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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
****
FORM 10-KSB
****
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended August 31, 1997.
[ ] 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.
-----------------
(Name of Small Business Issuer in Its Charter)
Minnesota 41-0944876
- --------- ----------
(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
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612)443-2500
--------------
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
---------------------------------------
(Title of Class)
RIGHTS TO PURCHASE COMMON STOCK
--------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No .
---- ----
Indicate if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [ ]
HEI, Inc. revenues for the fiscal year ended August 31, 1997 were $30,962,000.
The aggregate market value as of November 1, 1997 (based on the closing price
as reported by The Nasdaq National Market) of the voting stock held by
non-affiliates was approximately $18,000,000.
As of November 21, 1997, 4,068,576 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, 1997 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 21, 1998 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 optical switch
product line and light pen product line, which represented minor parts of
the Company's sales, were sold in August 1997 and August 1996,
respectively.
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 1997, 1996 and 1995.
Customer 1997 1996 1995
-------- ---- ---- ----
Customer A 55% 16%
Customer B 27% 38% 12%
Customer C 10%
Customer D 30%
Customer E 27%
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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-sponsored
research and development activities was approximately $843,000 and $849,000
for the years ended August 31, 1997 and 1996.
EMPLOYEES - At August 31, 1997, the Company employed approximately 120
persons of which 2 were part-time.
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. Due
to the sale of the optical switch business in August 1997, the Company no
longer leases a facility in Sauk Centre, Minnesota.
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 20.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information called for by Item 6 is incorporated by reference from the
Annual Report on pages 4-8.
ITEM 7. FINANCIAL STATEMENTS
The information called for by Item 7 is incorporated by reference from the
Annual Report on pages 9-18 as follows:
Page in
Annual Report:
--------------
Balance Sheet as of August 31, 1997 and 1996 9
Statement of Operations for the Years Ended
August 31, 1997, 1996 and 1995 10
Statement of Changes in Shareholders' Equity
for the Years Ended August 31, 1997, 1996 and 1995 11
Statement of Cash Flows for the Years Ended
August 31, 1997, 1996 and 1995 12
Notes to Financial Statements 13-17
Report of Independent Accountants 18
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, 1997.
NAME AGE POSITION
- ---- --- --------
Eugene W. Courtney 61 President, Chief Executive Officer
Jerald H. Mortenson 63 Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
Dale A. Nordquist 43 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 on Form 8-K: No reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended August 31, 1997.
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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 24, 1997
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 24, 1997
- ----------------------------------------------- -----------------
Eugene W. Courtney, Director Date
/s/ Jerald H. Mortenson
- -----------------------------------------------
Jerald H. Mortenson, Vice President of Finance
and Administration, Chief Financial Officer and November 24, 1997
Treasurer -----------------
Date
/s/ Craig E. Roble November 24, 1997
- ----------------------------------------------- -----------------
Craig E. Roble, Company Controller Date
/s/ Robert L. Brueck November 24, 1997
- ----------------------------------------------- -----------------
Robert L. Brueck, Director Date
/s/ William R. Franta November 24, 1997
- ----------------------------------------------- -----------------
William R. Franta, Director Date
/s/ Kenneth A. Schoen November 24, 1997
- ----------------------------------------------- -----------------
Kenneth A. Schoen, Director Date
/s/ Frederick M Zimmerman November 24, 1997
- ----------------------------------------------- -----------------
Frederick M Zimmerman, Director Date
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number or
Exhibit Number Description Incorporated by
- -------------- ----------- Reference
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<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended. Note 1
*3.2 Bylaws, as amended.
4.1 Rights Agreement dated May 27, 1988 between HEI, Inc. and Norwest Note 2
Bank Minnesota, N.A., as amended.
4.2a Credit Agreement with Norwest Bank Minnesota, N.A. dated April 1, 1996. Note 3
4.2b Current Note and Security Agreement with Norwest Bank Minnesota, Note 3
N.A. dated April 1, 1996.
4.3a Reimbursement Agreement by and between HEI, Inc. and Norwest Bank Note 3
Minnesota, N.A. dated April 1, 1996.
4.3b Mortgage Security Agreement Fixture Financing Statement and Note 3
Assignment of Leases and Rents by HEI, Inc. as Mortgagor to Norwest
Bank Minnesota, N.A. as Mortgagee dated April 1, 1996.
4.3c Security Agreement by HEI, Inc. in favor of Norwest Bank Minnesota, Note 3
N.A. dated April 1, 1996.
10.1 Form of Indemnification Agreement between HEI and officers and directors. Note 4
**10.2 HEI 1989 Omnibus Stock Compensation Plan adopted April 3, 1989, as Note 5
amended to date.
***10.3 1991 Stock Option Plan for Non-employee Directors, as amended to date.
***10.4 Form of Agreement regarding Employment/Compensation upon change
in control with Messrs. Courtney, Mortenson and Nordquist.
*13 Annual Report to Shareholders for the year ended August 31, 1997.
23 Consent of Independent Accountants.
*27 Financial Data Schedule.
</TABLE>
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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 Registration Statement on Form 8-A filed May 31,
1988, as amended by Form 8 filed June 27, 1988, and incorporated herein
by reference.
[3] Filed as an exhibit to Form 10-QSB for the quarter ended June 1, 1996,
and incorporated herein by reference.
[4] Filed as an exhibit to Registration Statement on Form S-2 (SEC no.
33-37285) filed October 15, 1990, and incorporated herein by reference.
[5] Filed exhibit to Annual Report on Form 10-KSB for the year ended August
31, 1996 and incorporated herein by reference.
* Filed herein as an exhibit.
** Denotes management contract or compensation plan or arrangement.
*** Denotes management contract or compensation plan or arrangement and filed
herein as an exhibit.
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BYLAWS OF HEI, INC. EXHIBIT 3.2
(AS AMENDED THROUGH NOVEMBER 19, 1997)
ARTICLE I
OFFICES - CORPORATE SEAL
Section 1.01. REGISTERED OFFICE. The registered office of the corporation
in Minnesota shall be that set forth in the Articles of Incorporation or in the
most recent amendment of the Articles of Incorporation or resolution of the
directors filed with the Secretary of State of Minnesota changing the registered
office.
Section 1.02. OTHER OFFICES. The corporation may have such other offices,
within or without the State of Minnesota, as the directors shall, from time to
time, determine.
Section 1.03. CORPORATE SEAL. The corporation may, in the discretion of
the Board of Directors, have a corporate seal. Any such seal shall have
inscribed thereon the name of the corporation and the word "Minnesota" and the
words "Corporate Seal."
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided otherwise by
Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any
place, within or without the State of Minnesota, as may from time to time be
designated by the directors and, in the absence of such designation, shall be
held at the registered office of the corporation in the State of Minnesota. The
directors shall designate the time of day for each meeting.
Section 2.02. REGULAR MEETINGS.
(a) A regular meeting of the shareholders shall be held on such date as
the Board of Directors shall by resolution establish.
(b) At the regular meeting, the shareholders, voting as provided in the
Articles of Incorporation and these Bylaws, shall designate the number of
directors to constitute the Board of Directors (subject to the authority of the
Board of Directors thereafter to increase or decrease the number of directors as
permitted by law), shall elect qualified successors for directors who serve for
an indefinite term or whose terms have expired or are due to expire within six
months after the date of the meeting, and shall transact such other business as
may properly come before them.
Section 2.03 SPECIAL MEETINGS. Special meetings of the shareholders may
be held at any time and for any purpose and may be called by the Chief Executive
Officer, Chief Financial Officer, any two directors, or by a shareholder or
shareholders holding 10% or more of the shares entitled to vote (except that a
special meeting for the purpose of considering any action to directly or
indirectly effect a business combination, including any action to change or
otherwise affect the composition of the Board of Directors for that purpose,
must be called by shareholders holding not less than 25% of all shares of the
corporation entitled to vote), who shall demand such special
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meeting by written notice given to the Chief Executive Officer or the Chief
Financial Officer of the corporation specifying the purposes of such meeting.
Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of a majority of
the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, those present may adjourn to such day as they shall, by
majority vote, agree upon. If a quorum is present, a meeting may be adjourned
from time to time without notice other than announcement at the meeting. At
adjourned meetings at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally noticed. If a
quorum is present at the beginning of the meeting, the shareholders may continue
to transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 2.05. VOTING. At each meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless the Articles of Incorporation or statute
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. Upon the demand of any shareholder, the vote upon any question
before the meeting shall be by ballot. All questions shall be decided by a
majority vote of the number of shares entitled to vote and represented at the
meeting at the time of the vote except if otherwise required by statute, the
Articles of Incorporation, or these Bylaws.
Section 2.06. CLOSING OF BOOKS. The Board of Directors may fix a time,
not exceeding 60 days preceding the date of any meeting of shareholders, as a
record date for the determination of the shareholders entitled to notice of, and
to vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. The Board of Directors may
close the books of the corporation against the transfer of shares during the
whole or any part of such period. If the Board of Directors fails to fix a
record date for determination of the shareholders entitled to notice of, and to
vote at, any meeting of shareholders, the record date shall be the 20th day
preceding the date of such meeting.
Section 2.07. NOTICE OF MEETINGS. Notice of each shareholders' meeting
shall be mailed to each shareholder, shown by the books of the corporation to be
a holder of record of voting shares, at his address as shown by the books of the
corporation, setting out the time and place of the meeting, except where the
meeting is an adjourned meeting and the date, time and place of the meeting were
announced at the time of adjournment, except that notice of a meeting at which
an agreement of merger or exchange is to be considered shall be mailed to all
shareholders of record, whether entitled to vote or not, at least fourteen days
prior thereto. Every notice of any special meeting called pursuant to Section
2.03 hereof shall state the purpose or purposes for which the meeting has been
called, and the business transacted at all special meetings shall be confined to
the purpose stated in the notice.
