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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended August 31, 1996.
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[ ] 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
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386
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(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. [X]
HEI, Inc. revenues for the fiscal year ended August 31, 1996 were $20,680,000.
The aggregate market value as of November 1, 1996 (based on the closing price as
reported by The Nasdaq National Market) of the voting stock held by non-
affiliates was approximately $35,000,000.
As of November 1, 1996, 4,072,427 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, 1996 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 22, 1997 are incorporated by reference in Part III.
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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. The light pen
product line, which represented a minor part of the Company's sales, was
sold in August 1996 to FTG Data Systems.
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
percentage of the Company's sales to major customers which accounted for
more than 10% of total sales in fiscal years 1996, 1995 and 1994.
Customer 1996 1995 1994
-------- ---- ---- ----
Customer A 38% 12% 19%
Customer B 16%
Customer C 10%
Customer D 27%
Customer E 30% 49%
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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-sponsered
research and development activities was approximately $849,000, $754,000
and $679,000 for the years ended August 31, 1996, 1995 and 1994.
EMPLOYEES - At August 31, 1996, the Company employed 131 full-time and 19
temporary persons.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns a 48,000 square foot facility for administration and production
in Victoria, Minnesota, which was completed in August 1981. The facility was
expanded during fiscal 1996 from the original 25,000 square feet with an
addition of 23,000 square feet to increase production capacity. 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.
ITEM 3. LEGAL PROCEEDINGS
There are no 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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PART II
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 6-14 as follows:
Page in
Annual Report:
--------------
Balance Sheet as of August 31, 1996 and 1995 6
Statement of Operations for the Years Ended
August 31, 1996, 1995 and 1994 7
Statement of Changes in Shareholders' Equity
for the Years Ended August 31, 1996, 1995 and 1994 8
Statement of Cash Flows for the Years Ended
August 31, 1996, 1995 and 1994 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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PART III
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, 1996.
NAME AGE POSITION
- ---- --- --------
Eugene W. Courtney 60 President, Chief Executive Officer
Jerald H. Mortenson 62 Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
Dale A. Nordquist 42 Vice President of Sales and Marketing
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index on Page 7
(b) Reports files on Form 8-K: No reports on Form 8-K were filed during the
fourth quarter of the fiscal year ended August 31, 1996.
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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
Date: November 8, 1996
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/ Eugene W. Courtney November 8, 1996
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Eugene W. Courtney, Director Date
/s/ Jerald H. Mortenson
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Jerald H. Mortenson, Vice President of Finance November 8, 1996
and Administration, Chief Financial Officer and ----------------
Treasurer Date
/s/ Craig E. Roble November 8, 1996
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Craig E. Roble, Company Controller Date
/s/ Robert L. Brueck November 8, 1996
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Robert L. Brueck, Director Date
/s/ William R. Franta November 8, 1996
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William R. Franta, Director Date
/s/ Kenneth A. Schoen November 8, 1996
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Kenneth A. Schoen, Director Date
/s/ Frederick M Zimmerman November 8, 1996
- ----------------------------------------------- ----------------
Frederick M Zimmerman, Director Date
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EXHIBIT INDEX
Page Number or
(a) EXHIBIT NUMBER Description Incorporated by
-------------- ----------- Reference
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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
4.3a Credit Agreement with Norwest Bank
Minnesota, N.A. dated April 1, 1996. Note 5
4.3b Current Note and Security Agreement
with Norwest Bank Minnesota, N.A.
dated April 1, 1996. Note 5
4.4a Reimbursement Agreement by and
between HEI, Inc. and Norwest Bank,
Minnesota, N.A. dated April 1, 1996. Note 5
4.4b Mortgage Security Agreement Fixture
Financing Statement and Assignment of
Leases and Rents by HEI, Inc. as
Mortgagor to Norwest Bank, Minnesota,
N.A. as Mortgagee dated April 1, 1996. Note 5
4.4c Security Agreement by HEI, Inc. in
favor of Norwest Bank, Minnesota, N.A.
dated April 1, 1996. Note 5
10.1a Lease between Sauk Centre
Opportunities Incorporated and HEI,
Inc. dated October 16, 1978 (the
Lease). Note 6
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 7
10.2 Form of Indemnification Agreement
between HEI and officers and
directors. Note 8
*10.3 HEI 1989 Omnibus Stock Compensation
Plan adopted April 3, 1989, as amended
to date (1989 Plan).
*10.4 1991 Stock Option Plan for
Non-employee Directors, as amended
to date.
*10.5 Form of Non-qualified Stock Option
agreement between HEI and executive
officers under 1989 Plan. Note 9
*10.6 Form of Incentive Stock Option
agreement between HEI and executive
officers under 1989 Plan. Note 9
13 Annual Report to Shareholders for
the year ended August 31, 1996.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
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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 Form 10-QSB for the quarter ended June 1, 1996, and
incorporated herein by reference.
[6] 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.
[7] Filed as an exhibit to Annual Report on Form 10-KSB for the year ended
August 31, 1993, and incorporated herein by reference.
[8] Filed as an exhibit to Registration Statement on Form S-2 (SEC no.
33-37285) filed October 15, 1990, and incorporated herein by reference.
[9] Filed as an exhibit to Form 10-K for the year ended August 31, 1989, and
incorporated herein by reference.
* Denotes management contract or compensation plan or arrangement.
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HEI, INC.
1989 OMNIBUS STOCK COMPENSATION PLAN
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 15, 1991 AND
AMENDED EFFECTIVE APRIL 29, 1992, MAY 11, 1994, AND OCTOBER 31, 1996
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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SECTION 1. Purpose; Definitions . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2. Administration . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 3. Stock Subject to Plan. . . . . . . . . . . . . . . . . . . . . 6
SECTION 4. Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 5. Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 6. Stock Appreciation Rights. . . . . . . . . . . . . . . . . . .10
SECTION 7. Restricted Stock . . . . . . . . . . . . . . . . . . . . . . .12
SECTION 8. Deferred Stock . . . . . . . . . . . . . . . . . . . . . . . .13
SECTION 9. Stock Purchase Rights. . . . . . . . . . . . . . . . . . . . .14
SECTION 10. Other Stock-Based Awards . . . . . . . . . . . . . . . . . . .17
SECTION 11 Change in Control Provisions . . . . . . . . . . . . . . . . .18
SECTION 12. Amendments and Termination . . . . . . . . . . . . . . . . . .19
SECTION 13. Unfunded Status of Plan. . . . . . . . . . . . . . . . . . . .20
SECTION 14. General Provisions . . . . . . . . . . . . . . . . . . . . . .21
SECTION 15. Effective Date of Plan . . . . . . . . . . . . . . . . . . . .22
SECTION 16. Term of Plan . . . . . . . . . . . . . . . . . . . . . . . . .23
SECTION 17. Applicability to Grants under Other Company Plans. . . . . . .23
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HEI, INC.
1989 OMNIBUS STOCK COMPENSATION PLAN
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 15, 1991
AND AMENDED EFFECTIVE APRIL 29, 1992 AND MAY 11, 1994, AND OCTOBER 31, 1996
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the HEI, Inc. 1989 Omnibus Stock Compensation Plan (the
"Plan") is to enable HEI, Inc. (the "Company") to attract, retain, and reward
employees of the Company and its Parents, Subsidiaries, and Affiliates, and
strengthen the mutuality of interests between such employees and the Company's
shareholders, by offering such employees performance-based stock incentives
and/or other equity interests or equity-based incentives of the Company.
In addition to definitions that may be contained elsewhere in this Plan,
for purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Affiliate" means any entity other than the Company and its
Parents and Subsidiaries that is designated by the Board as a participating
employer under the Plan, provided that the Company directly or indirectly
owns at least 20% of the combined voting power of all classes of stock of
such entity or at least 20% of the ownership interests in such entity.
(b) "Award" means any Option, Stock Appreciation Right, Restricted
Stock Award, Deferred Stock Award, Stock Purchase Right, or Other
Stock-Based Award, or any other right, interest, or option relating to
Stock or other securities of the Company granted pursuant to the provisions
of this Plan.
(c) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing any Award granted by the Committee
hereunder and signed by both the Company and the Participant.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(f) "Committee" means the Committee referred to in Section 2 of the
Plan. If at any time no Committee shall be in office, then the functions
of the Committee specified in the Plan shall be exercised by the Board.
Where the Board has retained administrative authority with respect to the
Plan, references herein to the "Committee" shall refer to the Board.
(g) "Company" means HEI, Inc., a corporation organized under the laws
of the State of Minnesota, or any successor corporation.
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(h) "Deferred Stock" means an Award made pursuant to Section 8 below
of the right to receive Stock at the end of a specified deferral period.
(i) "Disability" means disability as determined under procedures
established by the Committee for purposes of this Plan or, as applied to
Incentive Stock Options, as defined in Section 22(e)(3) of the Code.
(j) [deleted]
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(1) "Fair Market Value" means as of any given date, unless otherwise
determined by the Committee in good faith, the average for the preceding
five business days of the closing bid prices of the Stock as reported on
the National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") or, if the Stock is then traded on the NASDAQ National
Market System ("NASDAQ/NMS") or a national or regional securities exchange,
the average for the preceding five business days of the closing prices of
the Stock on NASDAQ/NMS or such exchange.
(m) "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the meaning of Section
422 of the Code.
(n) "Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(o) "Other Stock-Based Award" means an Award under Section 10 below
that is valued in whole or in part by reference to, or is otherwise based
on, Stock.
(p) "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
the granting of an Award, each of the corporations other than the Company
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
(q) "Participant" means an employee of the Company or any Subsidiary,
Parent, or Affiliate of the Company who is selected by the Committee to
receive an Award under the Plan.
(r) "Plan" means this HEI, Inc. 1989 Omnibus Stock Compensation Plan,
as hereafter amended from time to time.
(s) "Restricted Stock" means an Award made pursuant to Section 7
below of Stock that is subject to restrictions.
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(t) "Stock" means the Common Stock, $.05 par value per share, of the
Company.
(u) "Stock Appreciation Right" or "SAR" means the right to receive to
receive a payment in cash, Stock, Restricted Stock, or Deferred Stock as
determined by the Committee.
(v) "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 below.
(w) "Stock Purchase Right" means the right to purchase Stock pursuant
to Section 9 below.
(x) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time
of the granting of an Award, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in the chain.
In addition, the terms "Change in Control" and "Change in Control Price"
shall have the meanings set forth, respectively, in Sections 11(b) and (c)
below.
