<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
****
FORM 10-KSB
****
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended August 31, 1995.
---------------
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the transition period from to .
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Commission File Number 0-10078
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HEI, INC.
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(Name of Small Business Issuer in Its Charter)
Minnesota 41-0944876
- --------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
or incorporation or organization)
P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612)443-2500
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.05 PER SHARE
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(Title of Class)
RIGHTS TO PURCHASE COMMON STOCK
-------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
X No
- -- --
Indicate if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [ ]
HEI, Inc. revenues for the fiscal year ended August 31, 1995 were $23,423,000.
The aggregate market value as of November 15, 1995 (based on the closing price
as reported by The Nasdaq National Market) of the voting stock held by non-
affiliates was approximately $ 23,000,000.
As of November 15, 1995, 3,801,597 Common Shares (par value $.05) were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended August
31, 1995 are incorporated by reference into Parts I and II. Portions of the
Proxy Statement for Registrant's Annual Meeting of Shareholders to be held
January 17, 1996 are incorporated by reference in Part III.
<PAGE>
HEI, Inc. is referred to herein as the Company, unless the context indicates
otherwise.
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
HEI, Inc., a Minnesota corporation, was incorporated as Hybrid Electronics
Inc. in 1968 and changed its name to HEI, Inc. in 1969.
(b) BUSINESS OF THE COMPANY
PRINCIPAL PRODUCTS AND SERVICES - HEI, Inc. is a designer and manufacturer
of ultraminiature microelectronic devices and high technology products
incorporating these devices. HEI's custom-built microelectronics are
employed in medical, industrial and computer markets, and light pens are
used by value-added systems integrators and others in a variety of
applications.
DISTRIBUTION METHODS - HEI sells through its Company-employed sales force
based at corporate headquarters.
SOURCES AND AVAILABILITY OF RAW MATERIALS - There are many sources of raw
material supplies available nationally and internationally for Company
operations. The manufacture of Company products involves assembly of
components purchased from a wide variety of vendors. The Company's
business is not dependent on any single supplier.
DEPENDENCE ON SINGLE OR FEW CUSTOMERS - Following is the approximate % of
the Company's sales to major customers in fiscal years 1995, 1994, and
1993.
Customer 1995 1994 1993
-------- ---- ---- ----
Customer A 30% 49% 54%
Customer B 27% 0% 0%
Customer C 12% 19% 15%
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<PAGE>
COMPETITION - In each of its product lines, the Company has significant
competition, including users who may produce their own alternative devices.
The Company obtains new business by identifying customer needs and
engineering its products to meet those needs. It competes on the basis of
engineering expertise, quality, service and price to obtain new and repeat
orders.
RESEARCH AND DEVELOPMENT - The estimated amount spent on Company-sponsored
research and development activities was approximately $754,000, $679,000
and $614,000 for the years ended August 31, 1995, 1994 and 1993,
respectively.
EMPLOYEES - At August 31, 1995, the Company employed 133 full-time and 2
temporary persons.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns a 25,000 square foot facility for administration and production
in Victoria, Minnesota, which was completed in August 1981. Also, the Company
leases, with an option to buy, a facility of 11,600 square feet in Sauk Centre,
Minnesota. The lease was renewed for 3 years in fiscal 1993 and the Company can
elect to purchase the leased facility at any time for a specified price. The
Company is planning on expanding the Victoria, Minnesota facility in the coming
year to increase production capacity.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or its
properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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<PAGE>
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information called for by Item 5 is incorporated by reference from the
Annual Report on page 16.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information called for by Item 6 is incorporated by reference from the
Annual Report on pages 4-5.
ITEM 7. FINANCIAL STATEMENTS
The information called for by Item 7 is incorporated by reference from the
Annual Report on pages 6-13 as follows:
Page in
Annual Report:
--------------
Balance Sheet as of August 31, 1995
and 1994 6
Statement of Operations for the Years
Ended August 31, 1995, 1994 and 1993 7
Statements of Changes in Shareholders' Equity
for the Years Ended August 31, 1995, 1994 and 1993 8
Statement of Cash Flows for the Years Ended
August 31, 1995, 1994 and 1993 9
Notes to Financial Statements 10-13
Report of Independent Accountants 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The information regarding directors called for by Item 9 is contained in the
Proxy Statement under the caption "Election of Directors."
The following is a list of HEI, Inc. executive officers, their ages, positions
and offices as of November 1, 1995.
NAME AGE POSITION
Eugene W. Courtney 59 President, Chief Executive Officer
Jerald H. Mortenson 61 Vice President of Finance and
Administration, Chief Financial Officer,
and Treasurer
Dale A. Nordquist 41 Vice President of Sales
BUSINESS EXPERIENCE
EUGENE W. COURTNEY became President and Chief Executive Officer of the Company
in June 1990. He had served as Executive Vice President and Operating Officer
since August 1988 and has served as a Director since 1989. From 1980 to 1988,
Mr. Courtney served as Vice President and Group Vice President of National
Computer Systems.
JERALD H. MORTENSON joined the Company in March 1990. Prior thereto he had
spent ten years with CTS Fabri-Tek, first as Chief Financial Officer and the
last five years as Group President.
DALE A. NORDQUIST joined the Company on July 16, 1981 as Western Regional
Manager. In December 1986, he was appointed Vice President of Sales.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by Item 10 is contained in the Proxy Statement under
the captions "Executive Compensation" and "Proposal No. 1 Election of
Directors."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 11 is incorporated in the Proxy Statement
under the caption "Shares and Principal Shareholders."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-5-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index on Page 8
(b) Reports filed on Form 8-K: No reports on Form 8-K were filed during the
fourth quarter of the fiscal year ended August 31, 1995.
-6-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(c) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized
HEI, Inc.