Section 2.08. WAIVER OF NOTICE. Notice of any regular or special meeting
may be waived by any shareholder either before, at or after such meeting orally
or in a writing signed by such
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shareholder or a representative entitled to vote the shares of such shareholder.
A shareholder, by his attendance at any meeting of shareholders, shall be deemed
to have waived notice of such meeting, except where the shareholder objects at
the beginning of the meeting to the transaction of business because the item may
not lawfully be considered at the meeting and does not participate in the
consideration of the item at that meeting.
Section 2.09. WRITTEN ACTION. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by all of the shareholders entitled to vote on that action.
Section 2.10. ADVANCE NOTICE REQUIREMENTS. Only persons who are nominated
in accordance with the procedures set forth in this Section 2.10 shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the corporation may be made at a meeting of shareholders
(a) by or at the direction of the Board of Directors or (b) by any shareholder
of the corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 2.10.
Nominations by shareholders shall be made pursuant to timely notice in writing
to the Secretary of the corporation. To be timely, a shareholder's notice must
be delivered to or mailed and received at the principal executive offices of the
corporation not less than 50 days prior to the meeting; provided, however, that
in the event that less than 60 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be so received not later than the close of business on the
10th day following the first day on which such notice of the date of the meeting
was mailed or such public disclosure was made. Such shareholder's notice shall
set forth (x) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) such person's name and (ii) all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (y) as to the
shareholder giving the notice, (i) the name and address, as they appear on the
corporation's books, of such shareholder and (ii) the class and number of shares
of the corporation which are beneficially owned by such shareholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
corporation that information required to be set forth in a shareholder's notice
of nomination which pertains to a nominee. Notwithstanding anything in these
Bylaws to the contrary, no person shall be eligible for election as a director
of the corporation unless nominated in accordance with the procedures set forth
in this Section 2.10. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed in this Section 2.10 and, if the
Chairman should so determine, the Chairman shall so declare to the meeting and
the defective nomination shall be disregarded.
At any regular or special meeting of shareholders, only such business shall
be conducted as shall have been brought before the meeting (a) by or at the
direction of the Board of Directors or (b) by any shareholder of the corporation
who complies with the notice procedures set forth in this Section 2.10. For
business to be properly brought before any regular or special meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of
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the corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than 50 days prior to the meeting, provided, however, that in the event
that less than 60 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be received not later than the close of business on the 10th day following
the first day on which either such notice of the date of the regular or special
meeting was mailed or such public disclosure was made. A shareholder's notice
to the Secretary shall set forth as to each matter the shareholder proposes to
bring before the regular or special meeting (w) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (x) the name and address, as they appear on the
corporation's books, of the shareholder proposing such business, (y) the class
and number of shares of the corporation which are beneficially owned by the
shareholder and (z) any material interest of the shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any regular or special meeting except in accordance with the
procedures set forth in this Section 2.10 and, as an additional limitation, the
business transacted at any special meeting shall be limited to the purposes
stated in the notice of the special meeting. The Chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 2.10 and, if the Chairman should so determine, the Chairman shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
ARTICLE III
DIRECTORS
Section 3.01. GENERAL POWERS. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors, except as
otherwise permitted by statute.
Section 3.02. NUMBER, QUALIFICATION AND TERM OF OFFICE. Until the first
meeting of shareholders, the number of directors shall be the number named in
the Articles of Incorporation or, if no such number is named therein, the number
elected by the incorporator. Thereafter, the number of directors shall be
established by resolution of the shareholders (subject to the authority of the
Board of Directors to increase or decrease the number of directors as permitted
by law). In the absence of such shareholder resolution, the number of directors
shall be the number last fixed by the shareholders, the Board of Directors, the
incorporator or the Articles of Incorporation. Directors need not be
shareholders. Each of the directors shall hold office until the regular meeting
of shareholders next held after such director's election and until such
director's successor shall have been elected and shall qualify, or until the
earlier death, resignation, removal, or disqualification of such director;
provided, however, that no director shall be elected to a term in excess of five
years.
Section 3.03. BOARD MEETINGS. Meetings of the Board of Directors may be
held from time to time at such time and place within or without the State of
Minnesota as may be designated in the notice of such meeting.
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Section 3.04. CALLING MEETINGS; NOTICE. Meetings of the Board of
Directors may be called by the Chairman of the Board by giving at least
twenty-four hours' notice, or by any other director by giving at least five
days' notice, of the date, time and place thereof to each director by mail,
telephone, telegram or in person.
Section 3.05. WAIVER OF NOTICE. Notice of any meeting of the Board of
Directors may be waived by any director either before, at, or after such meeting
orally or in a writing signed by such director. A director, by his attendance
at any meeting of the Board of Directors, shall be deemed to have waived notice
of such meeting, except where the director objects at the beginning of the
meeting to the transaction of business because the meeting is not lawfully
called or convened and does not participate thereafter in the meeting.
Section 3.06. QUORUM. A majority of the directors holding office
immediately prior to a meeting of the Board of Directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. ABSENT DIRECTORS. A director may give advance written
consent or opposition to a proposal to be acted on at a meeting of the Board of
Directors. If such director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
Section 3.08. CONFERENCE COMMUNICATIONS. Any or all directors may
participate in any meeting of the Board of Directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this Section 3.08 shall be deemed present in person at
the meeting, and the place of the meeting shall be the place of origination of
the conference communication.
Section 3.09. VACANCIES; NEWLY CREATED DIRECTORSHIP. Vacancies in the
Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the remaining directors of the Board although less than a
quorum; newly created directorships resulting from an increase in the authorized
number of directors by action of the Board of Directors as permitted by Section
3.02 may be filled by a two-thirds vote of the directors serving at the time of
such increase; and each director elected pursuant to this Section 3.09 shall be
a director until such director's successor is elected by the shareholders at
their next regular or special meeting.
Section 3.10. REMOVAL. Any or all of the directors may be removed from
office at any time, with or without cause, by the affirmative vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors, except as otherwise provided by Minnesota Statutes Section 302A.223,
as amended, when the shareholders have the right to cumulate their votes. A
director named by the Board of Directors to fill a vacancy may be removed from
office
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at any time, with or without cause, by the affirmative vote of the remaining
directors if the shareholders have not elected directors in the interim between
the time of the appointment to fill such vacancy and the time of the removal.
In the event that the entire Board or any one or more directors be so removed,
new directors shall be elected at the same meeting.
Section 3.11. COMMITTEES. A resolution approved by the affirmative vote
of a majority of the Board of Directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors, except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a meeting is a quorum
for the transaction of business.
Section 3.12. WRITTEN ACTION. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the Articles provided otherwise and the
action need not be approved by the shareholders.
Section 3.13. COMPENSATION. Directors who are not salaried officers of
this corporation shall receive such fixed sum per meeting attended or such fixed
annual sum as shall be determined, from time to time, by resolution of the Board
of Directors. The Board of Directors may, by resolution, provide that all
directors shall receive their expenses, if any, of attendance at meetings of the
Board of Directors or any committee thereof. Nothing herein contained shall be
construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
ARTICLE IV
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall consist of a
Chairman of the Board (if one is elected by the Board), a Chief Executive
Officer, a Chief Financial Officer, a Secretary (if one is elected by the Board)
and such other officers and agents as may, from time to time, be elected or
appointed by the Board of Directors. Any number of offices may be held by the
same person.
Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board of
Directors shall elect or appoint by resolution approved by the affirmative vote
of a majority of the directors present, from within or without their number, the
Chief Executive Officer, Chief Financial Officer, and such other officers as may
be deemed advisable, each of whom shall have the powers, rights, duties,
responsibilities, and terms in office provided for in these Bylaws or a
resolution of the Board of Directors not inconsistent therewith. Officers who
may be directors shall continue to hold office until the election and
qualification of their successors, notwithstanding an earlier termination of
their directorship.
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Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from his
office by the Board of Directors at any time, with or without cause. Such
removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at all meetings of the shareholders and directors and
shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.05. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
have general active management of the business of the corporation. In the
absence of the Chairman of the Board, he/she shall preside at all meetings of
the shareholders and directors. He/she shall see that all orders and
resolutions of the Board of Directors are carried into effect. He/she shall
execute and deliver, in the name of the corporation, any deeds, mortgages,
bonds, contracts or other instruments pertaining to the business of the
corporation unless the authority to execute and deliver is required by law to be
exercised by another person or is expressly delegated by the Articles or Bylaws
or by the Board of Directors to some other officer or agent of the corporation.
He/she shall maintain records of and, whenever necessary, certify all
proceedings of the Board of Directors and the shareholders, and in general,
shall perform all duties usually incident to the office of the Chief Executive
Officer. He/she shall have such other duties as may, from time to time, be
prescribed by the Board of Directors.
Section 4.06. VICE PRESIDENT. Each Vice President, if one or more are
elected, shall have such powers and perform such duties as may be specified in
the Bylaws or prescribed by the Board of Directors or by the Chief Executive
Officer. In the event of the absence or disability of the Chief Executive
Officer, Vice Presidents shall succeed to this power and duties in the order
designated by the Board of Directors.
Section 4.07. SECRETARY. The Secretary, if one is elected, shall give
proper notice of meetings of shareholders and directors. He/she shall perform
such other duties as may, from time to time, be prescribed by the Board of
Directors or by the Chief Executive Officer.