SECTION 2. ADMINISTRATION
The Plan shall be administered by a Committee of not fewer than two members
of the Board, who shall be appointed by the Board and serve at the pleasure of
the Board. Initially, the Committee shall consist of the three nonemployee
directors. The functions of the Committee specified in the Plan shall be
exercised by the Board, if and to the extent that no Committee exists that has
the authority to so administer the Plan, or to the extent that the Board retains
authority to administer the Plan under specified circumstances. As to the
selection of and grants of Awards to persons who are not subject to Sections
16(a) and 16(b) of the Exchange Act, the Committee may delegate any or all of
its responsibility to members of the Company's administration. The grants of
Awards and determination of the terms thereof to persons who are subject to
Sections 16(a) and 16(b) of the Exchange Act shall be made in a manner that
satisfies the requirements of Rule 16b-3 under the Exchange Act, or any
successor rule.
The Committee shall have full power and authority, consistent with the
provisions of the Plan and subject to such orders or resolutions not
inconsistent with the provisions of the Plan as may be adopted by the Board:
(a) to select the employees of the Company and any Parent,
Subsidiary, or Affiliate to whom Awards may from time to time be granted
hereunder;
(b) to determine the type or types of Awards to be granted to
employees hereunder;
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(c) to determine the number of shares of Stock to be covered by each
Award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Award granted hereunder;
(e) to determine whether, to what extent, and under what
circumstances an Award may be settled in cash, Stock, or other property or
canceled or suspended;
(f) to determine whether, to what extent, and under what
circumstances cash, Stock, and other property and other amounts payable
with respect to an Award shall be deferred either automatically or at the
election of the Participant;
(g) to interpret and administer the Plan and any instrument or
agreement entered into thereunder;
(h) to establish such rules and regulations and appoint such agents
as it shall deem appropriate for proper administration of the Plan; and
(i) to make any other determination and take any other action that
the Committee deems necessary or desirable for administration of the Plan.
Members of the Board and of the Committee acting under the Plan shall be
fully protected in relying in good faith upon the advice of counsel and shall
incur no liability except for gross negligence or willful misconduct in the
performance of their duties.
Decisions of the Committee shall be made in the Committee's sole discretion
and shall be final, conclusive, and binding on all persons, including the
Company, any Participant, any shareholder, and any employee of the Company or
any Parent, Subsidiary, or Affiliate.
SECTION 3. STOCK SUBJECT TO PLAN
The total number of shares of Stock reserved and available for distribution
under the Plan shall be 1,200,000 shares of Stock. Such shares may consist, in
whole or in part, of authorized and unissued shares or treasury shares.
Subject to the possible adjustments described in the last paragraph of this
Section 3, the total number of shares of Stock reserved and authorized for
issuance upon exercise of Incentive Stock Options shall be 900,000. To the
extent that such shares are not used for Incentive Stock Options, they shall be
available for other Awards to be granted under the Plan.
If any shares of Stock subject to an Award are not issued to a Participant
because an Option or SAR is not exercised or an Award is otherwise forfeited or
any such Award otherwise terminates without a payment being made to the
Participant in the form of Stock, such shares shall again be available for
distribution in connection with future Awards under the Plan.
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In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split, or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, in the number and purchase price of shares subject to outstanding
Stock Purchase Rights under the Plan, and in the number of shares subject to
other outstanding Awards granted under the Plan as may be determined to be
appropriate by the Board, in its sole discretion, provided that the number of
shares subject to any Award shall always be a whole number. Any such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.
SECTION 4. ELIGIBILITY
Except as otherwise provided herein with respect to a specific Award under
Section 9, officers, management, or highly compensated employees of the Company
and any Subsidiary, Parent, or Affiliate (but excluding members of the
Committee) are eligible to be granted Awards under the Plan. The Committee
shall have the exclusive authority to determine what constitutes management or a
"highly compensated employee" and in making such a determination shall take into
consideration guidelines established by the Department of Labor and court
decisions as to what constitutes a "select group of management or highly
compensated employees."
SECTION 5. STOCK OPTIONS
Stock options may be granted alone, in addition to or in tandem with other
Awards granted under the Plan. Any Stock Option granted under the Plan shall be
in such form as the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Nonqualified Stock Options. Options may be issued with
or without Stock Appreciation Rights.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) EXERCISE PRICE. Except as provided in Section 5(i), the exercise
price per share of Stock purchasable under a Stock Option shall be
determined by the Committee at the time of grant but shall be not less than
85% of the Fair Market Value of the Stock on the date of grant.
(b) OPTION TERM. Except as provided in Section 5(i) hereof, the term
of each Stock Option shall be fixed by the Committee.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Committee at or after grant; provided, however, that, except as
provided in Sections 5(f), (g), and (h) and
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Section 11, unless otherwise determined by the Committee at or after grant,
no Stock Option shall be exercisable prior to the first anniversary date of
the granting of the Option. If the Committee provides, in its sole
discretion, that any Stock Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time at or
after grant in whole or in part, based on such factors as the Committee
shall determine, in its sole discretion.
(d) METHOD OF EXERCISE. Subject to whatever installment exercise
provisions apply under Section 5(c), Stock Options may be exercised in
whole or in part at any time during the option period.
Payment of the exercise price may be made by check, note (if approved
by the Board), or such other instrument or method as the Committee may
accept. If so provided in the related Award Agreement, payment in full or
in part may also be made in the form of Stock already owned by the optionee
or Restricted Stock or Deferred Stock subject to an Award hereunder (based,
in each case, on the Fair Market Value of the Stock on the date the Option
is exercised, as determined by the Committee). Payment of the exercise
price may be made through exercise of either Tandem SARS or Freestanding
SARS held by the optionee. With the prior approval of the Committee, the
exercise price of an Option may be paid through the delivery of Stock
acquired by successive exercises of the Option ("pyramiding").
If payment of the exercise price of a Stock Option is made in whole or
in part in the form of Restricted Stock or Deferred Stock, such Restricted
Stock or Deferred Stock (and any replacement shares relating thereto) shall
remain (or be) restricted or deferred, as the case may be, in accordance
with the original terms of the Restricted Stock Award or Deferred Stock
Award in question, and any additional Stock received upon the exercise
shall be subject to the same forfeiture restrictions or deferral
limitations, unless otherwise determined by the Committee, in its sole
discretion, at or after grant.
No shares of Stock shall be issued until full payment therefor has
been made. An optionee shall generally have the rights to dividends or
other rights of a shareholder with respect to shares subject to the Option
after the optionee has given written notice of exercise, has paid in full
for such Stock, and, if requested, has given the representation described
in Section 14(a).
(e) NONTRANSFERABILITY OF OPTIONS. Subject to Section 5(i), and
unless otherwise provided by the related Award Agreement, no Stock Option
shall be transferable by the optionee otherwise than by the laws of descent
and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security
Act, or the rules thereunder, and all Stock Options shall be exercisable
during the optionee's lifetime only by the optionee.
(f) TERMINATION BY DEATH. Subject to Section 5(i), if an optionee's
employment by the Company or any Subsidiary, Parent, or Affiliate
terminates by reason of death, any Stock Option held by such optionee may
thereafter be exercised, to the
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extent such option was exercisable at the time of death or on such
accelerated basis as the Committee may determine at or after grant (or as
may be determined in accordance with procedures established by the
Committee), by the legal representative of the optionee's estate or by any
person who acquired the Option by will or the laws of descent and
distribution, for a period of one year (or such other period as the
Committee may specify at grant) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(g) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(i), if
an optionee's employment by the Company or any Subsidiary, Parent, or
Affiliate terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in
accordance with procedures established by the Committee), until the
expiration of the stated term of such Stock Option (unless otherwise
specified by the Committee at the time of grant); provided, however, that,
if the optionee dies prior to such expiration (or within such other period
as the Committee shall specify at grant), any unexercised Stock Option held
by such optionee shall thereafter be exercisable to the extent to which it
was exercisable at the time of death for a period of one year from the date
of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) OTHER TERMINATION. Subject to Section 5(i), unless otherwise
determined by the Committee (or pursuant to procedures established by the
Committee) at or after grant, if an optionee's employment by the Company or
any Subsidiary, Parent, or Affiliate terminates for any reason other than
death or Disability, the Stock Option shall be exercisable, to the extent
otherwise then exercisable, for the lesser of three months from the date of
termination of employment or the balance of such Stock Option's term.
(i) INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary
not withstanding, no term of this Plan relating to Incentive Stock Options
shall be interpreted, amended, or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify the
Plan under Section 422 of the Code or, without the consent of the
optionee(s) affected, to disqualify any Incentive Stock Option under such
Section 422.
To the extent required for "incentive stock option" status under
Section 422 of the Code (taking into account applicable Internal Revenue
Service regulations and pronouncements and court decisions), the Plan shall
be deemed to provide:
(i) that Incentive Stock Options may be granted only to
employees of the Company or any Parent or Subsidiary of the Company;
(ii) that the exercise price of any Incentive Stock Option shall
not be less than 100% of the Fair Market Value of the Stock as of the
date of grant
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(110% for an optionee who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company or of a Parent or
Subsidiary);
(iii) that the maximum term of exercise for any Incentive
Stock Option shall not exceed ten years (five years in the case of an
optionee who owns stock possessing more than 10% of the voting power
of all classes of stock of the Company or of a Parent or Subsidiary);
and
(iv) that Incentive Stock Options shall not be transferable by
the optionee otherwise than by will or the laws of descent and
distribution and shall be exercisable, during the optionee's lifetime,
only by the optionee.
To the extent permitted under Section 422 of the Code or applicable
regulations thereunder or any applicable Internal Revenue Service
pronouncements:
(i) if a Participant's employment is terminated by reason of
death or disability and the portion of any Incentive Stock Option that
becomes exercisable during the post-termination period specified in
Section 5(f) or (g) hereof exceeds the $100,000 limitation contained
in Section 422(d) of the Code, such excess shall be treated as a
Nonqualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is accelerated
by reason of a Change in Control, any portion of such Option that
exceeds the $100,000 limitation contained in Section 422(d) of the
Code shall be treated as a Nonqualified Stock Option.
(j) NO TANDEM OPTIONS. Options consisting of both an Incentive Stock
Option and a Nonqualified Stock Option shall not be granted under the Plan.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted
either alone ("Freestanding SAR") or in addition to other Awards granted
under the Plan and may, but need not, relate to all or part of any Stock
Option granted under the Plan ("Tandem SAR"). In the case of a
Nonqualified Stock Option, a Tandem SAR may be granted either at or after
the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, a Tandem SAR may be granted only at the time of the grant of
such Stock Option.