BY: /s/ Eugene W. Courtney
----------------------------------------------
Eugene W. Courtney, President and Chief Executive Officer
BY: /s/ Jerald H. Mortenson
----------------------------------------------
Jerald H. Mortenson, Vice President of Finance and
Administration, Chief Financial Officer and Treasurer
BY: /s/ Craig E. Roble
-----------------------------------------------
Craig E. Roble, Company Controller
Date: November 21, 1995
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Robert L. Brueck November 21, 1995
- -------------------------------- -----------------
Robert L. Brueck, Director Date
/s/ Eugene W. Courtney November 21, 1995
- -------------------------------- -----------------
Eugene W. Courtney, Director Date
/s/ William R. Franta November 21, 1995
- -------------------------------- -----------------
William R. Franta, Director Date
/s/ Kenneth A. Schoen November 21, 1995
- -------------------------------- -----------------
Kenneth A. Schoen, Director Date
/s/ Frederick M. Zimmerman November 21, 1995
- -------------------------------- -----------------
Frederick M. Zimmerman, Director Date
-7-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number or
Incorporated by
(a) Exhibit Number Description Reference
-------------- ----------- --------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended. Note 1
3.2 Bylaws, as amended. Note 2
4.1 Rights Agreement dated May 27, 1988 between HEI, inc.
and Norwest Bank Minnesota, N.A., as amended. Note 3
4.2 Credit Agreement with Norwest Bank Minnesota,
N.A. dated March 7, 1995. Note 4
10.1a Lease between Sauk Centre Opportunites Incorporated and HEI,
Inc. dated October 16, 1978 (the "Lease"). Note 5
10.1b Second Addendum to the Lease, dated May 31, 1988. Note 2
10.1c Third Addendum to the Lease, dated June 1, 1993. Note 6
10.2 Form of Indemnification Agreement between HEI and officers
and directors. Note 7
**10.3a HEI 1989 Omnibus Stock Compensation Plan adopted April 3,
1989, as amended to date ("1989 Plan"). Note 8
**10.3b Amendment to 1989 Omnibus Stock Compensation Plan. Note 9
**10.4a 1991 Stock Option Plan for Non-Employee Directors. Note 8
**10.4b Amendment to 1991 Stock Option Plan. Note 9
**10.5 Form of Non-qualified Stock Option agreement between HEI
and executive officers under 1989 Plan. Note 10
**10.6 Form of Incentive Stock Option agreement between HEI and
executive officers under 1989 Plan. Note 10
*11 Computation of Net Income per Common Share.
*13 Annual Report to Shareholders for the year ended August 31,
1995.
*23 Consent of Independent Accountants.
*27 Financial Data Schedule
</TABLE>
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<PAGE>
Notes to Exhibits above:
[1] Filed as an exhibit to Annual Report on Form 10-K for the year ended August
31, 1990 and incorporated herein by reference.
[2] Filed as an exhibit to Annual Report on Form 10-K for the year ended August
31, 1988 and incorporated herein by reference.
[3] Filed as an exhibit to Registration Statement on Form 8-A filed May 31,
1988, as amended by Form 8 filed June 27, 1988, and incorporated herein by
reference.
[4] Filed as an exhibit to Form 10-QSB for the quarter ended February 25, 1995,
and incorporated herein by reference.
[5] Filed as an exhibit to a Registration Statement of the Company on Form S-18
which was filed with the SEC on February 23, 1981, and incorporated herein
by reference.
[6] Filed as an exhibit to Annual Report on Form 10-KSB for the year ended
August 31, 1993 and incorporated herein by reference.
[7] Filed as an exhibit to Registration Statement on Form S-2 (SEC No. 33-
37285) filed October 15, 1990 and incorporated herein by reference.
[8] Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
August 31, 1991, and incorporated herein by reference.
[9] Filed as an exhibit to Annual Report on Form 10-KSB for the fiscal year
1994, and incorporated herein by reference.
[10] Filed as an exhibit to Form 10-K for the year ended August 31, 1989 and
incorporated herein by reference.
* Filed herein as an exhibit
** Denotes management contract or compensation plan or arrangement.
-9-
<PAGE>
HEI, Inc.
EXHIBIT 11
STATEMENT RE COMPUTATION OF NET INCOME PER COMMON SHARE (UNAUDITED)
----------------------------
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended August 31
----------------------------------
PER SHARE DATA 1995 1994 1993
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<S> <C> <C> <C>
Net income $ 2,040 $ 1,325 $ 2,538
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Net income per common and common
equivalent shares:
Primary $ .52 $ .34 $ .66
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Fully diluted $ .52 $ .34 $ .66
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WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
Primary:
Weighted average number of common
shares outstanding 3,747,820 3,665,303 3,483,388
Common equivalent shares:
Dilutive stock options and warrants, using
Treasury Stock Method 150,842 192,434 338,341
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3,898,662 3,857,737 3,821,729
--------- --------- ---------
Fully diluted:
Weighted average number of common
shares outstanding 3,747,820 3,665,303 3,483,388
Common equivalent shares:
Dilutive stock options and warrants, using
Treasury Stock Method 206,208 213,622 343,488
------- ------- -------
3,954,028 3,878,925 3,826,876
--------- --------- ---------
</TABLE>
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<PAGE>
HEI, INC. EXHIBIT 13
1995 ANNUAL REPORT
TO OUR SHAREHOLDERS:
I am pleased to report substantial growth in both revenue and net income for
fiscal year 1995. Revenue for the year was $23,423,000, up 35% from $17,295,000
for fiscal 1994. Net income for fiscal 1995 was $2,040,000, or $.52 per share,
up 54% compared to net income of $1,325,000, or $.34 per share for 1994.
In addition to the continued strengthening of our position in the hearing
instrument market, major contributions to growth over the past few years,
including fiscal 1995, have come from relatively large programs with leading
providers of high density disk drives. As we have seen in the past, these
relatively large and dynamic programs tend to create peaks and valleys in our
quarter-to-quarter performance. The phase out of one such program resulted in a
downturn in fourth quarter results for fiscal 1995, and will impact the first
few months of fiscal 1996 until the unused capacity is filled by new programs.
Subsequently, HEI was awarded a production contract by a major manufacturer of
disk drives, with the potential to more than absorb the capacity made available
by the recent phase-out, and to become a substantial contributor to our revenue
starting in the second half of fiscal 1996.