Section 4.08. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep accurate financial records for the corporation. He/she shall deposit all
moneys, drafts and checks in the name of, and to the credit of, the corporation
in such banks and depositories as the Board of Directors shall, from time to
time, designate. He/she shall have power to endorse, for deposit, all notes,
checks and drafts received by the corporation. He/she shall disburse the funds
of the corporation, as ordered by the Board of Directors, making proper vouchers
therefor. He/she shall render to the Chief Executive Officer and the directors,
whenever requested, an account of all his/her transactions as Chief Financial
Officer and of the financial condition of the corporation, and shall perform
such other duties as may, from time to time, be prescribed by the Board of
Directors or by the Chief Executive Officer.
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Section 4.09. COMPENSATION. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 5.01. CERTIFICATES FOR SHARES. All shares of the corporation
shall be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
Board of Directors, certifying the number of shares of the corporation owned by
such shareholder. The certificates for such shares shall be numbered in the
order in which they shall be issued and shall be signed, in the name of the
corporation, by the Chief Executive Officer, and by the Secretary or an
Assistant Secretary or by such officers as the Board of Directors may designate.
If the certificate is signed by a transfer agent or registrar, such signature of
the corporate officers may be by facsimile if authorized by the Board of
Directors. Every certificate surrendered to the corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 5.04.
Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to
cause to be issued shares of the corporation up to the full amount authorized by
the Articles of Incorporation in such amounts as may be determined by the Board
of Directors and as may be permitted by law. No shares shall be allocated
except in consideration of cash or other property, tangible or intangible,
received or to be received by the corporation under a written agreement, of
services rendered or to be rendered to the corporation under a written
agreement, or of an amount transferred from surplus to stated capital upon a
share dividend. At the time of such allotment of shares, the Board of Directors
making such allotment shall state, by resolution, their determination of the
fair value to the corporation in monetary terms of any consideration other than
cash for which shares are allotted.
Section 5.03. TRANSFER OF SHARES. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate,
or the shareholder's legal representative, or the shareholder's duly authorized
attorney-in-fact, and upon surrender of the certificate or the certificates for
such shares. The corporation may treat as the absolute owner of shares of the
corporation, the person or persons in whose name shares are registered on the
books of the corporation.
Section 5.04. LOSS OF CERTIFICATES. Except as otherwise provided by
Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for
shares to be lost, stolen or destroyed shall make an affidavit of that fact in
such form as the Board of Directors shall require and shall, if the Board of
Directors so requires, give the corporation a bond of indemnity in form, in an
amount, and with one or more sureties satisfactory to the Board of Directors, to
indemnify the corporation against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
issued in the same tenor and for the same number of shares as the one alleged to
have been lost, stolen or destroyed.
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ARTICLE VI
DIVIDENDS; RECORD DATE
Section 6.01. DIVIDENDS. Subject to the provisions of the Articles of
Incorporation, of these Bylaws, and of law, the Board of Directors may declare
dividends whenever, and in such amounts as, is deemed advisable.
Section 6.02. RECORD DATE. Subject to any provision of the Articles of
Incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any dividend to the shareholders
entitled to receive payment of the dividend and, in such case, only shareholders
of record on the date so fixed shall be entitled to receive payment of such
dividend notwithstanding any transfer of shares on the books of the corporation
after the record date. The Board of Directors may close the books of the
corporation against the transfer of shares during the whole or any part of such
period.
ARTICLE VII
BOOKS AND RECORDS; FISCAL YEAR
Section 7.01. SHARE REGISTER. The Board of Directors of the corporation
shall cause to be kept at its principal executive office, or at another place or
places within the United States determined by the Board:
(1) a share register not more than one year old, containing the names and
addresses of the shareholders and the number and classes of shares held by each
shareholder; and
(2) a record of the dates on which certificates or transaction statements
representing shares were issued.
Section 7.02. OTHER BOOKS AND RECORDS. The Board of Directors shall cause
to be kept at its principal executive office, or, if its principal executive
office is not in Minnesota, shall make available at its registered office within
ten days after receipt by an officer of the corporation of a written demand for
them made by a shareholder or other person authorized by Minnesota Statutes
Section 302A.461, originals or copies of:
(1) records of all proceedings of shareholders for the last three years;
(2) records of all proceedings of the board for the last three years;
(3) its Articles of Incorporation and all amendments currently in effect;
(4) its Bylaws and all amendments currently in effect;
(5) financial statements required by Minnesota Statutes Section 302A.463
and the financial statement for the most recent interim period prepared in the
course of the operation of the corporation for distribution to the shareholders
or to a governmental agency as a matter of public record;
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(6) reports made to shareholders generally within the last three years;
(7) a statement of the names and usual business addresses of its directors
and principal officers;
(8) any shareholder voting or control agreements of which the corporation
is aware; and
(9) such other records and books of account as shall be necessary and
appropriate to the conduct of the corporation's business.
Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall be
determined by the Board of Directors.
ARTICLE VIII
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an obligation
of, become a surety for, or otherwise financially assist a person if the
transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present and:
(1) is in the usual and regular course of business of the corporation;
(2) is with, or for the benefit of, a related corporation, an organization
in which the corporation has a financial interest; an organization with which
the corporation has a business relationship; or an organization with which the
corporation has the power to make donations;
(3) is with, or for the benefit of, an officer or other employee of the
corporation or a subsidiary, including an officer or employee who is a director
of the corporation or a subsidiary, and may reasonably be expected, in the
judgment of the Board, to benefit the corporation; or
(4) has been approved by the affirmative vote of the holders of two-thirds
of the outstanding shares.
The loan, guarantee, surety contract or other financial assistance may be
with or without interest, and may be unsecured, or may be secured in such manner
as a majority of the directors approve, including, without limitation, a pledge
of or other security interest in shares of the corporation. Nothing in this
Section shall be deemed to deny, limit, or restrict the powers of guaranty or
warranty of the corporation at common law or under a statute of the State of
Minnesota.
ARTICLE IX
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is involved, as a non-party
witness or otherwise, in any action,
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suit or proceeding, whether civil, criminal, administrative or investigative,
including a proceeding by or in the right of the corporation (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person for whom he or
she is the legal representative, is or was a director or officer of the
corporation or, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, where the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the fullest extent authorized by the Minnesota Business
Corporation Act, as the same exists or may hereafter be amended (but in the case
of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than said law permitted
the corporation to provide prior to such amendment), by common law or by
administrative or judicial interpretation, against all expense, liability and
loss (including attorneys' fees, expert witness fees, bonds prospective or
retroactive, insurance premiums or costs, out-of-pocket expenses related to a
proceeding, judgments, fines, including without limitation, excise taxes or
penalties assessed against such person with respect to any employee benefit
plan, or amounts paid or to be paid in settlement, including any interest
payable thereon) reasonably incurred or suffered by such person in connection
therewith. Such indemnification shall continue as to a person who has ceased to
be a director or officer and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that except as provided in
Section 9.02 hereof, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the corporation. The right to indemnification conferred
in this Section shall be a contract right and shall include the right to be paid
by the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that payment of such
expenses in advance of the final disposition of a proceeding shall be made only
upon (i) delivery to the corporation of a written affirmation, by the person
seeking such payment in advance, of a good faith belief that the criteria for
indemnification set forth in the Minnesota Business Corporation Act have been
satisfied, (ii) a determination that the facts then known to those making the
determination would not preclude indemnification under the Minnesota Business
Corporation Act or these Bylaws, and (iii) delivery to the corporation of an
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it shall ultimately be determined that such person is not entitled to be
indemnified under this Section or otherwise. Such written undertaking to repay
shall be a general obligation of the person making it, shall not be secured, and
shall be accepted without reference to financial ability to make the repayment.
The corporation may, by action of its Board of Directors, provide
indemnification to other classes of employees and agents of the corporation with
the same scope and effect as the foregoing indemnification of directors and
officers.
Section 9.02. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section
9.01 of this Article is not paid in full by the corporation within sixty days
after a written claim has been received by the corporation the claimant may at
any time thereafter bring suit against the corporation to recover the unpaid
amount of the claim and, whether or not the claimant is successful in whole or
in part, the claimant shall be entitled to be paid also the expense of
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prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its normal disposition where the required undertaking,
if any is required, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the Minnesota
Business Corporation Act for the corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, Committee for the Board of Directors, special legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because claimant met the applicable standard of conduct set forth in the
Minnesota Business Corporation Act, nor an act or determination by the
corporation (including its Board of Directors, Committee of the Board of
Directors, special legal counsel, or its shareholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 9.03. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article IX shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute, common
law or administrative or judicial interpretation, provisions of the Articles of
Incorporation, Bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise.
Section 9.04. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Minnesota Business Corporation Act.
Section 9.05. INDEMNIFICATION AGREEMENTS. The corporation shall enter
into agreements with its directors further providing the terms and conditions of
their indemnification.
Section 9.06. AMENDMENTS LIMITED. Any amendment to this Article IX shall
only apply prospectively and shall in no way affect the corporation's
obligations to indemnify and make advances pursuant to the Minnesota Business
Corporation Act, this Article IX, or any contract of the corporation for actions
or events which occurred before such amendment.
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ARTICLE X
AMENDMENTS
Section 10.01. These Bylaws may be amended or altered by a vote of the
majority of the whole Board of Directors at any meeting, provided that notice of
such proposed amendment shall have been given in the notice given to the
Directors of such meeting. Such authority in the Board of Directors is subject
to the power of the shareholders to change or repeal such Bylaws by a majority
vote of the shareholders present or represented at any regular or special
meeting of shareholders called for such purpose, and the Board of Directors
shall not make or alter any Bylaws fixing a quorum for meetings of shareholders,
prescribing procedures for removing Directors or filling vacancies in the Board
of Directors, or fixing the number of directors or their classifications,
qualifications, or terms of office, except that the Board of Directors may adopt
or amend any Bylaw to increase its number.
