<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended MAY 27, 1995 ("THIRD QUARTER,
FISCAL 1995") or
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
--------------- -----------------
Commission File Number 0-10078
------------------------------
HEI, INC.
---------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-0944876
--------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
PO 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
--------------
None
----
Former name, former address and former
fiscal year, if changed since last report.
Check 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
--- ---
3,791,597 Common Shares, par value $0.05, were outstanding as of May 27, 1995.
This Form 10-QSB consists of 11 pages.
<PAGE>
2
Table of Contents HEI, Inc.
- ----------------------------------------------------------------------------
Part I - Financial Information
Item 1. Financial Statements
Balance Sheet............................... 3
Statement of Operations..................... 4
Statement of Cash Flows..................... 5
Notes to Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K................ 10
Signatures............................................... 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<TABLE>
<CAPTION>
HEI, INC. BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------
May 27, 1995 August 31, 1994
------------ ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,593 $1,579
Short-term investments 3,239 718
----- -----
4,832 2,297
Accounts receivable, net 2,891 3,421
Inventories 2,036 1,829
Prepaid expenses and other 85 98
- -------------------------------------------------------------------------------------------------------------------
Total current assets 9,844 7,645
- -------------------------------------------------------------------------------------------------------------------
Property and equipment:
Land 184 184
Building and improvements 1,398 1,398
Fixtures and equipment 5,276 4,732
Property under capital leases 138 138
Accumulated depreciation and amortization (4,000) (3,450)
- -------------------------------------------------------------------------------------------------------------------
Net property and equipment 2,996 3,002
- -------------------------------------------------------------------------------------------------------------------
Total assets $12,840 $10,647
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $923 $704
Accrued liabilities 981 906
Income taxes payable 318 366
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,222 1,976
- -------------------------------------------------------------------------------------------------------------------
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 6,133 5,918
Retained earnings 4,295 2,569
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,618 8,671
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $12,840 $10,647
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
HEI, INC. STATEMENT OF OPERATIONS (UNAUDITED) 4
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 27, 1995 May 28, 1994 May 27, 1995 May 28, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $6,134 $4,767 $18,005 $11,040
Cost of sales 4,806 3,274 13,026 7,952
- -------------------------------------------------------------------------------------------------------------------
Gross profit 1,328 1,493 4,979 3,088
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general
and administrative 608 585 1,842 1,602
Research, development
and engineering 194 160 578 495
- -------------------------------------------------------------------------------------------------------------------
Operating income 526 748 2,559 991
- -------------------------------------------------------------------------------------------------------------------
Other (income) expense, net (69) (10) (165) (55)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 595 758 2,724 1,046
- -------------------------------------------------------------------------------------------------------------------
Income taxes 231 273 998 387
- -------------------------------------------------------------------------------------------------------------------
Net income $364 $485 $1,726 $659
- -------------------------------------------------------------------------------------------------------------------
Net income per common share $.09 $.13 $.44 $.17
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 3,904,768 3,870,530 3,891,215 3,852,882
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
HEI, INC. STATEMENT OF CASH FLOWS (UNAUDITED) 5
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended May 27, 1995 May 28, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOW PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $1,726 $659
Depreciation and amortization 565 465
- -------------------------------------------------------------------------------------------------------------------
CHANGES IN CURRENT OPERATING ITEMS:
Accounts receivable 530 (1,177)
Inventories (207) (1,030)
Prepaid expenses and other 13 (173)
Accounts payable 219 526
Accrued liabilities 117 (22)
Income taxes payable (48) (133)
- -------------------------------------------------------------------------------------------------------------------
Net change in current operating items 624 (2,009)
- -------------------------------------------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED FOR) OPERATING
ACTIVITIES 2,915 (885)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW USED FOR INVESTING ACTIVITIES:
Short-term investments (2,521) (21)
Additions to property and equipment (559) (637)
- -------------------------------------------------------------------------------------------------------------------
NET CASH FLOW USED FOR INVESTING ACTIVITIES (3,080) (658)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments for obligations under
capital leases (42) (40)
Issuance of common shares 221 121
Tax benefit of nonqualified stock options 458
- -------------------------------------------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY FINANCING
ACTIVITIES 179 539
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14 (1,004)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,579 1,148
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,593 $144
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 2 $ 6
Income taxes paid 1,064 209
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements have been prepared by the Company, without
audit, under the rules and regulations of the Securities and Exchange
Commission. The accompanying financial statements contain all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted under such rules and regulations although the
Company believes that the disclosures are adequate to make the information
presented not misleading. The year-end balance sheet data were derived from
audited financial statements, but do not include all disclosures required by
generally accepted accounting principles. These unaudited financial statements
should be read in conjunction with the financial statements and notes included
in the Company's Annual Report to Shareholders on Form 10-KSB for the year ended
August 31, 1994. Interim results of operations for the nine month period ended
May 27, 1995 may not necessarily be indicative of the results to be expected for
the full year.
(2) 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 in
valuing inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) May 27, 1995 August 31, 1994
------------ ---------------
(Unaudited)
<S> <C> <C>
Purchased parts $1,776 $1,715
Work in process 989 820
Finished goods 256 172
Allowance for excess or obsolete stock (985) (878)
--------- ----------
$2,036 $1,829
--------- ---------
--------- ---------
</TABLE>
<PAGE>
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS HEI, INC.