A Tandem SAR shall terminate and no longer be exercisable upon
the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Tandem SAR is
granted with respect to less than the full number of shares covered by a
related Stock Option. Stock Options relating to exercised Tandem SARs
shall no longer be exercisable to the extent that the related Tandem SARs
have been exercised.
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A Stock Appreciation Right may be exercised, subject to Section
6(b), in accordance with the procedures established by the Committee for
such purpose and as set forth in the related Award Agreement. Upon such
exercise, the optionee shall be entitled to receive an amount determined in
the manner prescribed in Section 6(b).
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject
to such terms and conditions, not inconsistent with the provisions of the
Plan, as shall be determined from time to time by the Committee, including
the following:
(i) The exercise price of a Tandem SAR shall be the exercise
price of the related Option. The exercise price of a Freestanding SAR
shall be not less than 100% of the Fair Market Value of the Stock on
the date of grant of the Freestanding SAR. Notwithstanding the
foregoing, the Committee may unilaterally limit the appreciation in
value of Stock attributable to an SAR at any time prior to its
exercise.
(ii) Stock Appreciation Rights shall be exercisable only at such
time or times and to the extent provided in the related Award
Agreement; provided, however, that the exercise provisions of an SAR
granted in tandem with an Incentive Stock Option shall be the same as
the related Option.
(iii) Upon the exercise of a Stock Appreciation Right, the
holder shall be entitled to receive an amount in cash or shares of
Stock equal in value to the excess of the Fair Market Value of one
share of Stock on the date of exercise, or such other date as the
Committee shall specify in the Award Agreement, over the exercise
price per share specified in the related Award Agreement multiplied by
the number of shares in respect of which the Stock Appreciation Right
shall have been exercised, with the Committee having the right to
determine the form of payment. When payment is to be made in Stock,
the number of shares to be paid shall be calculated on the basis of
the Fair Market Value of the Stock on the date of exercise.
(iv) Except as may be otherwise provided in the related Award
Agreement, Stock Appreciation Rights shall not be transferable except
under the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder, and
shall be exercisable during the lifetime of the Participant only by
the Participant.
(v) Upon the exercise of a Stock Appreciation Right, any related
Stock Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of shares
of Stock to be issued under the Plan.
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(vi) The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control, the amount to be paid upon
the exercise of a Stock Appreciation Right shall be based on the
Change in Control Price, subject to such terms and conditions as the
Committee may specify at grant.
SECTION 7. RESTRICTED STOCK
(a) ADMINISTRATION. Restricted Stock Awards may be granted either
alone, in addition to, or in tandem with other Awards granted under the
Plan for no consideration or for such minimum consideration as may be
required by applicable law. The Committee shall determine the persons to
whom, and the time or times at which, grants of Restricted Stock will be
made, the number of shares to be awarded, the price (if any) to be paid by
the recipient of Restricted Stock, the time or times within which such
Awards may be subject to forfeiture, and all other terms and conditions of
the Awards.
The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals or such other factors or criteria
as the Committee shall determine, in its sole discretion, and the Committee
may, after grant, change the Restriction Period or waive the restrictive
limitations for all or any part of any Restricted Stock Award.
The provisions of Restricted Stock Awards need not be the same with
respect to each recipient. All Awards of Restricted Stock shall be
evidenced by appropriate Award Agreements.
(b) CERTIFICATES. Any Restricted Stock issued hereunder may be
evidenced in such manner as the Committee, in its sole discretion, shall
deem appropriate, including, without limitation, book-entry registration or
issuance of a stock certificate or certificates. Any such certificate
shall be registered in the name of the Participant and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such Award. The committee shall require that the stock
certificates evidencing such shares be held in custody by the Company until
the restrictions thereon shall have lapsed and that, as a condition of any
Restricted Stock Award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such Award.
(c) RESTRICTIONS AND CONDITIONS. Except as may be otherwise provided
in the related Award Agreement, during a period set by the Committee
commencing with the date of such Award (the "Restriction Period"), the
Participant shall not be permitted to sell, transfer, pledge, or assign
shares of Restricted Stock awarded under the Plan but shall have all of the
rights of a shareholder of the Company, including the right to vote the
shares and the right to receive any dividends.
The Committee, in its sole discretion, as determined at the time of
award, may permit or require the payment of cash or stock dividends to be
deferred and, if the Committee so determines, reinvested, subject to
Section 14(f) hereof, in additional
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Restricted Stock subject to the same restrictions and other terms and
conditions that apply to the shares with respect to which such dividends
are issued, to the extent shares are available under Section 3, or
otherwise reinvested.
Upon termination of a Participant's employment with the Company or any
Subsidiary, Parent, or Affiliate for any reason during the Restriction
Period, all or a portion of the shares still subject to restriction may
vest, or be forfeited, in accordance with the terms and conditions
established by the Committee at or after grant.
SECTION 8. DEFERRED STOCK
(a) ADMINISTRATION. Deferred Stock may be awarded either alone, in
addition to, or in tandem with other Awards granted under the Plan. The
Committee shall determine the persons to whom and the time or times at
which Deferred Stock shall be awarded, the number of shares of Deferred
Stock to be awarded to any person, the duration of the period (the
"Deferral Period") during which, and the conditions under which, receipt of
the Stock will be deferred, and the other terms and conditions of the Award
in addition to those set forth in Section 8(b).
The Committee may condition the grant of Deferred Stock upon the
attainment of specified performance goals or such other factors or criteria
as the Committee shall determine, in its sole discretion, and the Committee
may, after grant, change the vesting period or waive the deferral
limitations for all or any part of any Deferred Stock Award.
The provisions of Deferred Stock Awards need not be the same with
respect to each recipient.
All Awards of Deferred Stock shall be evidenced by appropriate Award
Agreements.
(b) TERMS AND CONDITIONS. Except as may be otherwise provided in the
related Award Agreement, Deferred Stock Awards may not be sold, assigned,
transferred, pledged, or otherwise encumbered during the Deferral Period.
At the expiration of the Deferral Period (or the Elective Deferral Period
referred to below, where applicable), share certificates shall be delivered
to the Participant, or his legal representative, representing the number of
shares covered by the Deferred Stock Award.
Any dividends declared during the Deferral Period with respect to
shares covered by a Deferred Stock Award will be paid to the Participant
currently, or deferred and deemed to be reinvested in additional Deferred
Stock, or otherwise reinvested, all as determined at or after the time of
the grant of the Award by the Committee, in its sole discretion.
Upon termination of a Participant's employment with the Company or any
Subsidiary, Parent, or Affiliate for any reason during the Deferral Period
for a given Award, all or a portion of the Deferred Stock subject to the
Award may vest, or be
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forfeited, in accordance with the terms and conditions established by the
Committee at or after grant.
A Participant may elect to further defer receipt of an Award (or an
installment of an Award) for a specified period or until a specified event
(the "Elective Deferral Period"), subject in each case to the Committee's
approval and to such terms as are determined by the Committee, all in its
sole discretion. Subject to any exceptions adopted by the Committee, such
election must generally be made at least 12 months prior to completion of
the Deferral Period for such Deferred Stock Award (or such installment).
SECTION 9. STOCK PURCHASE RIGHTS
(a) ELIGIBLE EMPLOYEES. Any employee who has been continuously in
the employment of the Company or any Parent or Subsidiary since the January
1 preceding a particular Purchase Period (as defined in Section 9(k)(ii)),
except (i) any employee customarily employed less than 20 hours weekly and
(ii) any employee who, immediately after a right to purchase is granted,
owns stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or any Parent or Subsidiary
(applying the rules of Section 425(d) of the Code to determine such stock
ownership and treating the shares of Stock that the employee may purchase
under outstanding options under this or any other plan of the Company or
any Parent or Subsidiary as owned by the employee), shall be eligible to
receive options under this Section 9 for a given Purchase Period. Subject
to the provisions of Section 9(d), an employee will continue to be eligible
to receive options under this Section 9 so long as he or she remains
eligible as defined herein.
(b) GRANT OF OPTION. Each eligible employee who elects to
participate is granted an option as of the first business day of the
Purchase Period to purchase on the last business day of the Purchase Period
that number of whole shares of Stock as could be purchased at a price equal
to the price specified in Section 9(c) with the entire credit balance in
the Participant's Stock Purchase Account (as defined) on such date;
provided, however, that no right will be deemed to be granted or received
hereunder which would permit a Participant to purchase Stock under this
Plan and under all other stock purchase plans, if any, of the Company at a
rate which exceeds $25,000 in Fair Market Value of Stock (determined as of
the date the option is granted) for each calendar year.
(c) PURCHASE PRICE. The purchase price will be the lesser of (i) 85%
of the Fair Market Value (as defined in Section 1(l) hereof) of the Stock
on the first business day of the Purchase Period or (ii) 85% of the Fair
Market Value (as defined in Section 1(l) hereof) of the Stock on the last
business day of the Purchase Period, in each case rounded up to the next
higher full cent.
(d) ELECTION TO PARTICIPATE. An eligible employee may elect to
participate in the Plan for a given Purchase Period by filing with the
Committee or a person designated
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by the Committee on or before the 30th day following commencement of that
Purchase Period an appropriate document authorizing regular payroll
deductions from Current Compensation (as defined herein) beginning with the
first payday in the Purchase Period and continuing through the last payday
in the Purchase Period or until the employee withdraws from the Plan or
ceases to be eligible to participate in the Plan.
(e) METHOD OF PAYMENT. A Participant may elect payroll deductions of
any whole percentage from 2% through 10% of Current Compensation. During
the Purchase Period, the Participant may not reduce or increase his payroll
deductions. However, the Participant may cease making payroll deductions at
any time by providing written notice to the Committee. Payroll deductions
will be credited to a separate bookkeeping account established by the
Company for each Participant (the "Stock Purchase Account") on each payday.
Payroll deductions will not earn interest.
The Stock Purchase Account is established solely for bookkeeping
purposes, and all amounts credited to the Stock Purchase Account will
remain part of the general assets of the Company. A Participant may not
make any separate cash payment into his Stock Purchase Account.
(f) PURCHASE OF STOCK. On the last business day of the Purchase
Period, the entire credit balance in each Participant's Stock Purchase
Account will be used to purchase the largest number of whole shares of
Stock purchasable with such amount unless, prior to such date, the
Participant elects to purchase a specified number of whole shares of Stock
which is less than the number described above or elects to receive the
entire credit balance in cash. Any amount remaining in a Participant's
Stock Purchase Account after such purchase (or the entire credit balance
thereof if the Participant elects not to purchase any Stock) will be paid
to the Participant in cash within 30 days after the end of the Purchase
Period.