ARTICLE XI
SECURITIES OF OTHER CORPORATIONS
Section 11.01. VOTING SECURITIES HELD BY THE CORPORATION. Unless
otherwise ordered by the Board of Directors, the Chief Executive Officer shall
have full power and authority on behalf of the corporation (a) to attend any
meeting of security holders of other corporations in which the corporation may
hold securities and to vote such securities on behalf of this corporation; (b)
to execute any proxy for such meeting on behalf of the corporation; or (c) to
execute a written action in lieu of a meeting of such other corporation on
behalf of this corporation. At such meeting, the President shall possess and
may exercise any and all rights and powers incident to the ownership of such
securities that the corporation possesses. The Board of Directors may, from
time to time, grant such power and authority to one or more other persons and
may remove such power and authority from the Chief Executive Officer or any
other person.
Section 11.02 PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered
by the Board of Directors, the Chief Executive Officer shall have full power and
authority on behalf of the corporation to purchase, sell, transfer or encumber
any and all securities of any other corporation owned by the corporation and may
execute and deliver such documents as may be necessary to effectuate such
purchase, sale, transfer or encumbrance. The Board of Directors may, from time
to time, confer like powers upon any other person or persons.
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Exhibit 10.3
HEI, Inc.
STOCK OPTION PLAN
FOR NONEMPLOYEE DIRECTORS
As Amended Effective May 11, 1994, October 31, 1996 and November 19, 1997
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
prices 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 ten years, and (c) shall vest and become
fully exercisable on the earlier of the date of the 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
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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.
(e) PRIOR GRANTS. Effective November 19, 1997, all Options then
outstanding held by currently serving Nonemployee Directors shall be
extended for an additional five years and shall expire ten years from the
original date of grant.
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.
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(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 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.
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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.
(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.
5
<PAGE>
(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.
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, October 31, 1996 and November 19, 1997.
6
<PAGE>
FORM OF AGREEMENT EXHIBIT 10.4
REGARDING EMPLOYMENT/COMPENSATION UPON
CHANGE IN CONTROL
THIS AGREEMENT is entered into as of ____________, 1997, by and between
HEI, INC., a Minnesota corporation (herein called the "Company"), and
____________________ (herein called the "Executive").
WHEREAS, Executive has been employed by the Company for several years and
is currently its _____________________; and
WHEREAS, Executive is a very important and valuable employee and the
Company desires to keep Executive in its service; and
WHEREAS, the Company desires to provide suitable compensation to the
Executive should his employment be terminated or substantially changed as a
result of a "Change in Control" as defined herein; and
WHEREAS, Executive acknowledges that this is not an employment agreement,
but is solely intended to provide for employment security and compensation in
the event of any Change in Control of the Company in accordance with the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto agree as follows:
1. DEFINITIONS. For the purposes of this Agreement, the following words
and phrases shall have the following meanings:
(a) "Change in Control" shall mean:
(i) the consummation of any consolidation or merger of the
Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's common stock
would be converted into cash, securities, or other property, other
than a merger of the Company in which the holders of the Company's
common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger; or
(ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company; or
<PAGE>
(iii) approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company; or
(iv) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 50% or more of the
Company's outstanding stock; or
(v) during any period of two consecutive years, individuals
who at the beginning of such period constitute the entire Board of
Directors shall cease for any reason to constitute a majority thereof
unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least
two- thirds of the directors then still in office who are directors at
the beginning of the period; or
(vi) the adoption by the Board of Directors of a resolution
declaring that a Change in Control has occurred.
(b) "Cause" shall mean clear and convincing evidence of:
(i) material dishonesty by the Executive involving the
employer;
(ii) failure or refusal to perform a material requirement of
the Executive's duties, or failure or refusal to comply with a
reasonable, important general policy of the Company, after receipt by
the Executive of written notice specifying in detail the failure or
refusal, and a reasonable time in which to perform; or
(iii) Executive's (a) death or (b) disability (by reason of
physical or mental disease, defect, accident or illness) such that
Executive is or, in the opinion of two independent physicians, one
selected by the Company and one by the Executive or his
representative, for purposes of making this determination, will be
unable for an aggregate of 180 or more days during any continuous 12-
month period to render the services required of him in his then
current position with the Company.
(c) "Competitive Activities" shall mean:
(i) directly or indirectly engaging in, continuing in, or
carrying on any business which substantially competes with the
business conducted by the Company;
2
<PAGE>
(ii) soliciting or accepting orders for business from any
persons (whether individuals or entities) who were customers of the
Company during the one-year period prior to Executive's termination of
employment or inducing or attempting to induce such persons to
terminate or modify their relationship with the Company for such
business; or
(iii) offering, soliciting or agreeing to employ an employee of
the Company, or inducing or attempting to induce such an employee to
quit his or her employ with the Company, without the prior written
consent of the Company;
Provided, however, that the term "Competitive Activities" shall not
include the ownership of securities of corporations which are listed
on a national securities exchange or quoted on a national over-the-
counter market in an amount not exceeding 2% of the outstanding shares
of any such corporation.
(d) "Confidential Information" shall mean confidential business
information, which information gives, or has the potential of giving,
actual or potential economic value to the Company by not being
generally known, or readily ascertainable, by the Company's
competitors, and which information the Company has taken, and will
continue to take, reasonable steps to maintain confidential vis-a-vis
its competitors; provided, however, nothing in this Agreement shall
limit the time periods during which Executive and others shall not
misappropriate or threaten to misappropriate the Company's trade
secrets as protected under Minnesota law.
(e) "Date of Termination" shall mean:
(i) if this Agreement is terminated by the Company for
disability, 90 days after Notice of Termination is given to the
Executive (provided that the Executive shall not have returned to the
performance of the Executive's duties on a full-time basis during such
90 day period); or
(ii) if the Executive's employment is terminated by the Company
for any other reason, 90 days after Notice of Termination is given;
provided, however, that if within 90 days after any Notice of
Termination is given to the Executive by the Company the Executive
notifies the Company that a dispute exists concerning the termination,
the Date of Termination shall be the date the dispute is finally
determined, whether by mutual agreement by the parties or upon final
judgment, order, or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been
perfected).
3
<PAGE>
(f) "Good Reason" shall mean any of the following (without Executive's
express written consent):
(i) Assignment to Executive by the Company of duties
inconsistent with Executive's position, duties, responsibilities, and
status with the Company immediately prior to a Change in Control of
the Company, or a change in Executive's titles or offices as in effect
immediately prior to a Change in Control of the Company, or any
removal of Executive from or any failure to reelect or reappoint
Executive to any of such positions, except in connection with the
termination of his employment for disability, retirement, or Cause or
as a result of Executive's death or by Executive other than for Good
Reason;
(ii) A reduction by the Company of Executive's base salary as
in effect on the date hereof or as the same may be increased from time
to time during the term of this Agreement or the Company's failure to
increase Executive's base salary (within 12 months of Executive's last
increase in base salary) after a Change in Control of the Company in
an amount which at least equals, on a percentage basis, the average
percentage increase in base salary for all executive officers of the
Company effected during the preceding 12 months;
(iii) Any failure by the Company to continue in effect, or to
provide a comparable substitute for, any benefit plan or arrangement
(including, without limitation, any profit sharing plan, executive
supplemental medical plan, group life insurance plan, and medical,
dental, accident, and disability plans) in which Executive is
participating at the time of a Change in Control of the Company (or
any other plans providing Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), the taking of
any action by the Company that would adversely affect Executive's
participation in or materially reduce Executive's benefits under any
such Benefit Plan or deprive Executive of any material fringe benefit
enjoyed by Executive at the time of a Change in Control of the
Company;
(iv) Any failure by the Company to continue in effect, or to
provide a comparable substitute for, any incentive plan or arrangement
(including, without limitation, any incentive compensation plan, long-
term incentive plan, bonus or contingent bonus arrangements or
credits, the right to receive performance awards, or similar incentive
compensation benefits) in which Executive is participating, or is
eligible to participate, at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) (hereinafter referred to as "Incentive
Plans") or the taking of any action by the Company which would
adversely affect Executive's participation in any
4
<PAGE>
such Incentive Plan, expressed as a percentage of his base salary, by
more than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year;
(v) Any failure by the Company to continue in effect, or to
provide a comparable substitute for, any plan or arrangement to
receive securities of the Company (including, without limitation, any
stock option plan or any other plan or arrangement to receive and
exercise stock options, stock appreciation rights, restricted stock,
or grants thereof) in which Executive is participating, or is eligible
to participate, at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Securities Plans") or the
taking of any action by the Company which would adversely affect
Executive's participation in or materially reduce Executive's benefits
under any such Securities Plan;
(vi) If at the time of a Change in Control of the Company
Executive is employed at the Company's principal executive offices, a
relocation of such principal executive offices to a location more than
fifty miles outside of the Minneapolis-St. Paul Metropolitan Area or,
if Executive is not employed at the Company's principal executive
offices, Executive's relocation to any place other than the location
at which the Executive performed Executive's duties prior to a Change
in Control of the Company, except for required travel by Executive on
the Company's business to an extent substantially consistent with
Executive's business travel obligations at the time of a Change in
Control of the Company;
(vii) Any failure by the Company to provide Executive with at
least the number of paid vacation days to which the Executive is
entitled at the time of a Change in Control of the Company;
(viii) Any material breach by the Company of any provision of
this Agreement;
(ix) Any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(x) Any purported termination of Executive's employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 1(g) hereof.
