<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 2, 1996 ("Second Quarter,
--------------------------------
Fiscal 1996") or
------------
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ___________________ to ________________
Commission File Number 0-10078
------------------------------
HEI, INC.
---------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-0944876
--------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
PO Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386
------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (612) 443-2500
--------------
None
----
Former name, former address and former
fiscal year, if changed since last report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
4,004,097 Common Shares, par value $0.05, were outstanding as of March 2, 1996.
This Form 10-QSB consists of 10 pages.
<PAGE>
2
Table of Contents HEI, Inc.
- ----------------------------------------------------------------------------
Part I - Financial Information
Item 1. Financial Statements
Balance Sheet............................... 3
Statement of Operations..................... 4
Statement of Cash Flows..................... 5
Notes to Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 7-8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K................ 9
Signatures............................................... 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<TABLE>
<CAPTION>
HEI, INC. BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------
March 2, 1996 August 31, 1995
------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,106 $1,438
Short-term investments 3,954 3,820
----- -----
5,060 5,258
Accounts receivable, net 2,702 2,525
Inventories 2,576 1,851
Other, principally deferred tax assets 382 349
- -------------------------------------------------------------------------------------------------
Total current assets 10,720 9,983
- -------------------------------------------------------------------------------------------------
Property and equipment:
Land 216 184
Building and improvements 1,819 1,398
Fixtures and equipment 6,108 5,475
Accumulated depreciation and amortization (4,569) (4,183)
- -------------------------------------------------------------------------------------------------
Net property and equipment 3,574 2,874
- -------------------------------------------------------------------------------------------------
Total assets $14,294 $12,857
- -------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $710 $385
Accrued liabilities 1,122 1,043
Income taxes payable 116 175
- -------------------------------------------------------------------------------------------------
Total current liabilities 1,948 1,603
- -------------------------------------------------------------------------------------------------
Deferred tax liability 272 272
- -------------------------------------------------------------------------------------------------
Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized,
none issued
Common stock, $.05 par; 10,000,000 shares
authorized; 4,004,097 and 3,791,597 shares
issued and outstanding 200 190
Paid-in capital 6,699 6,183
Retained earnings 5,175 4,609
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 12,074 10,982
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $14,294 $12,857
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
4
HEI, INC. STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Mar. 2, 1996 Feb. 25, 1995 Mar. 2, 1996 Feb. 25, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $4,917 $5,924 $9,627 $11,871
Cost of sales 3,662 4,189 7,322 8,220
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 1,255 1,735 2,305 3,651
- ------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general
and administrative 565 596 1,158 1,234
Research, development
and engineering 208 187 398 384
- ------------------------------------------------------------------------------------------------------------------------
Operating income 482 952 749 2,033
- ------------------------------------------------------------------------------------------------------------------------
Other income, net 66 60 153 96
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 548 1,012 902 2,129
- ------------------------------------------------------------------------------------------------------------------------
Income taxes 206 360 336 767
- ------------------------------------------------------------------------------------------------------------------------
Net income $342 $652 $566 $1,362
- ------------------------------------------------------------------------------------------------------------------------
Net income per common share $.08 $.17 $.14 $.35
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 4,064,970 3,874,553 4,034,687 3,881,067
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
5
HEI, INC. STATEMENT OF CASH FLOWS (UNAUDITED)
DOLLARS IN THOUSANDS
- -------------------------------------------------------------------------------------------------------
Six months ended March 2, 1996 February 25, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Net income $ 566 $1,362
Depreciation and amortization 394 366
- -------------------------------------------------------------------------------------------------------
CHANGES IN CURRENT OPERATING ITEMS:
Accounts receivable (177) (51)
Inventories (725) (209)
Other current assets (33) 24
Accounts payable 325 155
Accrued liabilities 79 212
Income taxes payable (59) (52)
- -------------------------------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY OPERATING
ACTIVITIES 370 1,807
- -------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Purchase of short-term investments (1,484) (3,522)
Maturity of short-term investments 1,350 1,266
Additions to property and equipment (1,094) (494)
- -------------------------------------------------------------------------------------------------------
NET CASH FLOW USED FOR INVESTING ACTIVITIES (1,228) (2,750)
- -------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments for obligations under
capital leases 0 (24)
Issuance of common shares 526 77
- -------------------------------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY FINANCING
ACTIVITIES 526 53
- -------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (332) (890)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,438 1,579
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,106 $689
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) HEI,INC.
- -------------------------------------------------------------------------
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements have been prepared by the Company, under the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements contain all normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of such
financial statements.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. The year-end balance sheet data were derived from audited financial
statements, but do not include all disclosures required by generally accepted
accounting principles. These unaudited financial statements should be read in
conjunction with the financial statements and notes included in the Company's
Annual Report to Shareholders on Form 10-KSB for the year ended August 31, 1995.
Interim results of operations for the three and six month periods ended March 2,
1996 may not necessarily be indicative of the results to be expected for the
full year.
(2) INVENTORIES
Inventories are stated at the lower of cost or market and include materials,
labor and overhead costs. The first-in, first-out cost method is used in
valuing inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) March 2, 1996 August 31, 1995
------------- ---------------
(Unaudited)
<S> <C> <C>
Purchased parts $2,206 $1,670
Work in process 1,252 907
Finished goods 148 233
Allowance for excess or obsolete stock (1,030) (959)
---------- ----------
$2,576 $1,851
---------- ----------
---------- ----------
</TABLE>
<PAGE>
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS HEI, INC.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow provided by operating activities was $370,000 for
the six months ended March 2, 1996. This included net income of $566,000, non-
cash depreciation and amortization of $394,000, offset by a net increase of
$590,000 in current operating items for the first six months of fiscal 1996.