Revenue for the fourth quarter of fiscal 1995 was $5,418,000, while revenue for
the fourth quarter of the previous year was $6,255,000. Net income for the
quarter just ended was $314,000, or $.08 per share, compared to $666,000, or
$.17 per share for the fourth quarter of fiscal 1994.
We are taking steps to moderate the volatility caused by these large programs in
two ways. First, we recently announced a planned $1.8 million facility expansion
that will allow doubling of our manufacturing capacity in ultraminiature
microcircuitry as required to meet the needs of our customers and prospects.
Current active prospects could more than fully utilize our present capacity. The
expansion is expected to enhance our ability to attract these large programs and
potentially to accommodate multiple programs simultaneously, thereby reducing
the impact of any single program. Second, we intend to continue our efforts to
grow in medical devices and other markets of opportunity where the technology
and processes developed for our current applications have value. While these
other
<PAGE>
applications typically do not develop as quickly as those in the computer
market, they can offer stability and excellent growth prospects for the future.
We have also continued to strengthen our financial position. As of August 31,
1995, we had cash and cash equivalent and short-term investment balances of
$5,258,000, up $2,961,000 from the end of the previous fiscal year. We also had
no bank debt, and finished the fiscal year with an average current ratio over
4:1.
1995 OPERATIONS
We sustained our focus on the design and production of ultraminiature devices,
with emphasis on thick film hybrids and related technologies, during fiscal
1995. Our continuing investments in plant and equipment, and in key support
staff, have strengthened our design and manufacturing capabilities and have
produced further manufacturing efficiencies along with measurably higher levels
of quality. We expect these enhanced capabilities to be the basis for ongoing
customer service improvements and competitive advantage, and to provide a sound
basis for future growth as a leading edge provider of custom devices for high
reliability applications in the computer peripheral, medical and industrial
markets.
Custom Design and Manufacturing
Our ongoing concentration on the custom design and manufacture of innovative
ultraminiature packaging solutions continues to yield technology transfers
across multiple markets and applications; our hearing and medical
instrumentation customers continue to benefit from developments for our
customers in the computer peripheral market, and vice versa. Further, we believe
that our growing credibility as a responsive, on-time provider of quality
circuit assemblies for high density disk drives can lead to significant
opportunities for expansion in this very large market segment.
<PAGE>
A growing portion of our shipments in fiscal 1995 was to providers of
miniaturized high-reliability medical instrumentation. Although product
development and release cycles are significantly longer in this segment than in
the more volatile disk drive market, we are confident that our growing base and
reputation in this segment will lead to a significant amount of future business.
HEI remains a leader in the design and manufacture of state-of-the-art circuit
packaging for hearing instrument providers, and we are optimistic that our
position and enhanced capabilities will continue to serve us well in the future
in this market.
Light Pens
HEI has retained its strong position in the market for Light Pens--specialized
devices to move and manage the cursor or position indicator on computer monitors
(cathode ray tube screens or "CRT's"). While the overall market for these
devices has not grown as much as we had anticipated, we have continued
development programs targeted at selected niche applications and marketing
efforts aimed at reaching these end users. We remain optimistic that these
efforts, plus the unique application of our rugged, ultraminiature
microelectronics technology to these devices, will address the needs of this
market with increasing success.
International
Our international activity continues to grow as we participate in a worldwide
market for our services. Offshore shipments, primarily to Western Europe and
Asia, grew to 21% of our total revenues in fiscal 1995. In June 1995, HEI was
awarded a certificate of registration to the ISO 9001 Quality Systems Standard
for our Victoria, Minnesota based design, development, production, installation
and servicing operations. The Company was audited to the newly revised 1994
version of this standard for Quality Assurance by representatives from the
National Standards Authority of Ireland, an international standards registrar.
We anticipate that this certification, along with our ongoing improvement under
the standard, will serve us particularly well with remote customers by attesting
to the Company's high quality standards.
<PAGE>
1996 PLANS
Our major objective for 1996 will be to expand and broaden our capabilities and
our base of accounts. The added capacity afforded by the expansion of our
Victoria, Minnesota manufacturing facility is expected to help alleviate
customer concerns related to our size, and open the door for new opportunities.
We currently plan on securing long term financing at favorable rates for the
$1.8 million plant expansion, and to finance on a five to seven year basis much
of the capital equipment that we foresee installing during the initial three
years of expanded operation. We will continue to pursue our target markets in
the computer, medical and hearing instrumentation industries, and continue
efforts to develop a more stable base for long-term growth.
We expect to see ongoing pressure on prices and margins in fiscal 1996 and
beyond, as we expand our business into broader markets worldwide. In response,
we will continue to emphasize goals of quality and productivity improvement.
These efforts, along with our past record of progress in these areas and our
proven ability to provide innovative packaging solutions, position HEI to meet
this challenge. We also anticipate that the ISO standard and our internal
quality programs will continue to serve us well, providing a formula for future
improvements.
Fiscal year 1995 was characterized by significant growth and success, but we
approached the physical limits of our capacity in certain areas. We expect to
emerge from fiscal year 1996 with the plant capacity to sustain further growth
as a credible and respected supplier of quality services and products to a
larger segment of our target markets. With an exceptionally strong financial
position, a proven infrastructure of talented employees and production
processes, and a growing base of key customers, I look forward to the challenges
of the coming year with enthusiasm and optimism.
Eugene W. Courtney
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FINANCIAL CONDITION
The Company's net cash flow provided by operating activities for the year
ended August 31, 1995, was $3,366,000. The significant components of this
operating net cash flow were positive cash flow of $2,943,000 from operations
before changes in current operating items and a $755,000 decrease in accounts
receivable, offset by a $319,000 decrease in accounts payable. The decrease in
accounts receivable is attributable primarily to lower shipment volumes in the
fourth quarter of 1995 compared to the fourth quarter of 1994.
Accounts receivable average days outstanding were 42 days as of August 31,
1995 compared to 51 days for the same period a year ago primarily due to
improved collections. Inventory turns were 7.5 turns as of August 31, 1995
compared to 8.8 turns for the same period a year ago. The inventory turn
decrease is primarily due to lower shipments during the fourth quarter of 1995
as compared to the fourth quarter of 1994.