(g) "Notice of Termination" shall mean a written notice which shall
indicate those specific termination provisions in this Agreement
relied upon and which sets forth in reasonable detail the facts and
circumstances claiming to provide a basis for termination of the
Executive's employment under the
5
<PAGE>
provisions so indicated. Any termination by the Company pursuant to
this Agreement shall be communicated by Notice of Termination. For
purposes of this Agreement, no such purported termination by the
Company shall be effective without such Notice of Termination.
2. TERM. This Agreement shall become effective immediately upon
execution and shall be in effect until August 31, 1998, and shall be renewed
automatically for each subsequent one-year period unless either the Executive or
the Company gives written notice to the other party on or before the June 1st
immediately preceding the expiration date, or, if a Change in Control has
occurred, this Agreement shall be in effect for a period of two (2) years
following the date of the Change in Control.
3. SEPARATE EMPLOYMENT ARRANGEMENTS. Executive is, and shall be,
employed by the Company solely upon the existing arrangements which are separate
from this Agreement, as those employment arrangements hereafter may be amended
by the parties. The parties expressly acknowledge and agree that this Agreement
is not intended to be an employment agreement.
4. PARTICIPATION IN OTHER EXECUTIVE BENEFIT PLANS. Nothing in this
Agreement shall in any manner modify, impair, or affect the existing or future
rights or interests of Executive (a) to receive any employee benefits from the
Company to which he would otherwise be entitled or (b) as a participant in any
incentive, profit-sharing or bonus plan, stock option plan or pension plan of
the Company. The rights and interests of Executive to any employee benefits or
as a participant or beneficiary in or under any or all such plans shall continue
in full force and effect. Executive shall have the right at any future time to
become a participant or beneficiary under or pursuant to any and all such plans.
Any compensation payable under this Agreement shall not be deemed salary or
other compensation to Executive for purposes of any retirement plans maintained
by the Company or for purposes of any other fringe benefit obligations of the
Company.
5. NONASSIGNABILITY OF BENEFITS. Executive shall not transfer, assign,
encumber, or otherwise dispose of his right to receive payments hereunder and,
in the event of any attempted transfer or assignment, the Company shall have no
further liability to Executive under this Agreement.
6. PAYMENTS AND BENEFITS UPON A CHANGE IN CONTROL. If Executive is
employed by the Company upon the occurrence of a Change in Control, the
following provisions shall govern:
(a) The Executive shall continue to be employed for twenty-
four (24) months with substantially the same duties, compensation, and
benefits in the same geographic location as existed just prior to the
Change in Control.
6
<PAGE>
(b) The Executive may terminate his employment during the
twenty-four (24) months following the Change in Control for Good
Reason as defined herein, and, upon such termination, shall receive
from the Company in a lump sum, in cash, on the fifth (5th) day
following the Date of Termination, an amount equal to two (2) times
the Executive's "annualized includable compensation for the base
period" (as defined in Section 280G(d) of the Internal Revenue Code of
1986, as amended (the "Code")), but, in any event, the Executive shall
not engage in Competitive Activities for two years following the Date
of Termination and shall not divulge at any time Confidential
Information about the Company.
(c) If the Company terminates the Executive's employment other
than for Cause as defined herein, the Executive shall receive as
severance pay in a lump sum, in cash, on the fifth (5th) day following
the Date of Termination, an amount equal to two (2) times the
Executive's "annualized includable compensation for the base period"
(as defined in Section 280G(d) of the Code), but, in any event, the
Executive shall not engage in Competitive Activities for two years
following the Date of Termination and shall not divulge at any time
Confidential Information about the Company.
(d) The Executive may terminate his employment upon at least
three months' notice at the end of the first twelve (12) months of
employment after the Change in Control for other than Good Reason,
thereby waiving any further benefits hereunder except a severance
benefit of three months salary and a prorated portion of annual bonus,
provided that the Executive then agrees not to hire or attempt to hire
any employee of the Company during the twelve (12) month period
following the termination of employment, but, in any event, the
Executive shall not divulge at any time any Confidential Information
about the Company.
(e) If the Executive terminates his employment during the 24-
month period following the change in Control otherwise than under any
of paragraphs (b) or (d) of this Section 6, the Executive shall not be
entitled to any payments for any period after the end of the
employment, shall not receive any severance benefit, and shall not
engage in any Competitive Activities during the balance of the twenty-
four (24) month period, but, in any event, the Executive shall not
divulge at any time any Confidential Information about the Company.
(f) If the Executive holds any options to purchase stock of
the Company after a Change in Control, such options shall become
immediately exercisable in full and the Executive shall be entitled to
exercise such options until the expiration date provided for in the
related stock option agreement.
7
<PAGE>
(g) If the lump sum severance payment provided for under this
Section 6, calculated as set forth above, either alone or together
with other payments which the Executive has the right to receive from
the Company, would constitute an "excess parachute payment" (as
defined in Section 280G of the Code), such lump sum severance payment
shall be reduced to the largest amount as will result in no portion of
the lump sum severance payment under this Section 6 being subject to
the excise tax imposed by Section 4999 of the Code. The determination
of any reduction in the lump sum severance payment under this Section
6(g) pursuant to the foregoing sentence shall be made by the Executive
in good faith, and such determination shall be conclusive and binding
on the Company.
(h) In the event of termination of Executive's employment
under paragraph (b), (c), or (d) of this Section 6, Executive shall be
entitled to continue to participate in the Company's group medical,
dental, life and disability plans on the same basis as Executive
participated immediately prior to the Notice of Termination for a
period of two (2) years following the Date of Termination. Executive
shall be responsible for payment of premiums to the same extent as
prior to the Notice of Termination. In the event that Executive
becomes eligible for or obtains substantially equivalent coverage from
another source, the Company's obligation under this paragraph 6(h)
shall terminate.
7. ENTIRE AGREEMENT; HEADINGS. This Agreement is the entire Agreement
between the parties on its subject matter and shall be deemed to supersede any
other agreements allegedly made between the parties regarding the subject
matter. The parties represent that no other such agreements or understandings
exist. Headings shall not be utilized in any interpretation of this Agreement.
8. RESOLUTION OF DISPUTES. Any dispute or claim arising out of this
Agreement, or breach thereof, shall be decided by arbitration, under the
commercial arbitration rules of the American Arbitration Association ("AAA"),
and shall be conducted in the Minneapolis, Minnesota, metropolitan area. This
agreement to arbitrate shall be specifically enforceable. Any decision rendered
by the arbitrator shall be final and binding, and judgment may be entered upon
it by any court having jurisdiction. Nothing herein contained shall bar either
party from seeking equitable remedies in a court of appropriate jurisdiction.
9. NOTICES. Any notice or other communication provided for herein or
given hereunder shall be in writing and shall be delivered in person or, in the
case of the Company, to the Board of Directors, or mailed by first class
registered or certified mail, postage prepaid, addressed to the Company at its
registered office in the State of Minnesota and addressed to the Executive or
any other person at the last known address of such person appearing on the books
of the Company.
8
<PAGE>
10. AMENDMENT. This Agreement may not be changed, modified or amended
except in writing signed by both parties.
11. WAIVER OF BREACH. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
12. INVALIDITY OF ANY PROVISION. The provisions of this Agreement are
severable, it being the intention of the parties hereto that should any
provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provision or provisions were omitted.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company, its successors and assigns, and Executive,
his heirs, legal representatives and assigns.
14. GOVERNING LAW. This Agreement is being delivered and is intended to
be performed in the State of Minnesota and shall be construed and enforced in
accordance with the laws of such state.
15. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
HEI, INC.
Dated: , 1997 By
-------------------- ------------------------------------
Its
--------------------------------
Dated: , 1997 By
-------------------- ------------------------------------
Its
--------------------------------
9
<PAGE>
HEI, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $30,962 $20,680 $23,423 $17,295 $18,893
Cost of sales 24,524 14,957 17,263 12,497 12,174
- --------------------------------------------------------------------------------------------
Gross profit 6,438 5,723 6,160 4,798 6,719
- --------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,277 2,342 2,401 2,094 2,130
Research, development and engineering 843 849 754 679 614
Gain on sale of product line, net (215) (45)
- --------------------------------------------------------------------------------------------
Operating income 3,533 2,577 3,005 2,025 3,975
- --------------------------------------------------------------------------------------------
Income before income taxes 3,980 2,833 3,250 2,102 3,997
- --------------------------------------------------------------------------------------------
Income taxes 1,430 720 1,210 777 1,459
- --------------------------------------------------------------------------------------------
Net income $2,550 $2,113 $2,040 $1,325 $2,538
- --------------------------------------------------------------------------------------------
Net income per common share $.60 $.52 $.52 $.34 $.66
- --------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares 4,279 4,098 3,899 3,858 3,822
- --------------------------------------------------------------------------------------------
Balance sheet:
Working capital $14,784 $10,088 $8,380 $5,927 $4,211
Total assets 24,511 22,414 12,857 10,905 8,564
Long-term debt, less current maturities 4,537 5,271
Shareholders' equity 16,995 13,816 10,982 8,671 6,762
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TO OUR SHAREHOLDERS
Fiscal year 1997 was a year of growth for HEI. We achieved record annual
revenue and net income results, and ended the year with an even stronger balance
sheet. Revenue for fiscal year 1997 was $30,962,000, compared to $20,680,000
for fiscal 1996. Net income for fiscal 1997 was $2,550,000, or $.60 per share,
compared to net income of $2,113,000, or $.52 per share, for 1996. Revenue for
the fourth quarter of fiscal 1997 was $6,440,000, compared to revenue of
$6,397,000 for the fourth quarter of the previous year, but down from revenue of
$9,067,000 for the third quarter of fiscal 1997. Net income for the fourth
quarter just ended was $410,000, or $.10 per share, compared to net income for
the fourth quarter of fiscal 1996 of $1,329,000, or $.32 per share, including a
one-time favorable deferred tax adjustment of $.07.