As soon as practicable after each Purchase Period, the Company will
cause to be delivered to the Participant a certificate representing the
Stock purchased.
The Company will not be required to issue or deliver any certificate
representing Stock purchased hereunder prior to registration under the
Securities Act of 1933, as amended, or registration or qualification under
any state law if such registration or qualification is required.
(g) TERMINATION OF EMPLOYMENT. Upon termination of employment for
any reason other than death, retirement or sale of a portion or all of the
Company's business, the Company will pay to the Participant in cash within
thirty (30) days the entire credit balance in the Participant's Stock
Purchase Account.
Upon termination as a result of a sale of all or a portion of the
Company's business, if so determined by the Board, in its sole discretion,
the Participant may, within thirty (30) days after such termination, elect
to purchase some or all of the shares of Stock he could have purchased with
the balance in his Stock Purchase Account as of the date of
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termination. The purchase price for any shares so purchased shall be the
price described in Section 9(c)(i) hereof. If such election is not made,
the Company will pay to the Participant in cash within sixty (60) days of
the termination, the entire balance remaining in the Participant's Stock
Purchase Account.
Upon termination due to death or retirement, the Participant or
his estate may, within 180 days after such termination (60 days after
termination in the case of retirement), elect to purchase some or all of
the shares of Stock he could have purchased with the balance in his Stock
Purchase Account as of the date of termination. The purchase price for any
shares so purchased shall be the price described in Section 9(c)(i) hereof.
If such election is not made, the Company will pay to the Participant or
his estate in cash within thirty (30) days of the failure to elect, the
entire balance remaining in the Participant's Stock Purchase Account.
For purposes of this Plan, an approved leave of absence or temporary
layoff will not be deemed a termination of employment.
(h) NONTRANSFERABILITY. An option granted pursuant to this Section 9
shall not be transferable by the optionee otherwise than by will or the
laws of descent and distribution and shall be exercisable, during the
optionee's lifetime, only by the optionee. The amounts credited to a Stock
Purchase Account may not be assigned, transferred, pledged, or hypothecated
in any way, and any attempted assignment, transfer, pledge, hypothecation,
or other disposition of such amounts will be null and void and without
effect.
(i) NO RIGHTS AS SHAREHOLDER. An employee will have no interest in
the Stock purchased until full payment has been made and a share
certificate representing the same has been issued.
(j) DEFINITIONS. For purposes of this Section 9, the following terms
have the meanings set forth below:
(i) "CURRENT COMPENSATION" means the basic gross cash compensation
(wage, salary, and sales incentives, including bonuses and
commissions) paid by the Company or any Parent or Subsidiary to a
Participant in accordance with the terms of employment, but excluding
all overtime earnings, bonus payments, severance pay, and all other
forms of compensation, and all remuneration which is not a term of the
employment relationship (whether or not paid pursuant to a voluntary
plan established by the Company or any Parent or Subsidiary).
(ii) "PURCHASE PERIOD" means the 12-month period beginning on April 1
of each year.
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SECTION 10. OTHER STOCK-BASED AWARDS
(a) ADMINISTRATION. Other Awards of Stock and other Awards that are
valued in whole or in part by reference to, or are otherwise based on,
Stock ("Other Stock-Based Awards"), including, without limitation,
performance shares, convertible preferred stock, convertible debentures, or
exchangeable securities, may be granted either alone or in addition to or
in tandem with Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock, or Stock Purchase Rights granted under the Plan.
Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which
such Awards shall be made, the number of shares of Stock to be awarded
pursuant to such Awards, and all other conditions of the Awards. The
Committee may also provide for the grant of Stock upon the completion of a
specified performance period.
The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
(b) TERMS AND CONDITIONS. Unless otherwise provided in the related
Award Agreement, Stock subject to Awards made under this Section 10 may not
be sold, assigned, transferred, pledged, or otherwise encumbered prior to
the date on which the Stock is issued or, if later, the date on which any
applicable restriction, performance, or deferral period lapses.
The Participant shall be entitled to receive, currently or on a
deferred basis, interest or dividends or interest or dividend equivalents
with respect to the Stock covered by the Award, as determined at the time
of the Award by the Committee, in its sole discretion, and the Committee
may provide that such amounts (if any) shall be deemed to have been
reinvested in additional Stock or otherwise reinvested.
Any Award under Section 10 and any Stock covered by any such Award
shall vest or be forfeited to the extent so provided in the Award
Agreement, as determined by the Committee, in its sole discretion.
In the event of the Participant's retirement, Disability, or death, or
in cases of special circumstances, the Committee may, in its sole
discretion, waive in whole or in part any or all of the remaining
limitations imposed with respect to any or all of an Award under this
Section 10.
Each Award under this Section 10 shall be confirmed by, and subject to
the terms of, an Award Agreement or other instrument entered into by the
Company and the Participant.
Stock (including securities convertible into Stock) issued on a bonus
basis under this Section 10 may be issued for no cash consideration. The
purchase price of any Stock (including securities convertible into Stock)
subject to a purchase right awarded under
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this Section 10 shall be at least 85% of the Fair Market Value of the Stock
on the date of grant.
SECTION 11. CHANGE IN CONTROL PROVISIONS
(a) IMPACT OF EVENT. In the event of a "Change in Control" as
defined in Section 11(b), the following provisions shall apply:
(i) Any Award, if so provided in the related Award Agreement, shall
become fully exercisable and vested.
(ii) The value of all outstanding Awards shall, unless otherwise
determined by the Committee in its sole discretion at or after grant
but prior to any Change in Control, be cashed out on the basis of the
"Change in Control Price" as defined in Section 11(c) as of the date
such Change in Control is determined to have occurred or such other
date as the Committee may determine prior to the Change in Control.
(b) DEFINITION OF "CHANGE IN CONTROL". For purposes of Section
11(a), a "Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the Exchange
Act and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act, but excluding
the Company or any Subsidiary or Parent or any employee benefit plan
sponsored or maintained by the Company or any Subsidiary or Parent
(including any trustee of such plan acting as trustee), directly or
indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, as amended from time to time), of securities
of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for any
reason other than death to constitute at least a majority thereof;
provided, however, that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied
such 24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of, or with the
approval of, at least 60% of the directors who then qualified as
Incumbent Directors either actually (because they were directors at
the beginning of such 24-month period) or by prior operation of this
Section 11(b)(ii); or
(iii) The approval by the shareholders of an acquisition of the
Company by an entity other than the Company or a Subsidiary or Parent
through purchase of assets, or by merger, or otherwise.
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(c) CHANGE IN CONTROL PRICE. For purposes of this Section 11,
"Change in Control Price" means the highest price per share paid in any
transaction reported on any market on which the Company's Stock is traded
or paid or offered in any bona fide transaction related to the Change in
Control of the Company at any time during the 60-day period immediately
preceding the occurrence of the Change in Control, except that, in the case
of Incentive Stock Options and Stock Appreciation Rights relating to
Incentive Stock Options, such price shall be based only on transactions
reported for the date on which the optionee exercises such Stock
Appreciation Rights or, where applicable, the date on which a cashout
occurs under Section 11(a)(ii).
SECTION 12. AMENDMENTS AND TERMINATION
The Board may amend, alter, discontinue, or terminate the Plan, or any
portion thereof, but no amendment, alteration, or discontinuation shall be made
which would impair the vested rights of a Participant under any Award
theretofore granted, without the Participant's consent, or which, without the
approval of the Company's stockholders, would:
(a) except as expressly provided in this Plan, increase the total
number of shares reserved for the purpose of the Plan;
(b) authorize an increase in the total number of shares reserved for
issuance upon exercise of Incentive Stock Options;
(c) decrease the option price of any Incentive Stock Option to less
than 100% of the Fair Market Value on the date of grant or change the
pricing terms of Section 9(c);
(d) increase the rate of payroll deductions under Section 9 to more
than 15% of Current Compensation;
(e) permit the issuance of Stock prior to payment in full therefor;
(f) change the employees or class of employees eligible to
participate in the Plan; or
(g) extend the maximum option period under Section 5(i) of the Plan
or extend a Participant's right to purchase Stock pursuant to the grant of
an option under Section 9 hereof to a date more than five years from the
date of such grant.
The Committee may amend the terms of any Award theretofore granted,
prospectively or retroactively, but, subject to Section 3 above, no such
amendment shall impair the vested rights of any holder without the holder's
consent. The Committee may also substitute new Stock Options for previously
granted Stock Options (on a one-for-one or other basis), including previously
granted Stock Options having higher option exercise prices.
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Subject to the above provisions, the Board shall have broad authority to
amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 13. UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company. In its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Stock or payments in lieu of or with respect to Awards hereunder;
provided, however, that, unless the Committee otherwise determines with the
consent of the affected Participant, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 14. GENERAL PROVISIONS
(a) The Committee may require each person purchasing shares pursuant
to a Stock Option or receiving shares pursuant to any other Award under the
Plan to represent to and agree with the Company in writing that the
Participant is acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend which the Committee
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange
Commission, any over-the-counter market on which the Stock is quoted, any
stock exchange upon which the Stock is then listed, and any applicable
federal or state securities law, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to
such restrictions.
(b) The Committee may at any time offer to buy out for a payment in
cash, Stock, Deferred Stock, or Restricted Stock an Award previously
granted, based on such terms and conditions as the Committee shall
establish and communicate to the Participant at the time that such offer is
made.
(c) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
(d) Neither the adoption of the Plan nor the grant of any Award
hereunder shall confer upon any employee of the Company or any Subsidiary,
Parent, or Affiliate any right to continued employment with the Company or a
Subsidiary, Parent, or
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Affiliate, as the case may be, or interfere in any way with the right of
the Company or a Subsidiary, Parent, or Affiliate to terminate the
employment of any of its employees at any time.
(e) No later than the date as of which an amount first becomes
includible in the gross income of the Participant for federal income tax
purposes with respect to any Award under the Plan, the Participant shall
pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any federal, state, or local taxes of any kind
required by law to be withheld with respect to such amount. The obligations
of the Company under the Plan shall be conditional on such payment or
arrangements, and the Company and any Subsidiary, Parent, or Affiliate
shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the Participant.
Unless otherwise determined by the Committee, withholding obligations may
be settled with Stock, including Stock that is part of the Award that gives
rise to the withholding requirement.