The increase in current operating items included increased accounts receivable
of $177,000 and increased inventories of $725,000, partially offset by increased
accounts payable of $325,000.
The inventory increase is primarily due to increased purchased parts and work in
process for customer scheduled build requirements.
Accounts receivable average days outstanding improved to 41 days at March 2,
1996 compared to 50 days a year ago primarily due to improved collections.
Inventory turns were 5.7 turns for the second quarter of fiscal 1996 as compared
to 7.5 turns for the same period a year ago. The reduced inventory turns are
primarily due to increased inventory to meet customer scheduled build
requirements.
The Company has a $3,000,000 revolving line of credit which expires in March
1997. Borrowings under this agreement would be collateralized by accounts
receivable. The agreement requires compliance with certain financial covenants
and restricts obtaining other borrowings. Interest on the revolving line of
credit is based on, at the Company's option, the lender's prime rate of interest
or 2% above the lender's LIBOR rate. As of March 2, 1996, there were no
borrowings under the revolving line of credit.
Capital equipment expenditures for the six months ended March 2, 1996 were
$1,094,000 primarily for production equipment and a facility addition.
During fiscal 1996, the Company intends to spend approximately $4.3 million for
a facility addition, manufacturing facility improvements and capital equipment.
These additions will increase manufacturing capacity to meet anticipated
requirements for continued revenue growth. It is expected that these
expenditures will be funded primarily through long-term financing.
<PAGE>
8
REVIEW OF OPERATIONS
NET SALES
1996 vs. 1995: HEI, Inc's net sales for the three and six month periods ended
March 2, 1996 decreased 17% and 19%, respectively, compared to the same periods
a year ago. Microelectronic sales decreased 17% and 21%, respectively, from the
same three and six month periods last year as a result of reduced shipments in
the high density disk drive business. However, the reduction in disk drive
business shipments was partially offset by increased shipments to medical and
hearing aid accounts. As previously reported, shipments to a new disk drive
account are expected to increase as that program enters production volumes. The
major new disk drive customer is expected to absorb much of the capacity made
available after the previous largest account model phased out in the first
quarter. Peripheral product sales decreased 13% and 1%,respectively, for the
three and six month periods ended March 2, 1996 compared to last year's
comparable periods.
GROSS PROFIT
1996 vs. 1995: For the three and six month periods ended March 2, 1996, gross
profit decreased $480,000, or 28%, and $1,346,000, or 37%, respectively, from
the same periods last year. For the three and six month periods ended March 2,
1996, the gross profit rate decreased to 26% and 24% from 29% and 31%,
respectively, for the same periods last year. The gross profit rate decrease is
primarily due to the effect of reduced volumes on manufacturing fixed costs, as
well as the effect of lower margins on new business as the product mix evolves
to a larger percentage of new programs bid under increasing price competition.
OPERATING EXPENSES
1996 vs. 1995: Operating expenses for the three and six month periods ended
March 2, 1996 decreased 1% and 4%, respectively, from last year's comparable
periods. The decrease in selling, general and administrative expense for the
quarter was due to reduced bad debt expense. Operating expenses were 16% of net
sales for the three and six month periods this year as compared to 13% and 14%,
respectively, for the three and six month periods last year. The increase in
the percentage of operating expenses to net sales is primarily due to the effect
of reduced volumes on fixed expenses.
INCOME TAXES
During each quarter of fiscal 1996, the Company is recording income tax expense
based on the expected effective rate for the full year. The expected effective
income tax rate for fiscal 1996 is approximately 37%, the same rate as fiscal
1995. Income tax expense for the three month and six month periods of fiscal
1996 was $206,000 and $336,000, respectively, as compared to $360,000 and
$767,000, respectively, for the same periods a year ago.
NET INCOME
1996 vs. 1995: The Company had net income of $342,000 for the second quarter of
fiscal 1996 compared to $652,000 for the same period a year ago. The Company
had net income of $566,000 for the six months ended March 2, 1996 compared to
$1,362,000 for the same period a year ago. The decrease in net income
principally was the result of reduced sales and reduced gross profit margins.
<PAGE>
9
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 2,
1996.
<PAGE>
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEI, INC.
(Registrant)
Date: March 27, 1996 /s/ Jerald H. Mortenson
--------------------- -----------------------------------
Jerald H. Mortenson
Vice President of Finance and
Administration,
Chief Financial Officer and Treasurer
(a duly authorized officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAR-02-1996
<CASH> 1,106
<SECURITIES> 0
<RECEIVABLES> 2,702
<ALLOWANCES> 0
<INVENTORY> 2,576
<CURRENT-ASSETS> 10,720
<PP&E> 8,143
<DEPRECIATION> 4,569
<TOTAL-ASSETS> 14,294
<CURRENT-LIABILITIES> 1,948
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 11,874
<TOTAL-LIABILITY-AND-EQUITY> 14,294
<SALES> 9,627
<TOTAL-REVENUES> 9,627
<CGS> 7,322
<TOTAL-COSTS> 7,322
<OTHER-EXPENSES> 1,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 902
<INCOME-TAX> 336
<INCOME-CONTINUING> 566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 566
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