Also during the fourth quarter of this past year, we completed the sale of
HEI's optoelectronic switch assembly business and related assets located at Sauk
Centre, Minnesota, thereby closing out activities at this site. The net gain
after tax on this sale contributed approximately $.03 per share to fourth
quarter earnings. Since the revenue from this segment was less than 5% of HEI's
total for the 1997 fiscal year, we expect the sale to have minimal impact on
future earnings.
As has been characteristic of our custom design and manufacturing business,
growth may be interrupted periodically by a hiatus either to effect expansion or
to concentrate on the replacement of phased-out programs. The ramp-down of a
large program in the fourth quarter of fiscal 1995 resulted in a downturn in
revenue and profit for that period and the ensuing three quarters of fiscal
1996. Similarly, in the fourth quarter of fiscal 1997 we experienced a phase-
out of the high volume disk drive program that represented about 55% of our
fiscal 1997 revenue. As stated previously, we anticipate significantly
decreased fiscal 1998 quarterly revenue and operating income compared to 1997
quarterly results until equivalent replacement business is secured. We have
placed a high priority on gaining new business, and are confident that our
current marketing activities will lead to significant new growth opportunities.
HEI's financial strength and stability continues to grow, enhancing our
ability to weather the storms of adverse business circumstances, and enabling
the Company to take advantage of a broader range of expansion opportunities as
they may arise. Fiscal 1997 closed with a record Shareholders' Equity of
$16,995,000, and a Current Ratio of 6.7:1.
1998 PLANS
In addition to our continuing efforts to replace business and resume
growth, we will strive to increase stability in operations and performance
through a broadening of markets served and/or through expansion of technologies
and process capabilities. We intend to advance our depth of knowledge and
experience in the diverse materials, substrates and interconnect techniques that
can contribute to our competence and reputation as a state-of-the-art
ultraminiature microelectronics packaging specialist. We anticipate that
continuing trends favoring miniaturization, and outsourcing will create
increased potential for small-scale implementations such as flip chip, ball grid
array and chip scale packages. Further, we believe that applications in medical
instrumentation--including implantables--and telecommunications represent
emerging growth opportunities for HEI.
During the past year we installed and initiated operation of a flexible
high volume, continuous flow manufacturing capability, thereby enhancing our
productivity on large volume contracts. It is our goal to take advantage of
this capability and expanded capacity to develop an improved balance of large
and medium volume manufacturing activities.
<PAGE>
We have been fortunate to serve exceptional customers who have allowed us
to do our best work. The entire team at HEI offers sincere thanks to our
customers, employees, shareholders and friends for your ongoing support.
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; CHANGE
IN OR CANCELLATION OF CUSTOMER REQUIREMENTS; 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.
MANAGEMENT'S DISCUSSION AND
<PAGE>
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, 1997, was $4,869,000. The significant components of this operating
net cash flow were positive cash flow of $3,883,000 from operations before
changes in current operating items and a $1,701,000 decrease in accounts
receivable. The decrease in accounts receivable is attributable primarily to
lower shipment volumes in the last month of the current fiscal year versus the
same period of last fiscal year.
Accounts receivable average days outstanding were 36 days as of August 31,
1997 compared to 41 days for the same period a year ago. Inventory turns were
10.9 turns and 7.7 turns as of August 31, 1997 and 1996, respectively.
The Company increased short-term investments, primarily in commercial
paper, to $9,175,000, up $3,687,000 from a year ago. The current ratio at the
end of 1997 was 6.7:1 as compared to 4.4:1 at the end of last year. The
improved current ratio is principally due to increased cash and cash equivalents
and short-term investments partially offset by decreased accounts receivable.
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, 1997,
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 would be 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 1997, the Company purchased $1,605,000 of property and
equipment to increase manufacturing capacity to meet anticipated requirements.
These expenditures were funded primarily from the proceeds of the Industrial
Development Revenue Bonds issued in April 1996. Restricted cash of $389,000 at
August 31, 1997 represents the unexpended funds from the bonds which are
available to the Company for qualifying capital expenditures during the next two
years.
During fiscal 1998, the Company intends to expend approximately $1.4
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 from internally generated funds and the remaining funds
available from the Industrial Development Revenue Bonds.
RESULTS OF OPERATIONS
SALES BY PRODUCT LINE
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
Microelectronics $30,962 $18,545 $21,187
Peripheral products 2,060 2,157
Other 75 79
- --------------------------------------------------------------------------------
Total $30,962 $20,680 $23,423
- --------------------------------------------------------------------------------
SALES. 1997 VS. 1996: Sales in 1997 increased $10,282,000, or 50%, over fiscal
1996. This increase was due to shipments in the high density disk drive
business, primarily to one customer. Shipments to this customer constituted
55% of sales during fiscal year 1997.
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,
<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.
In April 1997, the Company announced that it had received notice from its
then largest current customer to begin phasing out production of a
microelectronic assembly used in high density disk drives. Phase out of this
program commenced late in the third quarter of this year and was complete by the
end of the fourth quarter. The phase out is expected to result in significantly
decreased revenues and operating income in fiscal 1998 compared to fiscal 1997
until equivalent replacement business is secured.
1996 VS. 1995: Sales in 1996 decreased $2,743,000, or 12%, from fiscal
1995. Sales of microelectronic circuits, which include the optoelectronic
switch assembly business, 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.
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.
PERCENTAGE OF SALES
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Sales 100% 100% 100%
Gross profit 21% 28% 26%
Selling, general and
administrative 7% 11% 10%
Research, development
and engineering 3% 4% 3%
- --------------------------------------------------------------------------------
GROSS PROFIT. 1997 VS. 1996: The Company's gross profit as a percentage of
sales was 21% in 1997, compared to 28% in 1996. The reduced gross profit rate
was primarily the result of volume pricing to a customer resulting in lower
gross margin rates for sales on a high density disk drive program.
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.
OPERATING EXPENSES. 1997 VS. 1996: Selling, general and administrative
expenses decreased 3% in fiscal year 1997 from the prior fiscal year primarily
due to the sale of the light pen product line at the end of fiscal year 1996 and
the leveraging effects of a significantly higher sales level. Research,
development and engineering expenses remained fairly constant in fiscal year
1997 versus fiscal year 1996.
Gain on sale of product line of $215,000 in fiscal year 1997 represents the
gain on the sale of the optoelectronic switch assembly business in August 1997.
The $45,000 net gain on sale of product line in 1996 represents the gain on the
sale of the light pen product line, which was completed in August 1996,
partially offset by costs to close down the light pen product line (see Note 3
of Notes to Financial Statements).
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.
<PAGE>
OTHER, PRINCIPALLY INTEREST INCOME. 1997 VS. 1996: Other income increased
$191,000 or 75% from fiscal year 1996 primarily due to increased interest income
from significantly higher short-term investment balances, partially offset by
higher interest expense on the Industrial Development Revenue Bonds.
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 Industrial Development
Revenue Bonds.
NET INCOME. 1997 VS. 1996: The Company had net income of $2,550,000 for 1997
compared to net income of $2,113,000 for 1996. Operating income of $3,533,000
was up $956,000 from 1996 reflecting the significant 1997 sales increase. The
effective tax rate for fiscal year 1997 was 36% versus 25% in fiscal year 1996.
The reduced rate in fiscal year 1996 was due to the elimination of a deferred
tax asset valuation allowance.
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 the decrease in sales 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.
ISSUES AND UNCERTAINTIES
This Annual Report contains forward-looking statements that are based on the
Company's current expectations and involve a number of risks and uncertainties.
Factors that may materially affect revenues, expenses and operating results
include, without limitation, adverse business or market conditions, the ability
of the Company to secure and satisfy customers, the availability and cost of
materials from suppliers, adverse competitive developments, and change in or
cancellation of customer requirements.
The forward-looking statements included herein are based on current
assumptions that the Company will continue to develop, market, manufacture and
ship products on a timely basis, that competitive conditions within the
Company's markets will not change materially or adversely, that the Company will
continue to identify and satisfy customer needs for products and services, that
the Company will be able to retain and hire key personnel, that its equipment,
process, capabilities and resources will remain competitive and compatible with
the current state of technology, that risks due to shifts in customer demand
will be minimized, and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments that are based on incomplete information and are subject to many
factors that can materially affect results. The Company operates in a volatile
segment of high technology markets and applications that are subject to rapid
change and technical obsolescence.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. The following factors also may materially
affect results and therefore should be considered.
SUBSTANTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS: The Company has
experienced substantial fluctuations in its annual and quarterly operating
results, and such fluctuations are expected to continue in future periods. The
Company's operating results are affected by a number of factors, many of which
are beyond the Company's control. All products manufactured by the Company are
custom designed and assembled for a specific customer's requirement in
anticipation of the receipt of volume production orders from that customer,
which may not always materialize to the degree anticipated, if at all. The
Company typically incurs significant start-up costs in the production of a
particular product, which costs are expensed as incurred and for which the
Company attempts to seek reimbursement from the customer. Accordingly, the
<PAGE>
Company's level of experience in manufacturing a particular product and its
efficiency in minimizing start-up costs will affect the Company's operating
results during the periods in which production begins and ramp-up occurs. The
efficiencies of the Company in managing inventories and fixed assets, shortages
of components or labor, the degree of automation used in the assembly process,
fluctuations in material costs and the mix of materials, labor, manufacturing,
and overhead costs are also significant factors affecting annual and quarterly
operating results. Other factors contributing to fluctuations in the Company's
operating results include unforeseen design or manufacturing problems, price
competition, functional competition (other means of accomplishing the same or
similar packaging end result), the inability to pass on cost overruns, the
timing of expenditures in anticipation of increased sales, customer product
delivery requirements, and the range of services provided. In addition, the
amount and timing of orders placed by a customer may vary due to a number of
factors, including inventory balancing, changes in manufacturing strategy, and
variation in product demand attributable to, among other things, product life
cycles, competitive factors, and general economic conditions. Any one of these
factors, or a combination thereof, could adversely affect the Company's annual
and quarterly results of operations.
The Company's customers generally require short delivery cycles, and a
substantial portion of the Company's backlog is typically scheduled for delivery
within 90 days. Quarterly sales and operating results therefore depend in large
part on the volume and timing of bookings received during or immediately prior
to the quarter, which are difficult to forecast in advance of that time. The
short lead time for the Company's backlog also affects its ability to accurately
plan production and inventory levels. In addition, a significant portion of the
Company's operating expenses are relatively fixed in nature and planned
expenditures are based in part on anticipated orders. Any inability to adjust
spending quickly enough to compensate for any revenue shortfall may magnify the
adverse impact of such revenue shortfall on the Company's results of operations.
DEPENDENCE ON SINGLE INDUSTRY: During the past several years, the Company's
principal market has been the hard disk drive ("HDD") industry. In addition,
the Company has made significant sales in the medical products industry, with
emphasis on hearing instrument manufacturers, and is expanding its sales efforts
to include industrial and telecommunications applications. Each of these
industries is characterized by intense competition, relatively short product
life cycles, rapid technological change, significant fluctuations in product
demand, and significant pressure on vendors to reduce or minimize cost.
Although the Company is attempting to reduce its dependence on any single
industry, the Company does not expect this historic dependence to change
dramatically or quickly. Accordingly, the Company will likely be affected by
trends in the industries it serves.
CUSTOMER CONCENTRATION: The Company's customer base is highly concentrated. In
fiscal 1997 and 1996, the Company's two largest customers accounted for 82% and
54%, respectively, of net sales. Although the Company is attempting to reduce
its dependence on a limited number of customers, the Company expects that sales
to a relatively small number of original equipment manufacturers ("OEMs") will
continue to account for a substantial portion of net revenues for the
foreseeable future, and the loss of, or a decline in orders from, one of the
Company's key customers would have a material adverse effect on the Company's
financial and operating results.
COMPETITION: The Company operates in a highly competitive industry and competes
against several domestic and foreign providers of similar microelectronics
design and/or manufacturing services. The Company also faces competition from
the internal operations of its current and potential OEM customers, which the
Company believes will continue to evaluate the merits of manufacturing
components internally versus outsourcing, and from offshore contract
manufacturers, which, because of their lower labor rates and other related
factors, enjoy a comparative advantage over the Company with respect to high-
volume production. The Company expects to encounter future competition from
other electronics manufacturers that currently provide or may begin to provide
contract design and manufacturing services. A
<PAGE>
number of the Company's competitors may have substantially greater
manufacturing, financial, technical, marketing, and other resources than does
the Company, and may offer a broader scope and presence of operations on a
worldwide basis.
Significant competitive factors in the high density HDD assembly market,
for example, include price, quality, responsiveness, testing capabilities, the
ability to manufacture in very high volumes and proximity to the customers final
assembly facilities. While the Company has competed favorably in the recent
past with respect to these factors, this is a particularly fast changing market,
and there can be no assurance that the Company will continue to do so in the
future. The trends toward increasingly shorter product cycles and to off-shore
production are expected to result in more intense competition as each new
customer program is generally open to bidding by the Company and its
competitors, increasingly including those with off-shore facilities and
capabilities. Further, the Company is often only one of two or more suppliers
on any particular customer requirement and is therefore subject to continuing
competition on existing programs. In order to remain competitive in any of its
markets, the Company must continually provide timely and technologically
advanced design capabilities and manufacturing services, ensure the quality of
its products, and compete favorably with respect to turnaround and price. If
the Company were to fail to compete favorably with respect to the principal
competitive factors in its markets served, the Company's business and operating
results would be adversely affected.
COMPONENT SUPPLY AND SOURCES: Substantially all of the Company's manufacturing
services are provided on a turnkey basis in which the Company, in addition to
providing design, assembly and testing services, is responsible for the
procurement of the components that are assembled by the Company for its
customers. Although the Company attempts to minimize margin erosion as a result
of component price increases, in certain circumstances it is required to bear
some or all of the risk of such price fluctuations, which could adversely affect
the Company's profits. To date, the Company has generally been able to
negotiate contracts that allow it to shift much of the impact of price
fluctuations to the customer; however, there can be no assurance that the
Company will be able to do so in all cases. In addition, in order to assure an
adequate supply of certain key components that have long procurement lead times,
such as integrated circuits, the Company occasionally must order such components
prior to receiving formal customer purchase orders for the assemblies that
require such components. Failure to accurately anticipate the volume or timing
of customer orders can result in component shortages or excess component
inventory, which in either case could adversely affect the Company's financial
and operating results.
Some of the assemblies manufactured by the Company require one or more
components that are ordered from, or which may be available from, only one
source or a limited number of sources. Delivery problems relating to components
purchased from any of the Company's key suppliers could have a material adverse
impact on the financial performance of the Company. From time to time, the
Company's suppliers allocate components among their customers in response to
supply shortages. In some cases, supply shortages will substantially curtail
production of all assemblies using a particular component. In addition, at
various times there have been industry-wide shortages of electronic components.
While the Company has not experienced sustained periods of shortages of
components in the recent past, there can be no assurance that substantial
component shortages will not occur in the future. Any such shortages could have
a material adverse effect on the Company's operating results.
VARIABILITY OF CUSTOMER REQUIREMENTS AND CUSTOMER FINANCING: The level and
timing of orders placed by customers vary due to the customers' attempts to
balance their inventory, changes in customers' manufacturing strategies, and
variations and demand for the customers' products. Due in part to these
factors, most of the Company's customers do not commit to firm production
schedules for more than several weeks in advance of requirements. The Company's
inability to forecast the level of customers' orders with certainty makes it
difficult to schedule production and optimize utilization of manufacturing
capacity. In the past, the Company has been required to increase staffing and
incur other expenses in order to meet the anticipated demands of its customers.
From time to time, anticipated orders from some of the Company's
<PAGE>
customers have failed to materialize and delivery schedules have been deferred
as a result of changes in a customer's business needs, both of which have
adversely affected the Company's operating results. On other occasions,
customers have required rapid increases in production that have placed an
excessive burden on the Company's resources. There can be no assurance that the
Company will not experience similar fluctuations in customer demand in the
future. In addition, the Company may carry significant accounts receivable in
connection with providing manufacturing services to its customers. Although the
Company has not encountered significant problems in collecting on such accounts
receivable on a timely basis, if one or more of the Company's principal
customers were to become insolvent, or otherwise fail to pay for the services
and materials provided by the Company, the Company's operating results and
financial condition would be adversely affected.
RAPID TECHNOLOGICAL CHANGE: The Company's customers compete in markets that are
characterized by rapid technological change and short product life cycles. In
particular, the HDD, medical and telecommunications markets are prone to rapid
product obsolescence by new technologies. The microelectronics industry could
experience future competition from new or emerging technologies that render
existing technology less competitive or obsolete. The inability of the Company
to develop technologies or acquire capability to meet the evolving market
requirements of its customers could have a material adverse effect on the
Company's business, financial condition and results of operations, including the
Company's ability to maintain its revenue base.
MANAGEMENT OF GROWTH: The Company has a recent history of growth, sometimes
followed by significant decreases in revenues as customer demands for the
Company's products decrease. The Company's future operating results will depend
on management's ability to manage periods of both growth and downturn, to be
able to hire, train and retain the appropriate number of qualified employees,
and to forecast revenues and control expenses. Unexpected declines in revenues,
without corresponding and timely reductions in expenses, could have a material
adverse effect on the Company's business, results of operations, or financial
condition.
HIRING AND RETENTION OF EMPLOYEES: The Company's continued growth and
success depend to a significant extent on the continued service of senior
management and other key employees and the hiring of new qualified employees.
Competition for skilled business, product development, technical and other
personnel is intense. There can be no assurance that the Company will be
successful in recruiting new personnel and retaining existing personnel.
None of the Company's employees are subject to a long-term employment
agreement, although several key employees are subject to noncompetition
agreements. The loss of one or more key employees could have a material
adverse effect on the growth of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE: The market price of the Company's Common
Stock has experienced significant fluctuations and may continue to fluctuate in
the future. The market price of the Common Stock may be significantly affected
by factors such as changes in requirements or demands for the Company's
services, the announcement of new products or product enhancements by the
Company or its competitors, technological innovations by the Company or its
competitors, quarterly variations in the Company's or its competitors' results
of operations, changes in prices of the Company's or its competitors' products
and services, changes in revenue and revenue growth rates of the Company,
changes in earnings estimates by market analysts, speculation in the press or
analyst community, and general market conditions or market conditions specific
to particular industries. The stock prices for many companies in the technology
sector have experienced wide fluctuations that often have been unrelated to
their operating performance. Such fluctuations may adversely affect the market
price of the Company's Common Stock.