(f) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or in Deferred Stock or other
types of Plan Awards) at the time of any dividend payment shall only be
permissible if sufficient shares of Stock are available under Section 3 for
such reinvestment (taking into account then outstanding Stock Options,
Stock Purchase Rights, and other Plan Awards).
(g) To the extent that federal laws (such as the Code, the Exchange
Act, or the Employee Retirement Income Security Act of 1974) do not
otherwise control, this Plan and all Awards made and actions taken
hereunder shall be governed by and construed in accordance with the laws of
the State of Minnesota.
(h) Unless otherwise provided by the related Award Agreement, no
rights granted hereunder may be assigned, transferred, pledged, or
hypothecated (whether by operation or otherwise) or be subject to
execution, attachment, or similar process, and any attempted assignment,
transfer, pledge, hypothecation, or other disposition or levy of attachment
or similar process upon any such right will be null and void and without
effect.
(i) If any term, provision, or portion of this Plan or any Award
granted hereunder shall be deemed unenforceable or in violation of
applicable law, such term, provision, or portion of the Plan or the Award
shall be deemed severable from all other terms, provisions, or portions of
this Plan or the Award or any other Awards granted hereunder, which shall
otherwise continue in full force and effect.
SECTION 15. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of April 3, 1989, subject to the approval of
the Plan by a majority of the votes cast by the holders of the Company's Common
Stock at the annual shareholders' meeting next following adoption of the Plan.
Any grants made under the Plan prior
20
<PAGE>
to such approval shall be effective when made (unless otherwise specified by the
Committee at the time of grant), but shall be conditioned on, and subject to,
such approval of the Plan by such shareholders.
SECTION 16. TERM OF PLAN
No Incentive Stock Option shall be granted pursuant to the Plan on or after
the tenth anniversary of the date of adoption of the Plan, but Incentive Stock
Options granted prior to such tenth anniversary may extend beyond that date.
All other Awards may be granted at any time and for any period unless otherwise
provided by the Plan.
SECTION 17. APPLICABILITY TO GRANTS UNDER OTHER COMPANY PLANS
Subject to shareholder approval of the Plan (in accordance with Section 15
above), no further options shall be granted under the 1981 Incentive Stock
Option Plan and the 1984 Nonqualified Stock Option Plan, both of which shall
remain in effect until all options granted pursuant thereto have been exercised
or have expired or terminated by their terms. The share authorization
provisions of the 1981 Incentive Stock Option Plan and the 1984 Nonqualified
Stock Option Plan shall operate independently of Section 3 of the Plan.
21
<PAGE>
HEI, Inc.
STOCK OPTION PLAN
FOR NONEMPLOYEE DIRECTORS
As Amended Effective May 11, 1994 and October 31, 1996
1. PURPOSE. This Stock Option Plan (the "Plan") for HEI, Inc., a
Minnesota corporation (the "Company"), is intended to advance the interests of
the Company by providing members of the Board of Directors, who are responsible
for the direction of the Company, with additional incentive to promote the
success of the business, to increase their proprietary interest in the success
of the Company, and to attract, reward and retain them as directors of the
Company. These goals will be effectuated through the granting of nonqualified
options to purchase Common Stock of the Company.
2. DEFINITIONS. In addition to definitions that may be contained
elsewhere herein, for purposes of this Plan, the following terms shall be
defined as set forth below:
(a) "Option Agreement" means any written agreement, contract, or
other instrument or document evidencing any Option granted hereunder and
signed by both the Company and the Participant.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(d) "Committee" means the Committee referred to in Section 3 of the
Plan.
(e) "Disability" means disability as determined under procedures
established by the Board for purposes of this Plan or as defined in Section
22(e)(3) of the Code.
(f) [DELETED]
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(h) "Fair Market Value" means as of any given date, unless otherwise
determined by the Committee in good faith, the average for the preceding
five business days of the closing bid prices of the Stock as reported on
the National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") or, if the Stock is then traded on the NASDAQ/National
Market System ("NASDAQ/NMS") or on a national or regional securities
exchange, the average for the preceding five business days of the closing
pr ices of the Stock on NASDAQ/NMS or such exchange.
<PAGE>
(i) "Participant" means any person entitled to participate in this
Plan as set forth in Section 4 hereof.
(j) "Stock" means the Common Stock, $.05 par value per share, of the
Company.
(k) "Stock Option" or "Option" means any option to purchase shares of
Stock granted pursuant to Section 5 below.
3. ADMINISTRATION. The Plan shall be administered by the Board, which,
in its discretion, may delegate authority to a committee consisting of two or
more directors appointed by the Board. The members of any such committee shall
qualify as required under Rule 16b-3 of the Exchange Act, as it may be amended
from time to time. Grants of Options under the Plan shall be made automatically
as provided in Section 5. However, the Board shall have full authority to
interpret the Plan, to promulgate such rules and regulations with respect to the
Plan as it deems desirable and to make all other determinations necessary or
appropriate for the administration of the Plan, and such determinations shall be
final and binding upon all persons having an interest in the Plan.
4. ELIGIBILITY. Options will be granted only to persons who at the time
of the grant are directors of the Company and who are not otherwise employees of
the Company or any affiliate of the Company ("Nonemployee Director" or
"Nonemployee Directors").
5. OPTIONS.
(a) ANNUAL GRANT. Each year, on the first business day following the
annual meeting of the Company's shareholders (but in no event later than
April 1 or the first business day thereafter), each person serving on such
date as a Nonemployee Director of the Company shall be granted an Option to
purchase Ten Thousand (10,000) shares of Stock, except as otherwise may be
provided herein, each Option (a) shall be subject to all terms of the Plan,
(b) shall be granted for a term of five years, and (c) shall vest and
become fully exercisable on the earlier of the date of next annual meeting
of the shareholders or the date one year from the date of grant; provided,
in each instance, that the Participant has continuously served as a
Nonemployee Director of the Company during such period or until the
election of directors next following the date of grant, whichever shall
first occur (and, if not, said Option shall be forfeited in its entirety).
(b) EXERCISE PRICE. The exercise price per share of Stock
purchasable under an Option shall be not less than 100% of the Fair Market
Value of the Stock on the date of grant.
(c) METHOD OF EXERCISE. Stock Options may be exercised in whole or
in part at any time during the term of the Option. Payment of the exercise
price shall be made by (i) cash or certified bank check, (ii) delivery of
shares of Stock already owned by the Participant, or (iii) any combination
of the foregoing. For purposes of this paragraph, shares of Stock that are
delivered in payment of the exercise price shall be valued at their
2
<PAGE>
Fair Market Value as of the date of the exercise of the Option. The
Company's obligation to deliver shares upon the exercise of Options shall
be subject to applicable federal, state, and local tax withholding
requirements. Unless otherwise determined by the Board, withholding
obligations may be settled with Stock, including Stock received as part of
the exercise giving rise to the withholding requirement.
(d) RESTRICTIONS ON TRANSFER OF OPTION. Unless otherwise provided in
the related Option Agreement and approved in advance by the Board, each
Option granted under this Plan shall be transferable only by will or the
laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act ("ERISA"), or the rules thereunder. Except
as permitted by the preceding sentence, no Option granted under the Plan or
any of the rights and privileges thereby conferred shall be transferred,
assigned, pledged, or hypothecated in any way (whether by operation of law
or otherwise), and no such Option, right, or privilege shall be subject to
execution, attachment, or similar process. Unless otherwise provided in the
related Option Agreement and approved in advance by the Board, an Option
may be exercised during the Participant's lifetime only by the Participant
or his or her guardian or legal representative.
6. SHARES OF STOCK SUBJECT TO THE PLAN. There shall be reserved and
available for issuance upon the exercise of Options granted from time to time
under the Plan an aggregate of 400,000 shares of Stock. Such shares may
consist, in whole or in part, of authorized but unissued shares of Stock or
issued shares that have been reacquired by the Company. If any shares subject
to an Option are not issued because the Option is not exercised, such shares
shall again be available for distribution in connection with future Options.
In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split, or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan and in the
number and option price of shares subject to outstanding Options granted under
the Plan as may be determined to be appropriate by the Board, in its sole
discretion, provided that the number of shares subject to any Option shall
always be a whole number.
7. DEATH OR DISABILITY OF PARTICIPANT.
(a) TERMINATION BY DEATH. If a Participant's service to the Company
terminates by reason of death, any Stock Option held by such Participant
will immediately become fully exercisable and may thereafter be exercised
by the legal representative of the Participant's estate or by any person
who acquired the Option by will or the laws of descent and distribution for
a period of one year from the date of such death or until the expiration of
the stated term of such Stock Option, whichever period is the shorter.
(b) TERMINATION BY REASON OF DISABILITY. If a Participant's service
to the Company terminates by reason of Disability, any Stock Option held by
such Participant
3
<PAGE>
shall immediately become fully exercisable and may thereafter be exercised
by the Participant until the expiration of the stated term of such Stock
Option; provided, however, that, if the Participant dies prior to the
expiration of the Option, any unexercised Stock Option held by such
Participant shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
8. RESTRICTIONS ON TRANSFER OF STOCK. Unless a registration statement
under the Securities Act of 1933 is in effect with respect to Stock to be
purchased upon exercise of Options to be granted under the Plan, the Company may
require that the Participant represent to and agree with the Company in writing
that he or she is acquiring such shares of Stock for the purpose of investment
and with no present intention to transfer, sell, or otherwise dispose of such
shares of Stock. Further, in the absence of such registration, no shares of
Stock acquired pursuant to exercise of an option may be transferred unless, in
the opinion of counsel to the Company, such transfer is in compliance with
applicable securities laws, and each certificate representing any shares of
Stock issued to a Participant hereunder shall have endorsed thereon an
appropriate legend referring to the restrictions against transfer.
9. AMENDMENT OF THE PLAN. The Board of Directors may suspend or
terminate the Plan or any portion thereof at any time, and the Board of
Directors may amend the Plan from time to time as may be deemed to be in the
best interests of the Company; provided, however, that no such amendment,
alteration or discontinuation shall be made (a) that would impair the rights of
a Nonemployee Director with respect to Options theretofore awarded, without such
person's consent, or (b) without the approval of the stockholders (i) if such
approval is necessary to comply with any legal, tax, or regulatory requirement,
including any approval requirement that is a prerequisite for exemptive relief
from Section 16(b) of the Exchange Act; or (ii) to increase the maximum number
of shares of Stock subject to this Plan, increase the maximum number of shares
issuable to any Nonemployee Director under this Plan, or change the definition
of persons eligible to receive Options under this Plan.
