each; and
(b) Beginning on May 8, 2000, and on the first Banking Day of each
week thereafter, in equal weekly installments of Twenty Five Thousand
Dollars ($25,000) each; and
(c) On the Termination Date, the entire unpaid principal balance of
the Term Note, and all unpaid interest accrued thereon, shall in any event
be due and
<PAGE>
payable.
3. Extension of Final Date for Payment. Notwithstanding the terms of the
-----------------------------------
Default Letter, the Lender hereby agrees to extend the time for payment in full
of the Obligations to August 1, 2000.
4. Accommodation Fee. In consideration of the Lender's execution of this
-----------------
Amendment, the Borrower hereby agrees to pay to the Lender a fully earned,
nonrefundable fee in the amount of One Hundred Thousand Dollars ($100,000). In
consideration of the payment of such fee, the Lender agrees to waive further
payments of the Ten Thousand Dollar ($10,000) monthly accommodation fee required
pursuant to the Default Letter.
5. No Other Changes. Except as explicitly amended by this Amendment, all
----------------
of the terms and conditions of both the Credit Agreement and the Default Letter
shall remain in full force and effect and shall apply to any Advance or Letter
of Credit thereunder.
6. Conditions Precedent. This Amendment shall be effective when the
--------------------
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the articles
of incorporation and bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to the Certificate of Authority of the
Borrower's secretary or assistant secretary dated as of December 31, 1998
continue in full force and effect and have not been amended or otherwise
modified except as set forth in the Certificate to be delivered, and (iii)
setting forth the sample signatures of each of the officers and agents of
the Borrower authorized to execute and deliver this Amendment and all other
documents, agreements and certificates on behalf of the Borrower.
(b) The Acknowledgment and Agreement of Guarantors set forth at the
end of this Amendment, duly executed by each Guarantor.
(c) Such other matters as the Lender may require.
7. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not
2
<PAGE>
(i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, (ii) violate any provision of any law, rule or regulation or of
any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or by-laws
of the Borrower, or (iii) result in a breach of or constitute a default
under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
8. References. All references in the Credit Agreement to "this Agreement"
----------
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby.
9. No Waiver. The execution of this Amendment and acceptance of any
---------
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Credit Agreement or breach, default or event of
default under any Security Document or other document held by the Lender,
whether or not known to the Lender and whether or not existing on the date of
this Amendment.
10. Release. The Borrower, and each Guarantor by signing the
-------
Acknowledgment and Agreement of Guarantors set forth below, each hereby
absolutely and unconditionally releases and forever discharges the Lender, and
any and all participants, parent corporations, subsidiary corporations,
affiliated corporations, insurers, indemnitors, successors and assigns thereof,
together with all of the present and former directors, officers, agents and
employees of any of the foregoing, from any and all claims, demands or causes of
action of any kind, nature or description, whether arising in law or equity or
upon contract or tort or under any state or federal law or otherwise, which the
Borrower or such Guarantor has had, now has or has made claim to have against
any such person for or by reason of any act, omission, matter, cause or thing
whatsoever arising from the beginning of time to and including the date of this
Amendment, whether such claims, demands and causes of action are matured or
unmatured or known or unknown.
11. Costs and Expenses. The Borrower hereby reaffirms its agreement under
------------------
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the
3
<PAGE>
documents and instruments incidental hereto. The Borrower hereby agrees that the
Lender may, at any time or from time to time in its sole discretion and without
further authorization by the Borrower, make a loan to the Borrower under the
Credit Agreement, or apply the proceeds of any loan, for the purpose of paying
any such fees, disbursements, costs and expenses and the accommodation fee
pursuant to Paragraph 4 hereof.
12. Miscellaneous. This Amendment and the Acknowledgment and Agreement of
-------------
Guarantors may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed an original and all of which
counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
Credit and Security Agreement and Amendment of Default Letter to be duly
executed as of the date first written above.
WELLS FARGO BUSINESS CREDIT, INC. P. G. DESIGN ELECTRONICS, INC.
By: /s/ Thomas Zak By: /s/ Edwin Jacobson
---------------------- ---------------------------
Its: V.P. Its: Chairman
---------------------- ---------------------------
4
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of P. G. Design
Electronics, Inc. (the "Borrower") to Wells Fargo Business Credit, Inc.,
formerly known as Norwest Business Credit, Inc. (the "Lender"), pursuant to a
separate Guaranty each dated as of December 31, 1998 (each, a "Guaranty"),
hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the
terms (including, without limitation, the release set forth in Paragraph 10 of
the Amendment) and execution thereof; (iii) reaffirms its obligations to the
Lender pursuant to the terms of its Guaranty; and (iv) acknowledges that the
Lender may amend, restate, extend, renew or otherwise modify the Credit
Agreement and any indebtedness or agreement of the Borrower, or enter into any
agreement or extend additional or other credit accommodations, without notifying
or obtaining the consent of the undersigned and without impairing the liability
of the undersigned under its Guaranty for all of the Borrower's present and
future indebtedness to the Lender.
HEARTLAND TECHNOLOGY, INC.
By: /s/ Edwin Jacobson
--------------------------
Its: Chairman
--------------------------
ZECAL CORP.
By: /s/ Edwin Jacobson
---------------------------
Its: Chairman
---------------------------
5
<PAGE>
EXHIBIT 10.2
LaSalle Bank, N.A.
________________________________________________________________________________
LASALLE BANKS
135 South LaSalle Street
Chicago, Illinois 60603
(312) 904-8101
FAX: (312)904-4364
David E. Heise
Assistant vice President
March 30, 2000
Mr. Richard P. Brandstatter
Vice President - Finance
Heartland Technology, Inc.
547 W. Jackson Boulevard
Chicago, IL 60661
Re: Covenant Waiver for Solder Station One, Inc. for December 31, 1999
Violation
Dear Rick:
Please be advised that LaSalle Bank National Association ("LBNA") has received
your covenant waiver request letter dated March 22, 2000. LBNA hereby grants
Solder Station One, Inc.'s waiver request as it pertains to sections
11.2(f)(ii), 11.2(f)(iii), and 11.2(f)(iv) of the Loan Agreement. All other
conditions remain changed and in full force and effect.
This waiver applies to the covenant violations that occurred solely for the
period ended 12/31/99 and its effective through January 1, 2001.
Sincerely,
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ David E. Heise
------------------
David E. Heise
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<RECEIVABLES> 4,279
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