- -------------------------------------------------------------------------------
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow provided by operating activities was $2,915,000 for
the nine months ended May 27, 1995. This included net income of $1,726,000,
non-cash depreciation and amortization of $565,000, and a net reduction of
$624,000 in current operating items for the first nine months of fiscal 1995.
The current operating items reduction included increased accounts payable of
$219,000, increased accrued liabilities of $117,000 and decreased receivables of
$530,000, partially offset by increased inventories of $207,000. The inventory
increase is primarily due to increased work in process toward customer scheduled
build requirements.
Accounts receivable average days outstanding were 43 days of as of May 27, 1995
as compared to 55 days for the same period a year ago. Inventory turns were 9.6
turns as of May 27, 1995 as compared to 6.5 turns for the same period a year
ago. The inventory turn increase is primarily due to higher shipments and lower
inventories for the three month period ended May 27, 1995.
In March 1995, the Company completed a new financing agreement which provides
for a $3,000,000 revolving line of credit. As of May 27, 1995, there were no
borrowings under the line. Borrowings under this agreement would be
collateralized by accounts receivable. The agreement contains certain
restrictive covenants including limitations on obtaining other borrowings and
requiring maintenance of specified financial levels and ratios for net income,
tangible net worth and debt to tangible net worth. Borrowings are limited to
$3,000,000 or the borrowing base, which is 80% of eligible accounts receivable.
Interest on the borrowings is, at the Company's option, the lender's prime rate
of interest or 2% above the lender's LIBOR rate.
During fiscal 1995, the Company intends to invest approximately $1.0 million in
capital equipment and manufacturing facility improvements. These additions are
deemed necessary in order to strengthen the Company's infrastructure while
maintaining its concentration on further quality improvements and market
expansion in fiscal 1995. It is anticipated that most, if not all, of these
expenditures can be funded through internally generated funds.
Capital equipment expenditures for the nine months ended May 27, 1995 were
$559,000, primarily for production equipment, including die placement systems
and automatic wire bonding equipment.
<PAGE>
8
REVIEW OF OPERATIONS
- -------------------------------------------------------------------------------
NET SALES
1995 vs. 1994: HEI, Inc's net sales for the three months and nine months ended
May 27, 1995 increased 29% and 63%, respectively, as compared to the same period
a year ago as a result of stronger microelectronic sales. Microelectronic sales
increased 34% and 77%, respectively, from the same three month and nine month
periods last year. For the three months, microelectronic sales increased due to
higher shipments to the high density disk drive market as well as stronger sales
to medical related markets. For the nine months, microelectronics sales
increased primarily as a result of higher shipments to the high density disk
drive market. Peripheral product sales decreased 7% and 8% from last year's
comparable three month and nine month periods, respectively, as a result of
lower demand.
As reported earlier, the Company announced that it was commencing a production
build up for a new customer, a major manufacturer of high density disk drives,
while winding down production for another disk drive manufacturer. This
transition was completed during the first month of the third quarter.
GROSS PROFIT
1995 vs. 1994: For the three months ended May 27, 1995, gross profit decreased
$165,000, or 11%, from last year with the gross profit rate decreasing to 22%
from 31% last year. A decline in gross profit rates was expected for the second
half of fiscal 1995 as the product mix evolves to a heavier portion of new
programs bid under increasing price competition as well as the consequence of
start-up costs on several new programs. For the nine months ended May 27, 1995,
gross profit increased $1,891,000, or 61%, from last year with the gross profit
rate at 28% for both periods. The gross profit increase for the nine months is
primarily due to the effect of increased shipments.
OPERATING EXPENSES
1995 vs. 1994: Operating expenses for the three month period ended May 27, 1995
increased 8% from last year's comparable period. Operating expenses were 13% of
net sales as compared to 16% for the third quarter of last year. Operating
expenses for the nine month period ended May 27, 1995 increased 15% from last
year's comparable period. Selling, general and administrative expense for the
three and nine month periods increased primarily due to higher sales expense in
support of the increased revenues. Research, development and engineering
expense increased primarily due to the increased level of testing done to
support new product development.
INCOME TAXES
During each quarter of fiscal 1995, the Company is recording income tax expense
based on the expected effective rate for the full year. The expected effective
income tax rate for fiscal 1995 is approximately 36.6% compared to 37.5% for
fiscal 1994.
<PAGE>
9
REVIEW OF OPERATIONS
- -------------------------------------------------------------------------------
NET INCOME
1995 vs. 1994: The Company had net income of $364,000 for the third quarter of
fiscal 1995 compared to $485,000 for the same period a year ago. The Company
had net income of $1,726,000 for the nine month period ended May 27, 1995
compared to $659,000 for the same period a year ago. The decrease in net income
for the three month period of 1995 was the result of lower gross profit rates on
new programs. The increase in net income for the nine month period is primarily
due to higher sales volume, as compared to a year ago.
<PAGE>
10
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
4 - Credit agreement with Norwest Bank Minnesota, dated March 7, 1995.
Filed as an exhibit to Form 10-QSB for the quarter ended February 25,
1995 and incorporated herein by reference.
b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE>
11
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEI, INC.
(Registrant)
Date:
--------------------- ---------------------------------------
Jerald H. Mortenson
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(a duly authorized officer)