10. APPLICABILITY OF PLAN TO OUTSTANDING STOCK OPTIONS. This Plan shall
not affect the terms and conditions of any stock options currently outstanding
to any director of the Company, nor shall it affect any of the rights of any
director to whom such a stock option was granted.
11. EFFECTIVE DATE OF PLAN. This Plan shall become effective upon the
date of its adoption by the Board of Directors of the Company, subject to
approval of the shareholders of the Company at the 1992 annual meeting.
12. CHANGE IN CONTROL PROVISIONS.
(a) IMPACT OF EVENT. In the event of a "Change in Control" as
defined in Section 12(b), the following provisions shall apply:
(i) All Options granted hereunder shall become fully exercisable
and vested.
4
<PAGE>
(ii) At the option of the holder thereof, the value of any
outstanding Option shall be cashed out on the basis of the "Change in
Control Price" as defined in Section 12(c) as of the date such Change
in Control is determined to have occurred or such other date as the
Committee may determine prior to the Change in Control.
(b) DEFINITION OF "CHANGE IN CONTROL." For purposes of Section
12(a), a "Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act,
but excluding the Company or any subsidiary or parent or any employee
benefit plan sponsored or maintained by the Company or any subsidiary
or parent (including any trustee of such plan acting as trustee),
directly or indirectly, becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act, as amended from time to time), of
securities of the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for any
reason other than death to constitute at least a majority thereof;
provided, however, that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied
such 24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of, or with the
approval of, at least 60% of the directors who then qualified as
Incumbent Directors either actually (because they were directors at
the beginning of such 24-month period) or by prior operation of this
Section 12(b)(ii); or
(iii) The approval by the shareholders of an acquisition of the
Company by an entity other than the Company or a subsidiary or parent
through purchase of assets, or by merger, or otherwise.
(c) CHANGE IN CONTROL PRICE. For purposes of this Section 12,
"Change in Control Price" means the highest price per share paid in any
transaction reported on any market on which the Company's Stock is traded
or paid or offered in any bona fide transaction related to the Change in
Control of the Company at any time during the 60-day period immediately
preceding the occurrence of the Change in Control.
13. NONEXCLUSIVITY OF THE PLAN. The adoption of this Plan shall not be
construed as limiting the power of the Board of Directors to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
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<PAGE>
14. MISCELLANEOUS.
(a) GOVERNING LAW. This Plan shall be governed by and construed in
accordance with the laws of the State of Minnesota, and all terms shall be
interpreted and construed so that there shall not be committed any
violation of applicable state or federal securities laws.
(b) NO ADDITIONAL RIGHTS OF SERVICE. Participation in or eligibility
for participation in the Plan does not grant any person any right of
service as a director, and the Company retains the right to terminate
service of any director pursuant to the Company's Articles, Bylaws, and
applicable law.
---------------------------------------
APPROVED and adopted by the Board of Directors of HEI, lnc. on November 15,
1991 and amended effective May 11, 1994, and October 31, 1996.
6
<PAGE>
HEI, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales $20,680 $23,423 $17,295 $18,893 $14,138
Cost of sales 14,957 17,263 12,497 12,174 9,491
Gross profit 5,723 6,160 4,798 6,719 4,647
- ---------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,342 2,401 2,094 2,130 1,963
Research, development and engineering 849 754 679 614 565
Gain on sale of product line, net (45)
Operating income 2,577 3,005 2,025 3,975 2,119
- ---------------------------------------------------------------------------------------------------
Income before income taxes 2,833 3,250 2,102 3,997 2,012
Income taxes 720 1,210 777 1,459 150
Net income $ 2,113 $ 2,040 $ 1,325 $ 2,538 $ 1,862
- ---------------------------------------------------------------------------------------------------
Net income per common share $.52 $.52 $.34 $.66 $.57
- ---------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares 4,098 3,899 3,858 3,822 3,285
- ---------------------------------------------------------------------------------------------------
Balance sheet:
Working capital $10,088 $ 8,380 $ 5,927 $ 4,211 $ 2,147
Total assets 22,414 12,857 10,905 8,564 5,850
Long-term debt, less current maturities 5,271 308
Shareholders' equity 13,816 10,982 8,671 6,762 3,635
- ---------------------------------------------------------------------------------------------------
</TABLE>
PHOTOGRAPH
1
<PAGE>
TO OUR SHAREHOLDERS
Fiscal year 1996 was a building year for HEI - establishing a foundation for
future growth. Having nearly reached the limits of our Victoria, Minnesota
plant capacity in fiscal 1995, we undertook a major construction and capacity
expansion program throughout the past year. Manufacturing floor space was more
than doubled by a 23,000 square foot building addition featuring designed-in
flexibility to accommodate production line layout changes, and extensive
environmental controls critical to the maintenance of our precision and quality
standards. In addition, we installed over $2 million of new continuous flow
processing equipment and expanded our technical support staff accordingly. As
one result, HEI's capabilities have been enhanced to include a greater variety
of ultraminiature microelectronic packaging solutions - ceramic, flexible
circuit and laminate - to better satisfy our customers' requirements.
We closed the year on the upswing; revenue for the fourth quarter of fiscal
1996 was $6,397,000, setting a company record and comparing favorably to revenue
of $5,418,000 for the fourth quarter of the previous year. Net income for the
fourth quarter of fiscal 1996 was $1,329,000, or $.32 per share. Of the $.32
recorded, $.07 was due to a one-time favorable adjustment in a deferred tax
item. Net income for the fourth quarter of fiscal 1995 was $314,000, or $.08
per share.
Revenue For the 1996 fiscal year was $20,680,000, compared to $23,423,000
for fiscal 1995. Net income for fiscal 1996 was $2,113,000, or $.52 per share,
compared to net income of $2,040,000, or $.52 per share for fiscal 1995. Fourth
quarter performance reflected the beginning of higher volume production on a
previously announced program to manufacture microelectronic devices for high
density disk drives. We were pleased to see volumes on this program increase,
and are aggressively pursuing improved production efficiencies to meet the
significantly lower cost objectives required when the program reaches full
volume pricing. We do not expect the fourth quarter's higher gross margin rates
to continue throughout fiscal year 1997. At present, we anticipate this
program reaching full volume production sometime during the first or second
quarter of fiscal 1997.
As we have seen in the past, these relatively large and dynamic programs
can increase the volatility of our quarter-to quarter performance. The phase-
out of one such program resulted in a downturn in fourth quarter results for
fiscal 1995, and had a continuing negative impact on the first three quarters of
fiscal 1996. During that period, however, we were gratified by the substantial
growth of shipments to the hearing and medical instrument markets, reflecting
previous efforts targeting these sectors. It is strategically important that we
continue to keep these segments of our business in balance with the more
volatile and unpredictable computer portion.
On August 29, 1996, we announced the sale of our FastPoint-Registered
Trademark- Light Pen product line. This product, while a good application of
HEI's technology, represented a relatively small and divergent part of our
overall business, and we anticipate no substantial effect of the sale on our
ongoing performance. We believe that it is increasingly important and
potentially rewarding to focus all our energies and resources on the growth
opportunities in HEI's mainstream business - the design and manufacture of
custom microelectronic devices for selected niche markets.
We have continued to strengthen our financial position. The recent
facility expansion, and certain of the manufacturing process equipment to be
housed therein, have been financed through the issuance of $5.6 million of
Industrial Development Revenue Bonds by the City of Victoria. As of August 31,
1996, we had $2,455,000 of unexpended proceeds from these bonds, which have a
maturity of seven to fifteen years. HEI's shareholders' equity was $13,816,000
at August 31, 1996, up $2,834,000 from the end of the previous fiscal year.
2
<PAGE>
1997 PLANS
Major objectives for 1997 will be growth and productivity improvements as
enabled by the augmentation of our manufacturing capabilities and the expansion
of our base of business - to enhance the stability of our future performance.
The facility addition is expected to help alleviate customer concerns related to
our size and open the door for new opportunities. We will continue to focus on
target applications in the computer, industrial, medical and hearing
instrumentation markets, and continue efforts to strengthen and expand a
balanced base of accounts for long-term growth.
As before, we will pursue goals of quality and productivity improvement.
We know that growth brings with it change and challenge, and we expect the ISO
9001 quality standard and our internal quality programs to continue to serve us
well, providing a foundation for these and future improvements.
[PHOTOGRAPH]
With strong financial position, we expect to be well positioned to deal
with the potential uncertainties of our markets, and to be able to finance the
growth and expansion opportunities available to us in fiscal 1997. A foundation
of talented employees and loyal customers provides the basis for our growth and
continuous improvement. We expect that the recent facility and equipment
additions will enhance our ability to compete profitably on larger contracts,
and we look forward to the challenges of 1997 and beyond with enthusiasm and
optimism.
Eugene W. Courtney
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE STATEMENTS CONTAIN INFORMATION REGARDING TECHNOLOGY, MARKETS, GROWTH AND
EARNINGS EXPECTATIONS BASED ON THE COMPANY'S CURRENT ASSUMPTIONS INVOLVING A
NUMBER OF RISKS AND UNCERTAINTIES. THERE ARE CERTAIN IMPORTANT FACTORS THAT CAN
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
INCLUDING, WITHOUT LIMITATION, ADVERSE BUSINESS OR MARKET CONDITIONS; THE
ABILITY OF THE COMPANY TO SECURE AND SATISFY CUSTOMERS; THE AVAILABILITY AND
COST OF MATERIALS FROM HEI'S SUPPLIERS; ADVERSE COMPETITIVE DEVELOPMENTS; AND
OTHER FACTORS DISCUSSED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS; HEI UNDERTAKES NO OBLIGATION TO UPDATE
THESE STATEMENTS TO REFLECT ENSUING EVENTS OR CIRCUMSTANCES, OR SUBSEQUENT
ACTUAL RESULTS.
3
<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, 1996, was $2,316,000. The significant components of this operating
net cash flow were positive cash flow of $2,884,000 from operations before
changes in current operating items offset by a $1,539,000 increase in accounts
receivable. The increase in accounts receivable is attributable primarily to
higher shipment volumes in the fourth quarter of 1996 compared to the fourth
quarter of 1995.
Accounts receivable average days outstanding were 41 days as of August 31,
1996 compared to 42 days for the same period a year ago. Inventory turns were
7.7 turns as of August 31, 1996 compared to 7.5 turns for the same period a year
ago. The inventory turn increase is primarily due to higher shipments in the
fourth quarter of fiscal 1996 and lower inventory levels at August 31, 1996.