In addition to purchasing $634,000 of capital equipment, the Company
increased short-term investments, primarily in treasury bills, to $3,820,000, up
$3,102,000 from a year ago. The current ratio at the end of 1995 was 6.2:1 as
compared to 4.0:1 at the end of last year; however, the average current ratio in
1995 was 4.2:1.
Capital expenditures for 1995 of $634,000 were primarily for
<PAGE>
new manufacturing equipment, including two automatic component placement
systems, an additional wire bonder, and semi-automatic printing equipment.
In March 1995, the Company completed a new financing agreement which
provides for a $3,000,000 revolving line of credit. As of August 31, 1995,
there were no borrowings under the line. Borrowings under this agreement would
be collaterized by accounts receivable. The agreement contains certain
restrictive covenants including limitations on other borrowings and maintenance
of specified financial levels and ratios for net income, tangible net worth and
debt to tangible net worth. Borrowings are limited to the lesser of $3,000,000
or the borrowing base, which is 80% of eligible accounts receivable. Interest
on the borrowings is based on the Company's option, at the lender's prime rate
of interest or 2% above the lender's LIBOR rate.
During fiscal 1996, the Company intends to expend approximately $4.3
million for a facility addition, manufacturing facility improvements and capital
equipment. These additions will increase manufacturing capacity to meet
anticipated requirements for continued revenue growth. It is expected that
these expenditures will be funded primarily through long-term financing.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
APPROXIMATE SALES BY PRODUCT LINE
(IN THOUSANDS) 1995 1994 1993
<S> <C> <C> <C>
Microelectronics $21,187 $14,888 $16,580
Peripheral products 2,157 2,334 2,165
<PAGE>
Other 79 73 148
------- ------- -------
Total $23,423 $17,295 $18,893
</TABLE>
SALES
1995 VS. 1994: Sales in 1995 increased 35% from fiscal 1994, from $17.3
million to $23.4 million. Sales of microelectronic circuits, which include
opto-electronic circuits, increased 42% from the prior year from $14.9 million
to $21.2 million. This increase was primarily due to increased shipments in
1995 of microelectronic devices to the computer disk drive market, primarily to
the IBM Corporation and another disk drive manufacturer. Shipments of
microelectronic circuits to IBM were 30% and 49% of HEI's total sales in 1995
and 1994, respectively. During mid-year 1995, shipments of microelectronic
circuits to IBM were discontinued as the product reached the end of its life
cycle. During the second quarter of fiscal 1995, the Company began
manufacturing circuits for another major disk drive manufacturer, utilizing some
of the capacity available from the conclusion of the IBM order. Shipments to
this disk drive manufacturer accounted for 27% of the Company's sales in 1995,
but are expected to phase out during the first quarter of fiscal 1996. Recently
the Company entered into a production contract with another manufacturer of high
density disk drives to build circuits. Shipments to this customer are expected
to reach production volumes in the second half of fiscal 1996.
Because the Company's sales to the computer disk drive market are generally
tied to the customer's projected sales and production of the related product,
the Company's sales levels are
<PAGE>
subject to fluctuations outside of the Company's control. To the extent that
sales to any one customer represent a significant portion of the Company's
sales, any change in the level of sales to that customer can have a significant
impact on the Company's total revenues. In addition, production for one
customer may conclude while production for a new customer has not yet begun or
is not yet at full volume. These factors may result in significant fluctuations
in sales from quarter to quarter.
1994 VS. 1993: HEI's 1994 sales decreased 8% from fiscal 1993, from $18.9
million to $17.3 million. Sales of microelectronic circuits decreased 10% from
the prior year as a result of reduced orders from the Company's largest account
in the first half of fiscal 1994. Sales of peripheral products increased 8%
from the prior year due to higher demand.
PERCENTAGE OF SALES
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Sales 100% 100% 100%
Gross profit 26% 28% 36%
Selling, general and administrative 10% 12% 11%
Research, development and engineering 3% 4% 3%
</TABLE>
GROSS PROFIT
1995 VS. 1994: The Company's gross profit as a percentage of sales was 26%
in 1995, compared to 28% in 1994. The reduced gross profit rate reflects
primarily the impact of increased competitive
<PAGE>
pressures to lower prices on new programs. The Company anticipates continuing
pressure on gross profit rates in fiscal 1996 as a result of both the
aforementioned volatility in shipments to the computer peripheral market and
increasingly competitive pricing.
1994 VS. 1993: The Company's gross profit as a percentage of sales was 28%
in 1994 compared with 36% in 1993. The reduced gross profit rate in 1994
reflects the impact of lower sales accompanied by increases in indirect
manufacturing expenses and pressures to lower prices.
OPERATING EXPENSES
1995 VS. 1994: Fiscal year 1995 selling, general and administrative
expenses increased 15% from 1994 and research, development and engineering
expenses increased 11%. Both increases were in support of increased product
development and shipments. As a percentage of sales, selling, general and
administrative expenses for fiscal 1995 decreased to 10% versus 12% for fiscal
1994 reflecting increased sales. In fiscal 1996, the Company plans to continue
strengthening its product design and marketing capabilities.
1994 VS. 1993: Fiscal year 1994 selling, general and administrative
expenses decreased 2% and research, development and engineering expense
increased 11% from the prior year.
OTHER INCOME
1995 VS. 1994: Other income increased $168,000 over fiscal 1994 primarily
due to increased interest income on short-term investments.
<PAGE>
1994 VS. 1993: Other income increased $55,000 primarily due to increased
interest income.
NET INCOME
1995 VS. 1994: The Company had net income of $2,040,000 for 1995 compared
to net income of $1,325,000 for 1994. This increase was primarily due to
increased revenues and was partially offset by reduced gross profit margins.
Operating income of $3,005,000 was up $980,000 from 1994 reflecting a gross
profit increase of $1,362,000 partially offset by an operating expense increase
of $382,000 over 1994. The effective tax rate for both fiscal 1994 and 1995 was
37%.
1994 VS. 1993: The Company had net income of $1,325,000 for 1994 compared
to a net income of $2,538,000 for 1993. The reduced net income from 1993 was
due to a sales decrease of 8%, a reduced gross profit rate of 28% in fiscal 1994
compared to 36% in fiscal 1993, and an operating expense increase of $29,000.
<PAGE>
HEI, INC. FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
Years Ended August 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $23,423 $17,295 $18,893 $14,138 $ 9,038
Cost of sales 17,263 12,497 12,174 9,491 6,527
- ----------------------------------------------------------------------
Gross profit 6,160 4,798 6,719 4,647 2,511
- ----------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative 2,401 2,094 2,130 1,963 1,823
Research, development
and engineering 754 679 614 565 646
- ----------------------------------------------------------------------
Operating income
3,005 2,025 3,975 2,119 42
- ----------------------------------------------------------------------
Income (loss)
before income
taxes 3,250 2,102 3,997 2,012 (51)
- ----------------------------------------------------------------------
Income taxes 1,210 777 1,459 150 24
- ----------------------------------------------------------------------
Net income
(loss) $ 2,040 $ 1,325 $ 2,538 $ 1,862 $ (75)
- ----------------------------------------------------------------------
Net income (loss) per common share:
Primary $ .52 $ .34 $ .66 $ .57 $ (.04)
Fully diluted $ .52 $ .34 $ .66 $ .54 $ (.04)
- ----------------------------------------------------------------------
Weight average number of common
and common equivalent shares outstanding:
Primary 3,898,662 3,857,737 3,821,729 3,284,725 1,957,291
Fully
diluted 3,954,028 3,878,925 3,826,876 3,443,235 1,957,291
<PAGE>
- ----------------------------------------------------------------------
Balance sheet:
Current
assets $ 9,983 $ 7,903 $ 5,743 $ 4,054 $ 2,956
Total assets 12,857 10,905 8,564 5,850 4,394
Current
liabilities 1,603 1,976 1,532 1,907 2,760
Long-term debt,
less current
maturities 308
Shareholders'
equity 10,982 8,671 6,762 3,635 1,634
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
HEI, INC. BALANCE SHEET
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
As of August 31 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,438 $ 1,579
Short-term investments 3,820 718
----- -----
5,258 2,297
Accounts receivable, net 2,525 3,421
Inventories 1,851 1,829
Other, principally deferred tax assets 349 356
- ----------------------------------------------------------------------
Total current assets 9,983 7,903
- ----------------------------------------------------------------------
Property and equipment:
Land 184 184
Building and improvements 1,398 1,398
Fixtures and equipment 5,475 4,870
Accumulated depreciation and
amortization (4,183) (3,450)
- ----------------------------------------------------------------------
Net property and equipment 2,874 3,002
- ----------------------------------------------------------------------
Total assets $12,857 $10,905
- ----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $385 $704
Accrued liabilities 1,043 906
Income taxes payable 175 366
<PAGE>
- ----------------------------------------------------------------------
Total current liabilities 1,603 1,976
- ----------------------------------------------------------------------
Deferred tax liability 272 258
- ----------------------------------------------------------------------
Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized,
none issued
Common stock, $.05 par; 10,000,000 shares authorized;
3,791,597, and 3,685,520 shares issued
and outstanding 190 184
Paid-in capital 6,183 5,918
Retained earnings 4,609 2,569
- ----------------------------------------------------------------------
Total shareholders' equity 10,982 8,671
- ----------------------------------------------------------------------
Total liabilities and shareholders' equity $12,857 $10,905
- ----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEI, INC. STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Years Ended August 31 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 23,423 $ 17,295 $ 18,893
Cost of sales 17,263 12,497 12,174
- ----------------------------------------------------------------------
Gross profit 6,160 4,798 6,719
- ----------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative 2,401 2,094 2,130
Research,development and
engineering 754 679 614
- ----------------------------------------------------------------------
Operating income 3,005 2,025 3,975
- ----------------------------------------------------------------------
Other, principally interest income (245) (77) (22)
- ----------------------------------------------------------------------
Income before income
taxes 3,250 2,102 3,997
- ----------------------------------------------------------------------
Current income taxes 1,210 777 1,629
Benefit arising from utilization
of net operating loss carryforwards (170)
- ----------------------------------------------------------------------
Income taxes 1,210 777 1,459
- ----------------------------------------------------------------------
Net income $ 2,040 $ 1,325 $ 2,538
<PAGE>
- ----------------------------------------------------------------------
Net income per common share $ .52 $ .34 $ .66
- ----------------------------------------------------------------------
Weighted average number of common
and common equivalent shares
outstanding 3,898,662 3,857,737 3,821,729
- ----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEI, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Common Stock Paid-in Retained
Shares Amount Capital Earnings
Outstanding Outstanding (Accumulated
Deficit)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, August 31,
1992 3,177,310 $ 159 $4,770 $(1,294)
Net income 2,538
Issuance of common shares
under employee stock purchase
and option plans 456,125 23 566
- -----------------------------------------------------------------------
Balance, August 31,
1993 3,633,435 182 5,336 1,244
Net income 1,325
Tax benefit of nonqualified
stock options 458
Issuance of common shares
under employee stock purchase
and option plans 52,085 2 124
- -----------------------------------------------------------------------
Balance, August 31,
1994 3,685,520 184 5,918 2,569
Net income 2,040
Tax benefit of nonqualified stock options 50
Issuance of common shares
under employee stock purchase
and option plans 106,077 6 215
- -----------------------------------------------------------------------
Balance, August 31,
1995 3,791,597 $ 190 $6,183 $4,609
- -----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEI, INC. STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Years Ended August 31 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow provided by operating activities:
Net income $ 2,040 $ 1,325 $ 2,538
Depreciation and
amortization 759 640 462
Provision for doubtful
accounts 141 150 86
Other 3 4 26
Changes in current operating items:
Accounts receivable 755 (1,248) (765)