In addition to purchasing $2,464,000 of fixtures and equipment and
completing a building addition of $2,377,000, the Company increased short-term
investments, primarily in treasury bills, to $5,488,000, up $1,668,000 from a
year ago. The current ratio at the end of 1996 was 4.4:1 as compared to 6.2:1
at the end of last year. The lower current ratio is principally due to over $2
million of internally generated funds invested in the Company's plant expansion
and to the increase in current liabilities including current portion of long-
term debt and increased accounts payable, accrued liabilities and income taxes
payable.
In April 1996, the Company completed a new financing agreement which
provides for a $3,000,000 revolving line of credit. As of August 31, 1996,
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 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, at the Company's option, on the lender's prime rate
of interest or 2% above the lender's LIBOR rate.
During fiscal 1996, the Company purchased $4,841,000 of property and
equipment, including a facility addition, manufacturing facility improvements
and capital equipment. These additions will increase manufacturing capacity to
meet anticipated requirements for continued revenue growth. These expenditures
were funded primarily through the issuance of Industrial Development Revenue
Bonds of $5,625,000, which was completed in April 1996. Restricted cash of
$2,455,000 at August 31, 1996 represents the unexpended funds from the bonds
which are available to the Company for qualifying capital expenditures during
the next three years.
During fiscal 1997, the Company intends to expend approximately $1.8
million for 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
SALES BY PRODUCT LINE
(IN THOUSANDS) 1996 1995 1994
Microelectronics $18,545 $21,187 $14,888
Peripheral products 2,060 2,157 2,334
Other 75 79 73
Total $20,680 $23,423 $17,295
- --------------------------------------------------------------
SALES. 1996 VS. 1995: Sales in 1996 decreased $2,743,000 or 12% from fiscal
1995. Sales of microelectronic circuits, which include opto-electronic
circuits, decreased 12% from $21.2 million to $18.5 million. This decrease was
primarily due to reduced shipments to the high density disk drive market as two
large programs were completed in late 1995 and early 1996 and was partially
offset by the ramp up in the late second half of fiscal 1996 of shipments to
another computer disk drive manufacturer. Shipments to the hearing aid and
other medical markets more than doubled over fiscal year 1995 as a result of
increased demand by current customers and shipments to new accounts.
Because the Company's sales to the computer disk drive market are generally
tied to the customers' projected sales and production of the related product,
the Company's sales levels are subject to fluctuations outside 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,
4
<PAGE>
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.
Shipments of peripheral products, primarily light pens, decreased 4% from
fiscal 1995. The light pen product line was sold to FTG Data Systems in August
1996.
1995 VS. 1994: Sales in 1995 increased 35% from fiscal 1994, from $17.3
million to $23.4 million. Sales of microelectronic 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.
PERCENTAGE OF SALES
1996 1995 1994
Sales 100% 100% 100%
Gross profit 28% 26% 28%
Selling, general and
administrative 11% 10% 12%
Research, development
and engineering 4% 3% 4%
GROSS PROFIT. 1996 VS. 1995: The Company's gross profit as a percentage of
sales was 28% in 1996, compared to 26% in 1995. The increased gross profit rate
reflects primarily the impact of a higher number of products built utilizing
customer supplied materials. While the gross margin rate for fourth quarter
fiscal 1996 was 36%, the Company does not expect that rate to continue
throughout fiscal 1997.
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 reflected
primarily the impact of increased competitive pressures to lower prices on new
programs.
OPERATING EXPENSES. 1996 VS. 1995: Fiscal year 1996 selling, general and
administrative expenses decreased 2% from 1995 and research, development and
engineering expenses increased 13%. The decrease in selling, general and
administrative expense was primarily due to a reduction in bad debt expense in
1996. The increase in research, development and engineering was primarily in
support of increased product development for new disk drive, hearing aid and
medical products. As a percentage of sales, selling, general and administrative
expenses for fiscal 1996 increased to 11% versus 10% for fiscal 1995 reflecting
decreased sales.
The $45,000 net gain on sale of product line represents the gain on the
sale of the light pen product line to FTG Data Systems, which was completed in
August 1996, partially offset by costs to close down the light pen product line
(see Note 3).
1995 VS. 1994: Fiscal year 1995 selling, general and administrative
expenses increased 15% and research, development and engineering expenses
increased 11% from the prior year. Both increases were in support of increased
product development and production. As a percentage of sales, selling, general
and administrative expenses for fiscal 1995 decreased to 10% versus 12% for
fiscal 1994 reflecting increased sales.
OTHER INCOME. 1996 VS. 1995: Other income increased $11,000 over fiscal year
1995 primarily due to increased interest income from higher short-term
investment balances, partially offset by interest expense on the IDRB.
1995 VS. 1994: Other income increased $168,000 primarily due to increased
interest income.
NET INCOME. 1996 VS. 1995: The Company had net income of $2,113,000 for 1996
compared to net income of $2,040,000 for 1995. Operating income of $2,577,000
was down $428,000 from 1995 reflecting a revenue decrease of $2,743,000. The
increase in net income was primarily due to lower income tax expense. The
valuation allowance for the deferred tax asset of $274,000 was eliminated in the
fourth quarter of 1996 as a result of the sale and disposal of the light pen
inventory and the determination that the deferred tax assets related to the
remaining inventory allowance will most likely be recoverable. The elimination
of the remaining deferred tax asset valuation allowance resulted in a reduced
effective tax rate in fiscal 1996. The effective tax rate for fiscal 1996 was
25% versus 37% for 1995.
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 due to a sales increase
of 35%, partially offset by a reduced gross profit rate of 26% in fiscal 1995
compared to 28% in fiscal 1994, and an operating expense increase of $382,000.
5
<PAGE>
HEI, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF AUGUST 31 1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,186 $ 1,438
Short-term investments 5,488 3,820
6,674 5,258
Accounts receivable, net 4,039 2,525
Inventories 1,561 1,851
Other, principally deferred tax assets 764 349
Total current assets 13,038 9,983
- -------------------------------------------------------------------------------------
Property and equipment:
Land 216 184
Building and improvements 3,767 1,398
Fixtures and equipment 7,667 5,475
Accumulated depreciation (4,868) (4,183)
Net property and equipment 6,782 2,874
Restricted cash 2,455
Deferred financing costs 139
Total assets $22,414 $12,857
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 354
Accounts payable 673 $ 385
Accrued liabilities 1,354 1,043
Income taxes payable 569 175
Total current liabilities 2,950 1,603
- -------------------------------------------------------------------------------------
Long-term debt 5,271
Deferred tax liability 377 272
Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized,
none issued
Common stock, $.05 par; 10,000,000 shares authorized;
4,030,427 and 3,791,597 shares issued and outstanding 202 190
Paid-in capital 6,892 6,183
Retained earnings 6,722 4,609
Total shareholders' equity 13,816 10,982
Total liabilities and shareholders' equity $22,414 $12,857
- -------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
<PAGE>
HEI, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED AUGUST 31 1996 1995 1994
Net sales $20,680 $23,423 $17,295
Cost of sales 14,957 17,263 12,497
Gross profit 5,723 6,160 4,798
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,342 2,401 2,094
Research, development and engineering 849 754 679
Gain on sale of product line, net (45)
Operating income 2,577 3,005 2,025
- --------------------------------------------------------------------------------
Other, principally interest income (256) (245) (77)
Income before income taxes 2,833 3,250 2,102
- --------------------------------------------------------------------------------
Income taxes 720 1,210 777
Net income $2,113 $2,040 $1,325
- --------------------------------------------------------------------------------
Net income per common share $0.52 $0.52 $0.34
- --------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares 4,097,765 3,898,662 3,857,737
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
<PAGE>
HEI, INC.
STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
OUTSTANDING OUTSTANDING
<S> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1993 3,633,435 $182 $5,336 $1,244
Net income 1,325
Issuance of common shares
under employee stock purchase
and option plans 52,085 2 124
Tax benefit of nonqualified stock options 458
BALANCE, AUGUST 31, 1994 3,685,520 184 5,918 2,569
Net income 2,040
Issuance of common shares
under employee stock purchase
and option plans 106,077 6 215
Tax benefit of nonqualified stock options 50
BALANCE, AUGUST 31, 1995 3,791,597 190 6,183 4,609
Net income 2,113
Issuance of common shares
under employee stock purchase
and option plans 238,830 12 636
Tax benefit of nonqualified stock options 73
BALANCE, AUGUST 31, 1996 4,030,427 $202 $6,892 $6,722
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
<PAGE>
HEI, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31 1996 1995 1994
<S> <C> <C> <C>
Cash flow provided by operating activities:
Net income $2,113 $2,040 $1,325
Depreciation and amortization 938 759 640
Provision for doubtful accounts 25 141 150
Deferred income tax benefit (198)
Other 6 3 4
Changes in current operating items:
Accounts receivable (1,539) 755 (1,248)
Inventories 290 (22) (739)
Other current assets (112) 21 30
Accounts payable 88 (319) 140
Accrued liabilities 311 179 3
Income taxes payable 394 (191) 306
Net cash flow provided by operating activities 2,316 3,366 611
- -----------------------------------------------------------------------------------------------
Cash flow used for investing activities:
Purchases of short-term investments (7,033) (6,910) (936)
Maturities of short-term investments 5,365 3,808 1,044
Additions to property and equipment (4,621) (634) (825)
Increase in restricted cash (2,455)
Net cash flow used for investing activities (8,744) (3,736) (717)
- -----------------------------------------------------------------------------------------------
Cash flow provided by financing activities:
Proceeds from long-term debt 5,625
Increase in deferred financing costs (170)
Principal payments for obligations under capital leases (42) (47)
Issuance of common stock 648 221 126
Tax benefit of nonqualified stock options 73 50 458
Net cash flow provided by financing activities 6,176 229 537
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (252) (141) 431
Cash and cash equivalents, beginning of year 1,438 1,579 1,148
Cash and cash equivalents, end of year $1,186 $1,438 $1,579
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 80 $ 2 $ 6
Income taxes paid 515 1,351 429
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HEI, Inc. (the Company) specializes in the design and manufacture of
ultraminiature microelectronic devices and high technology products
incorporating those devices.
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
allowance to record such 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 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. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable for the periods
and the change during the period in deferred income tax assets and liabilities.
REVENUE RECOGNITION. Revenue is recognized at the time of shipment.