Inventories (22) (739) 251
Prepaid expenses and other 21 30 (5)
Accounts payable (319) 140 (143)
Accrued liabilities 179 3 17
Income taxes payable (191) 306 (87)
- ----------------------------------------------------------------------
Net cash flow provided by operating
activities 3,366 611 2,380
- ----------------------------------------------------------------------
Cash flow used for investing activities:
Purchase of short-term investments (6,910) (936) (1,132)
Maturity of short-term investments 3,808 1,044 606
Additions to property and
equipment (634) (825) (1,513)
- ----------------------------------------------------------------------
<PAGE>
Net cash flow used for investing
activities (3,736) (717) (2,039)
- ----------------------------------------------------------------------
Cash flow provided by financing activities:
Repayment of long-term debt (390)
Principal payments for obligations under
capital leases (42) (47) (38)
Tax benefit of nonqualified stock
options 50 458
Issuance of common shares 221 126 589
- ----------------------------------------------------------------------
Net cash flow provided by
financing activities 229 537 161
- ----------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (141) 431 502
Cash and cash equivalents,
beginning of year 1,579 1,148 646
- ----------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 1,438 $ 1,579 $ 1,148
- ----------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ----------------------------------------------------------------------
Interest paid $ 2 $ 6 $ 40
Income taxes paid 1,351 429 1,524
- ----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
SUMMARY OF QUARTERLY OPERATING RESULTS (unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Fiscal year 1995 First Second Third Fourth
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $5,947 $5,924 $6,134 $5,418
Gross profit 1,916 1,735 1,328 1,181
Operating income 1,081 952 526 446
Net income 710 652 364 314
- ----------------------------------------------------------------------
Net income per share $ .18 $ .17 $ .09 $ .08
- ----------------------------------------------------------------------
Fiscal year 1994 (unreviewed) First Second Third Fourth
- ----------------------------------------------------------------------
Net sales $3,119 $3,154 $4,767 $6,255
Gross profit 860 735 1,493 1,710
Operating income 148 95 748 1,034
Net income 102 72 485 666
- ----------------------------------------------------------------------
Net income per share $ .03 $ .02 $ .13 $ .17
- ----------------------------------------------------------------------
</TABLE>
Note:
The summation of quarterly net income per share for 1994 does not equate to the
calculation for the year since the quarterly calculations are performed on a
discrete basis.
<PAGE>
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HEI, Inc. (the Company) specializes in the design and manufacture of custom
microelectronics (thick film hybrid circuits and optical switches and
assemblies) and light pens.
CASH AND CASH EQUIVALENTS.
The Company considers its investments in all highly liquid debt instruments
with original maturities of three months or less at date of purchase to be cash
equivalents. The carrying amount approximates fair value because of the short
maturity of those instruments.
INVENTORIES.
Inventories are stated at the lower of cost or market and include
materials, labor and overhead costs. The first-in, first-out cost method is
used to value inventories.
The allowance for excess or obsolete stock is determined based on the
Company's continuing analysis of inventory levels in excess of current
requirements or considered to be obsolete. The Company has established an
estimated allowance to record inventories at estimated net realizable value.
PROPERTY AND EQUIPMENT.
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the estimated useful lives of the
property and equipment.
Maintenance and repairs are charged to expense as incurred. Major
improvements and tooling costs are capitalized and depreciated over their
estimated useful lives. The cost and
<PAGE>
accumulated depreciation of property and equipment retired or otherwise disposed
of are removed from the related accounts, and any resulting gain or loss charged
or credited to operations.
INCOME TAXES.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred income tax assets and liabilities are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using currently enacted tax rates in effect for
the year in which the differences are expected to reverse. Income tax expense
is the tax payable for the period and the change during the period in deferred
income tax assets and liabilities.
REVENUE RECOGNITION.
Revenue is recognized at the time of shipment. Product returns are applied
against revenue.
PRODUCT WARRANTY.
The Company records estimated product warranty costs in the period in which
the related sales are recognized.
NET INCOME PER COMMON SHARE.
Net income per common share is based on the weighted average number of
common and common equivalent shares outstanding, assuming the exercise of stock
options and warrants, when dilutive.
USE OF ESTIMATES.
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.
RECLASSIFICATIONS.
Certain reclassifications have been made to 1994 amounts to conform to the
1995 presentation with no effect on previously
<PAGE>
reported net income and shareholders' equity.
2. MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK
AND GEOGRAPHIC DATA
Major customers, each of which accounted for more than 10% of the Company's
total sales for the years ended August 31, were as follows:
1995 1994 1993
---- ---- ----
Customer A 30% 49% 54%
Customer B 27
Customer C 12 19 15
The Company generally sells its products to original equipment manufacturers in
the United States and abroad in accordance with supply contracts specific to
certain manufacturer product programs. The Company performs ongoing credit
evaluations of its customers financial condition and, generally, does not
require collateral from its customers. The Company's continued sales to these
customers is often dependent upon the continuance of the customer's product
programs. The Company's ten largest customers accounted for approximately 89%
of sales in 1995, 86% in 1994 and 86% in 1993 and approximately 87% and 86% of
accounts receivable at August 31, 1995 and 1994, respectively.
The Company had sales of $2,493,000 to Hong Kong in 1995 and $2,230,000 to
Singapore in 1994. Total export sales were $4,995,000 in 1995 and $2,749,000 in
1994.
3. OTHER FINANCIAL STATEMENT DATA
The Company had $895,000 in cash and cash equivalents and short-term
investments at August 31, 1994 invested with a single banking institution, and
$1,607,760 and $1,355,000 in cash and cash equivalents and short-term
investments at August 31, 1995 and 1994, respectively, invested with an
affiliate of the same banking institution. Short-term investments are primarily
treasury bills at August 31, 1995 and certificates of deposit at August 31,
1994.
The following provides additional information concerning
<PAGE>
selected balance sheet accounts at August 31, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C>
Accounts receivable, net: 1995 1994
---- ----
Trade accounts receivable $ 2,793 $ 3,679
Less allowance for
doubtful accounts (268) (258)
------- -------
$ 2,525 $ 3,421
======= =======
Inventories:
Purchased parts $ 1,670 $ 1,715
Work in process 907 820
Finished goods 233 172
Less allowance for
excess or obsolete stock (959) (878)
------- -------
$ 1,851 $ 1,829
======= =======
Accrued liabilities:
Vacation and employee
benefits $ 398 $ 298
Payroll related 220 141
Real estate taxes 75 71
Warranty 100 80
Other 250 316
------- -------
$ 1,043 $ 906
======= =======
</TABLE>
4. FINANCING ARRANGEMENTS
During fiscal 1995, the Company completed a new financing agreement which
provides for a $3,000,000 revolving line of credit. At August 31, 1995, there
were no borrowings under the line of credit. Borrowings under this agreement
would be collateralized by accounts receivable. The agreement contains
<PAGE>
certain restrictive covenants including limitations on other borrowings and
maintenance of specified financial levels and ratios for net income, tangible
net worth and debt to tangible net worth. Borrowings are limited to the lesser
of $3,000,000 or the borrowing base, which is 80% of eligible accounts
receivable. Interest on the borrowings is, based on the Company's option, at
the lender's prime rate of interest or at 2% above the lender's LIBOR rate. The
prime rate of interest was 8.75% on August 31, 1995 and 7.75% on August 31,
1994. The revolving line of credit expires in March 1997.
5. INCOME TAXES
Income tax expense for the years ended August 31 consisted of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,106 $ 730 $ 1,359
State 104 47 270
------- ----- ------
Current tax expense 1,210 777 1,629
------- ----- ------
Benefit arising from
utilization of net operating
loss carryforwards -- -- (170)
------ ----- ------
Income tax expense $1,210 $ 777 $1,459
====== ===== ======
</TABLE>
The components of the deferred tax assets and liability at August 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful
accounts $ 99 $ 95
Inventories 274 282
Accrued liabilities 101 94
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Other 72 69
----- -----
546 540
Valuation allowance (274) (282)
----- -----
$272 $258
===== =====
Deferred tax liability:
Depreciation $(272) $(258)
====== ======
</TABLE>
Management has retained the valuation allowance for the deferred tax asset
related to the reserve established for excess or obsolete inventories due to
uncertainty as to the timing of disposition of such inventories.
The Company adopted FAS109 in fiscal 1992 and has had no effect on the
Company's financial position, results of operations or cash flow.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate for the years ended August 31 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
State income tax rate
(net of federal tax
effect) 3.2 3.0 4.9
Effect of net operating loss
carryforwards (2.4)
------ ----- -----
Effective tax rate 37.2% 37.0% 36.5%
===== ===== =====
</TABLE>
6. STOCK BENEFIT PLANS
1989 PLAN. Under the Company's 1989 Omnibus Stock Compensation Plan (the
"1989 Plan"), a maximum of 1,200,000 shares
<PAGE>
of common stock may be issued in connection with awards that may be granted
under the Plan, including qualified and nonqualified stock options, stock
purchase rights and other stock-based awards.
Stock options granted become exercisable in varying increments and
generally expire five years after the date of grant. The exercise price for
options granted is equal to the market value of the common stock on the date of
grant.
Under the 1989 Plan, substantially all regular full-time employees are
given the opportunity to designate up to 10% of their annual compensation to be
withheld, through payroll deductions, for the purchase of common stock at 85% of
the lower of (i) the market price at the beginning of the plan year or (ii) the
market price at the end of the plan year. During fiscal 1995, 1994, and 1993,
22,077, 12,235, and 21,850 shares at prices of $3.95, $4.74, and $2.38,
respectively, were purchased under the 1989 Plan.
DIRECTORS' OPTIONS. In fiscal 1990, the Company granted to its directors
(including officers who were also directors) options to purchase, in the
aggregate, 227,500 shares of common stock at an average price of $1.34 per
share. Options to purchase 20,000 shares at an average price of $1.34 per share
and 187,500 shares at $1.33 per share were exercised in fiscal 1994 and 1993,
respectively.
DIRECTORS' PLAN. In fiscal 1992, the shareholders approved adoption of a
stock option plan for the non-employee directors. The plan, under which 400,000
shares are authorized for issuance, provides for an annual grant of 10,000
shares to each non-employee
<PAGE>
director. These grants are effective on the first business day following the
annual shareholders' meeting at an exercise price equal to the fair market value
on the date of grant. The options become exercisable one year after the grant
date and expire five years after the grant date. Options to purchase 40,000
shares were granted each year to the four non-employee directors at $4.71 per
share, $5.425 per share and $6.60 per share in 1995, 1994 and 1993,
respectively. Options to purchase 30,000 shares were exercised in 1993 under
the Directors' Plan at $1.525 per share.
WARRANTS. In connection with the shareholder rights offering in fiscal
1991, the Company issued to the underwriter warrants to purchase 103,275 shares
at $.60 per share exercisable for a four-year period commencing April 22, 1992.
These warrants were exercised in fiscal 1993.
SUMMARY OF ACTIVITY.
The following is a summary of all activity involving options and warrants for
the years ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Outstanding, beginning of year 398,500 346,100 741,375
Granted 377,500 92,500 40,000
Exercised (84,000) (39,850) (434,275)
Cancelled (250) ( 1,000)
------- ------- -------
Outstanding, end of year 692,000 398,500 346,100
======== ======== ========
Exercisable, end of year 308,500 212,500 64,500
Available for grant 350,560 750,137 854,622
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Exercise price of options $ .725- $.725- $.725-
and warrants outstanding $ 6.60 $6.60 $6.60
</TABLE>
RIGHTS PLAN. On May 27, 1988, the Company's Board of Directors authorized
a shareholder rights plan which provides for a dividend distribution of one
right for each share of common stock to shareholders of record at the close of
business on June 10, 1988. With certain exceptions, the rights will become
exercisable only in the event that an acquiring party accumulates 20% or more of
the Company's voting stock or a party announces an offer to acquire 30% or more
of the voting stock. The rights will expire on June 10, 1998, if not previously
redeemed or exercised. Each right will entitle the holder to purchase
one-fourth of one common share at a price of $6.00 per share, subject to
adjustment under certain circumstances. In addition, upon the occurrence of
certain events, holders of the rights will be entitled to purchase a defined
number of shares of an acquiring entity or the Company's common stock at half
its then current market value. The Company will generally be entitled to redeem
the rights at $.05 per right at any time until the tenth day following the
acquisition of 20% or more, or an offer to acquire 30% or more, of the Company's
voting stock.
7. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering all eligible employees. Employees
can make voluntary contributions to the plan of up to 20% of their compensation,
not to exceed the maximum specified by the Internal Revenue Code. The plan
also provides for a discretionary contribution by the Company. During fiscal
<PAGE>
years 1995, 1994 and 1993, the Company contributed $75,000, $65,000 and $49,000,
respectively, to the plan.
8. RENT EXPENSE
Total rent expense under noncancelable operating leases was approximately
$57,000 in 1995, $62,000 in 1994, and $69,000 in 1993. Future minimum rental
payments under these noncancelable operating leases are not significant.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of HEI, Inc.:
We have audited the accompanying balance sheet of HEI, Inc. as of August
31, 1995 and 1994, and the related statements of operations, changes in
shareholders' equity, and cash flows for the years ended August 31, 1995, 1994
and 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
<PAGE>
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HEI, Inc. as of August 31,
1995 and 1994, and the results of its operations and its cash flows for the
years ended August 31, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
September 29, 1995
<PAGE>
Corporate Information
BOARD OF DIRECTORS
Robert L. Brueck
Consultant
Eugene W. Courtney
President and Chief Executive Officer
HEI, Inc.
William R. Franta
Vice President
Network Systems Corporation
Kenneth A. Schoen
Executive Vice President (ret.)
3M Company
Frederick M. Zimmerman
Chair of Manufacturing Systems Engineering Department
University of St. Thomas
CORPORATE OFFICERS AND MANAGEMENT
Eugene W. Courtney
President and Chief Executive Officer
Jerald H. Mortenson
Vice President of Finance and Administration, Chief Financial Officer and
Treasurer
Dale A. Nordquist
Vice President of Sales
<PAGE>
Thomas G. Easter
Director of Manufacturing
Scott J. Kazle
Director of Engineering
Wray A. Wentworth
Director of Corporate Quality
GENERAL COUNSEL
Moss & Barnett
Minneapolis, Minnesota
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
STOCK TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N. A.
Box 738
161 North Concord Exchange
South St. Paul, Minnesota 55075-0738
CORPORATE HEADQUARTERS
HEI, Inc.
Box 5000
1495 Steiger Lake Lane
Victoria, Minnesota 55386-5000
(612) 443-2500
<PAGE>
FORM 10-KSB
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-KSB is available without charge by sending a written or
oral request to:
Shareholder Relations
HEI, Inc.
P.O. Box 5000
Victoria, Minnesota 55386
Phone (612) 443-2500 Facsimile (612) 443-2668
ANNUAL MEETING OF SHAREHOLDERS
The Company's annual meeting of shareholders will be held on January 17,
1996 at 3:00 P.M. at The Planets (50th floor), IDS Center, 80 South Eighth
Street, Minneapolis, Minnesota.
MARKET PRICE AND RELATED MATTERS
The Company's common stock is currently traded on The Nasdaq National
Market under the symbol HEII. Below are the high and low closing bid prices for
each quarter of fiscal year 1995 and 1994, as reported on The Nasdaq. These
quotations represent prices between dealers, do not include retail markups,
markdowns or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
1995 HIGH LOW
<S> <C> <C>
First Quarter $6 $4 1/4
Second Quarter $5 1/2 $4 1/8
Third Quarter $5 1/2 $4 3/8
Fourth Quarter $6 3/8 $4 1/4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 HIGH LOW
<S> <C> <C>
First Quarter $6 3/8 $4 3/8
Second Quarter 6 4 1/4
Third Quarter 6 4 1/2
Fourth Quarter 6 4 1/2
</TABLE>
As of August 31, 1995, the Company had approximately 3,300 shareholders of
which approximately 800 are shareholders of record. The Company does not
declare cash dividends.
STATEMENT OF FINANCIAL RESPONSIBILITY
The accompanying financial statements, including the notes thereto, and
other financial information presented in this Annual Report, were prepared by
management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon management's best
estimates and judgments.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that the Company's assets are protected and that
transactions are executed in accordance with established authorizations and are
recorded properly. The reasonable assurance concept is based on recognition that
the cost of a system of internal accounting controls should not exceed the
benefit derived.
The Audit Committee of the Board of Directors is responsible for
recommending the independent accounting firm to be retained for the coming year.
The Audit Committee meets periodically and privately with the independent public
accountants, as well as with
<PAGE>
management, to review accounting, auditing, and financial reporting matters.
The Company's independent certified public accountants, Coopers & Lybrand
L.L.P., are engaged to audit the financial statements of the Company and to
issue their report thereon. Their audit has been performed in accordance with
generally accepted auditing standards.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of HEI, Inc. on Forms S-8 (File Nos. 33-33322, 33-46928 and 33-46929) of our
report dated September 29, 1995, on our audits of the financial statements of
HEI, Inc. as of August 31, 1995 and 1994, and for the years ended August 31,
1995, 1994 and 1993, which report is incorporated by reference in its Annual
Report on Form 10-KSB for the year ended August 31, 1995.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
November 20, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<CASH> 1,438
<SECURITIES> 0
<RECEIVABLES> 2,525
<ALLOWANCES> 0
<INVENTORY> 1,851
<CURRENT-ASSETS> 9,983
<PP&E> 7,057
<DEPRECIATION> 4,183
<TOTAL-ASSETS> 12,857
<CURRENT-LIABILITIES> 1,603
<BONDS> 0
<COMMON> 190
0
0
<OTHER-SE> 10,792
<TOTAL-LIABILITY-AND-EQUITY> 12,857
<SALES> 23,423
<TOTAL-REVENUES> 23,423
<CGS> 17,263
<TOTAL-COSTS> 17,263
<OTHER-EXPENSES> 2,910
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,250
<INCOME-TAX> 1,210
<INCOME-CONTINUING> 2,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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