NET INCOME PER COMMON SHARE. Net income per common share is based on the
weighted average number of common and common equivalent shares, assuming the
exercise of stock options, 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 expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 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:
1996 1995 1994
Customer A 38% 12% 19%
Customer B 16%
Customer C 10%
Customer D 27%
Customer E 30% 49%
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 conditions 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 customers' product programs. The Company's ten largest customers accounted
for approximately 88% of sales in 1996, 89% in 1995, and 86% in 1994 and
approximately 90% and 87% of accounts receivable at August 31, 1996 and 1995,
respectively.
The Company had sales of $5,924,000 and $2,230,000 to Singapore in 1996
and 1994, respectively, and $2,493,000 to Hong Kong in 1995. Total export sales
were $7,278,000, $4,995,000 and $2,749,000 in 1996, 1995 and 1994, respectively.
10
<PAGE>
NOTE 3
OTHER FINANCIAL STATEMENT DATA
The Company had $1,282,000 and $1,608,000 of cash and cash equivalents at August
31, 1996 and 1995, respectively, invested with an affiliate of a single banking
institution. Short-term investments consist of U.S. Treasury bills with
maturities of less than one year. The short-term investments are carried at
amortized cost which approximates fair value.
The following provides additional information concerning selected balance
sheet accounts at August 31, 1996 and 1995:
(DOLLARS IN THOUSANDS) 1996 1995
Accounts receivable, net:
Trade accounts receivable $4,309 $2,793
Less allowance for doubtful accounts (270) (268)
$4,039 $2,525
- --------------------------------------------------------------------
Inventories:
Purchased parts $1,394 $1,670
Work in process 697 907
Finished goods 182 233
Less allowance for excess
or obsolete stock (712) (959)
$1,561 $1,851
- --------------------------------------------------------------------
Accrued liabilities:
Vacation and employee benefits $500 $398
Payroll related 255 220
Real estate taxes 110 75
Warranty 100
Other 489 250
$1,354 $1,043
- --------------------------------------------------------------------
SALE OF LIGHT PEN PRODUCT LINE. In August 1996, the Company sold its light pen
product line. Through this transaction, the buyer acquired certain assets
including manufacturing equipment and related inventory, received product
licenses and assumed all warranties. In connection with the sale, the Company
received a cash payment for the assets and an agreement for an additional amount
to be paid monthly over the next two years. As a result of the sale of the
light pen product line, costs associated with the close down of the light pen
product line have been accrued at August 31, 1996 and are included in the
$45,000 net gain from the sale of the light pen product line. The Company
anticipates no substantial effect of the sale on future operating results.
NOTE 4
FINANCING ARRANGEMENTS
In April 1996, the Company received proceeds of $5,625,000 from the issuance of
Industrial Development Revenue Bonds. Of these funds, approximately $1,500,000
has been used for the construction of the new addition to the Company's
manufacturing facility, and the remainder will be or has been used for equipment
purchases. The bonds related to the facility expansion require annual principal
payments of $90,000 in the first year and $95,000 on April 1 of each year
thereafter through 2011. The bonds related to the equipment require payments
over seven years from the date of purchase of the equipment through no later
than April 1, 2006. The bonds bear interest at a rate which varies weekly,
based on comparable tax exempt issues, and is limited to a maximum rate of 10%.
The interest rate at August 31, 1996 was 3.95%. A revolving commitment fee is
paid annually to the bank at a rate of 1% of the average daily unused revolving
commitment. 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, debt to tangible net worth, cash
flow and indebtedness. The bonds are collateralized by two irrevocable letters
of credit and essentially all property and equipment. Restricted cash on the
balance sheet represents cash advanced under the bonds which is held by the bond
trustee in an interest bearing account and will be released to the Company over
the next three years for equipment purchases. To the extent such funds are not
expended, they will revert back to the bond holders.
Also in April 1996, the Company extended the due date of its $3,000,000
revolving line of credit to April 1998. At August 31, 1996 and 1995, there were
no borrowings under the line of credit. Any borrowings under this agreement are
collateralized 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 and cash flow. 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, at the Company's option, on
the lender's prime rate of interest or at 2% above the lender's LIBOR rate.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Principal maturities of long-term debt, excluding the unexpended funds
classified as restricted cash at August 31, 1996 are as follows (in thousands):
Years ending August 31,
1997 $ 354
1998 359
1999 359
2000 358
2001 358
Thereafter 1,382
3,170
Restricted cash 2,455
$5,625
- ------------------------------------------------------------
NOTE 5
INCOME TAXES
Income tax expense for the years ended August 31 consisted of the following:
(DOLLARS IN THOUSANDS) 1996 1995 1994
Current:
Federal $829 $1,106 $730
State 89 104 47
Deferred (198)
Income tax expense $720 $1,210 $777
- ------------------------------------------------------------
The components of the deferred tax assets and liability at August 31, 1996
and 1995 are as follows:
(DOLLARS IN THOUSANDS) 1996 1995
Deferred tax assets:
Allowance for doubtful accounts $ 138 $ 99
Inventories 199 274
Accrued liabilities 162 101
Other 76 72
575 546
Valuation allowance (274)
$ 575 $ 272
- ------------------------------------------------------------
Deferred tax liability:
Depreciation $(377) $ (272)
- ------------------------------------------------------------
Management has eliminated the valuation allowance for the deferred tax
asset related to the allowance established for excess or obsolete inventories
due to the sale and disposal of light pen inventories during the fourth quarter
of fiscal 1996 and the determination that the deferred tax asset related to the
remaining inventory allowance will most likely be recoverable.
A reconciliation of the statutory federal income tax rate for the years
ended August 31 is as follows:
1996 1995 1994
Federal statutory tax rate 34.0% 34.0% 34.0%
State income tax rate
(net of federal tax effect) 2.7 3.2 3.0
Reversal of valuation
allowance (9.7)
Other (1.6)
Effective tax rate 25.4% 37.2% 37.0%
- ------------------------------------------------------------
NOTE 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 of common stock may be issued, 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 date of grant. The exercise price for options
granted is equal to the market price 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 1996, 1995 and 1994,
26,330, 22,077 and 12,235 shares at prices of $3.96, $3.95 and $4.74,
respectively, were purchased under the 1989 Plan.
12
<PAGE>
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. At August 31, 1996, all of these options have been exercised.
DIRECTORS' PLAN. Under the plan, 400,000 shares are authorized for issuance,
with an annual grant of 10,000 shares to each non-employee 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 $6.00 per share, $4.71
per share and $5.425 per share in 1996, 1995 and 1994, respectively. At August
31, 1996, options on 170,000 shares remain outstanding and options on 200,000
shares are available for grant.
SUMMARY OF ACTIVITY. The following is a summary of all activity involving
options for the years ended August 31:
1996 1995 1994
Outstanding,
beginning of year 692,000 398,500 346,100
Granted 110,000 377,500 92,500
Exercised (212,500) (84,000) (39,850)
Cancelled (250)
Outstanding, end of year 589,500 692,000 398,500
- ---------------------------------------------------------------------------
Exercisable, end of year 253,375 308,500 212,500
Available for grant 214,230 350,560 750,137
Exercise price of options
outstanding $.725-$6.60 $.725-$6.60 $.725-$6.60
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, a new standard of accounting and reporting for stock-based compensation
plans. The Company is not required to adopt the new standard until fiscal 1997.
The Company will continue to measure compensation cost, if any, for its stock
option plans using the intrinsic value based method of accounting it has
historically used. Therefore, the new standard will have no effect on the
Company's operating results. The Company's financial statement disclosures will
be expanded in fiscal 1997, as required, to include pro forma disclosures as if
the fair value based method of accounting had been followed.
RIGHTS PLAN. The Company's shareholder rights plan 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.
NOTE 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 years
1996, 1995 and 1994, the Company contributed $96,000, $75,000 and $65,000,
respectively, to the plan.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF HEI, INC.:
We have audited the accompanying balance sheet of HEI, Inc. as of August 31,
1996 and 1995, and the related statements of operations, changes in
shareholders' equity, and cash flows for the years ended August 31, 1996, 1995
and 1994. 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.
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, 1996
and 1995, and the results of its operations and its cash flows for the years
ended August 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Minneapolis, Minnesota
October 4, 1996
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 management, to review accounting, auditing, and
financial reporting matters.
The Company's independent 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.
14
<PAGE>
SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR 1996 FIRST SECOND THIRD FOURTH
Net sales $4,710 $4,917 $4,656 $6,397
Gross profit 1,050 1,255 1,093 2,325
Operating income 267 482 284 1,544
Net income 224 342 218 1,329
- ----------------------------------------------------------------------------
Net income per share $.06 $.08 $.05 $.32
- ----------------------------------------------------------------------------
FISCAL YEAR 1995 FIRST SECOND THIRD FOURTH
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
- ----------------------------------------------------------------------------
NOTE:
The summation of quarterly net income per share on a primary basis for 1996 does
not equate to the calculation for the year since the quarterly calculations are
performed on a discrete basis.
15
<PAGE>
CORPORATE INFORMATION
HEI INC
BOARD OF DIRECTORS
ROBERT L. BRUECK
CONSULTANT
EUGENE W. COURTNEY
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
HEI, INC.
WILLIAM R. FRANTA
FORMER SENIOR 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
AND MARKETING
THOMAS G. EASTER
DIRECTOR OF MANUFACTURING
SCOTT J. KAZLE
DIRECTOR OF ENGINEERING
WRAY A. WENTWORTH
DIRECTOR OF CORPORATE QUALITY
GENERAL COUNSEL
Moss & Barnett
A Professional Association
Minneapolis, Minnesota
INDEPENDENT ACCOUNTANTS
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.
P.O. Box 5000
1495 Steiger Lake Lane
Victoria, Minnesota 55386-5000
(612) 443-2500
E-mail: [email protected]
Internet: www.heii.com
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 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 22, 1997 at
3:00 PM at the Marquette Hotel (4th floor), 710 Marquette Avenue, 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 1996 and 1995, 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.
1996 HIGH LOW
----------------------
First Quarter $6-7/8 $4-3/4
Second Quarter 6-5/8 5-1/4
Third Quarter 8 5-1/2
Fourth Quarter 8 5-1/2
1995 HIGH LOW
----------------------
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
As of August 31, 1996, the Company had approximately 3,150 shareholders of which
approximately 560 are shareholders of record. The Company does not declare cash
dividends.
16
<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 October 4, 1996, on our audits of the financial statements of HEI, Inc. as
of August 31, 1996 and 1995, and for the years ended August 31, 1996, 1995 and
1994, which report is incorporated by reference in its Annual Report on Form 10-
KSB for the year ended August 31, 1996.
/S/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
November 21, 1996
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