<PAGE>
HEI, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
AS OF AUGUST 31 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $3,458 $1,186
Short-term investments 9,175 5,488
- --------------------------------------------------------------------------------
12,633 6,674
Accounts receivable, net 2,325 4,039
Inventories 1,575 1,561
Other, principally deferred tax assets 860 764
- --------------------------------------------------------------------------------
Total current assets 17,393 13,038
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Property and equipment:
Land 216 216
Building and improvements 3,790 3,767
Fixtures and equipment 8,158 7,667
Accumulated depreciation (5,558) (4,868)
- --------------------------------------------------------------------------------
Net property and equipment 6,606 6,782
- --------------------------------------------------------------------------------
Restricted cash 389 2,455
Deferred financing costs 123 139
- --------------------------------------------------------------------------------
Total assets $24,511 $22,414
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $648 $354
Accounts payable 728 673
Accrued liabilities 1,233 1,354
Income taxes payable 569
- --------------------------------------------------------------------------------
Total current liabilities 2,609 2,950
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Long-term debt 4,537 5,271
Deferred tax liability 370 377
- --------------------------------------------------------------------------------
Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized,
none issued
Common stock, $.05 par; 10,000,000 shares authorized;
4,103,176 and 4,030,427 shares issued and
outstanding 205 202
Paid-in capital 7,518 6,892
Retained earnings 9,272 6,722
- --------------------------------------------------------------------------------
Total shareholders' equity 16,995 13,816
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $24,511 $22,414
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
HEI, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
YEARS ENDED AUGUST 31 1997 1996 1995
- --------------------------------------------------------------------------------
Net sales $ 30,962 $ 20,680 $ 23,423
Cost of sales 24,524 14,957 17,263
- --------------------------------------------------------------------------------
Gross profit 6,438 5,723 6,160
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,277 2,342 2,401
Research, development and engineering 843 849 754
Gain on sale of product line, net (215) (45)
- --------------------------------------------------------------------------------
Operating income 3,533 2,577 3,005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other, principally interest income (447) (256) (245)
- --------------------------------------------------------------------------------
Income before income taxes 3,980 2,833 3,250
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income taxes 1,430 720 1,210
- --------------------------------------------------------------------------------
Net income $ 2,550 $ 2,113 $ 2,040
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net income per common share $ 0.60 $ 0.52 $ 0.52
- --------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares 4,278,586 4,097,765 3,898,662
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
HEI, INC.
STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COMMON STOCK COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
OUTSTANDING OUTSTANDING
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Net income 2,550
Issuance of common shares
under employee stock purchase
and option plans 177,049 8 799
Common shares repurchased and retired (104,300) (5) (595)
Tax benefit of nonqualified stock options 422
- ---------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1997 4,103,176 $ 205 $7,518 $9,272
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
HEI, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED AUGUST 31 1997 1996 1995
- --------------------------------------------------------------------------------
Cash flow provided by operating activities:
Net income $ 2,550 $ 2,113 $ 2,040
Depreciation 1,376 907 759
Amortization 70 31
Accounts receivable and inventory allowances 59 (222) 221
Deferred income tax expense (benefit) 8 (198)
Gain on sale of product line, net (215) (45)
Other 35 51 3
Changes in current operating items:
Accounts receivable 1,701 (1,539) 755
Inventories (60) 537 (102)
Other current assets (220) (112) 21
Accounts payable 255 88 (319)
Accrued liabilities (121) 311 179
Income taxes payable (569) 394 (191)
- --------------------------------------------------------------------------------
Net cash flow provided by operating activities 4,869 2,316 3,366
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash flow used for investing activities:
Purchases of short-term investments (10,892) (7,033) (6,910)
Maturities of short-term investments 7,205 5,365 3,808
Additions to property and equipment (1,605) (4,621) (634)
Proceeds on sales of product lines and
equipment 494
Decrease (increase) in restricted cash 2,066 (2,455)
- --------------------------------------------------------------------------------
Net cash flow used for investing activities (2,732) (8,744) (3,736)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash flow provided by financing activities:
Proceeds from long-term debt 5,625
Repayment of long-term debt (440) (42)
Increase in deferred financing costs (54) (170)
Issuance of common stock 807 648 221
Tax benefit of nonqualified stock options 422 73 50
Repurchase of common shares (600)
- --------------------------------------------------------------------------------
Net cash flow provided by financing activities 135 6,176 229
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 2,272 (252) (141)
Cash and cash equivalents, beginning of year 1,186 1,438 1,579
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,458 $ 1,186 $ 1,438
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------------------------------------
Interest paid $ 218 $ 80 $ 2
Income taxes paid 1,656 515 1,351
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<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, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. 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. Short-term investments consist mainly of U.S. Treasury bills and
high quality commercial paper with maturities of less than one year. The short-
term investments are carried at amortized cost which approximates fair value.
The Company had $3,094,000 and $1,282,000 of cash and cash equivalents at
August 31, 1997 and 1996, respectively, invested with an affiliate of a single
banking institution.
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 outstanding,
assuming the exercise of stock options, when dilutive.
In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS
No. 128), Earnings per Share (EPS) was issued by the Financial Accounting
Standards Board. This standard, which the Company must adopt effective with its
second quarter of fiscal 1998, requires dual presentation of basic and diluted
EPS on the face of the statement of operations. Net income per common share
currently presented by the Company is comparable to the diluted EPS required
under SFAS No. 128. Basic EPS for the Company would be calculated based on only
weighted average common shares outstanding without considering the dilutive
effects of common stock equivalents.
<PAGE>
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 net
sales for the years ended August 31, were as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Customer A 55% 16%
Customer B 27% 38% 12%
Customer C 10%
Customer D 30%
Customer E 27%
- --------------------------------------------------------------------------------
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. Customer A's product program was completed
during the fourth quarter of fiscal 1997. The Company's ten largest customers
accounted for approximately 95% of net sales in 1997, 88% in 1996, and 89% in
1995 and approximately 87% and 90% of accounts receivable at August 31, 1997 and
1996, respectively.
The Company had net sales of $14,970,000 to Thailand in 1997, $6,647,000
and $5,924,000 to Singapore in 1997 and 1996, respectively, and $2,493,000 to
Hong Kong in 1995. Net export sales were $22,604,000, $7,278,000 and $4,995,000
in 1997, 1996 and 1995, respectively. The majority of the international sales
were to multinational companies who instructed HEI to ship products to their
off-shore assembly facilities.
NOTE 3
- --------------------------------------------------------------------------------
OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet
accounts at August 31, 1997 and 1996:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
Accounts receivable, net:
Trade accounts receivable $2,608 $4,309
Less allowance for doubtful accounts (283) (270)
- --------------------------------------------------------------------------------
$2,325 $4,039
- --------------------------------------------------------------------------------
Inventories:
Purchased parts $1,557 $1,394
Work in process 556 697
Finished goods 220 182
Less allowance for excess
or obsolete stock (758) (712)
- --------------------------------------------------------------------------------
$1,575 $1,561
- --------------------------------------------------------------------------------
Accrued liabilities:
Vacation and employee benefits $482 $500
<PAGE>
Payroll related 198 255
Real estate taxes 136 110
Other 417 489
- --------------------------------------------------------------------------------
$1,233 $1,354
- --------------------------------------------------------------------------------
SALE OF PRODUCT LINES. In August 1997 and 1996, the Company sold its
optoelectronic switch assembly and light pen product lines, respectively.
Through these transactions, the buyers acquired certain assets including
manufacturing equipment and related inventory, product licenses and assumed all
warranties. In connection with these sales, the Company received cash payments
for the assets and an agreement for additional amounts to be paid monthly over
the subsequent two years. At August 31, 1996, as a result of the sale of the
light pen product line, costs associated with the close down of this product
line were accrued and were included in the $45,000 net gain from the sale of
product line. The Company anticipates no substantial effect of the sale of
these product lines 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
was 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 purchased equipment require payments over seven
years from the date of purchase of the equipment through no later than April 1,
2006. In April 1997 the Company repaid $440,000 of the construction and
equipment bonds. 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, 1997 was 3.75%. The bonds are collateralized by two
irrevocable letters of credit and essentially all property and equipment. A
commitment fee is paid annually to the bank at a rate of 1% of the letters of
credit. The letter of credit reimbursement 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. 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 two years for equipment purchases. To the extent such funds are not
expended, they will revert back to the bond holders.
Also in fiscal 1996, the Company extended the due date of its $3,000,000
revolving line of credit to April 1998. At August 31, 1997 and 1996, there were
no borrowings under the line of credit. Any 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 and cash flow. The agreement also includes a
covenant which limits the sale of assets not in the ordinary course of business.
In accordance with the agreement, the Company received waivers for the sale of
each product line. 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.
Principal maturities of long-term debt, excluding the unexpended funds
classified as restricted cash, at August 31, 1997 are as follows (in thousands):
Years ending August 31,
1998 $648
1999 648
2000 648
<PAGE>
2001 648
2002 648
Thereafter 1,556
----------------------------------------------------------
4,796
----------------------------------------------------------
Restricted cash 389
----------------------------------------------------------
$5,185
----------------------------------------------------------
NOTE 5
- --------------------------------------------------------------------------------
INCOME TAXES
Income tax expense for the years ended August 31 consisted of the following:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $1,279 $829 $1,106
State 143 89 104
Deferred 8 (198)
- --------------------------------------------------------------------------------
Income tax expense $1,430 $720 $1,210
- --------------------------------------------------------------------------------
The components of the deferred tax assets and liabilities at August 31,
1997 and 1996 are as follows:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Receivables $160 $138
Inventories 282 199
Accrued liabilities 118 162
Other 76
- --------------------------------------------------------------------------------
$560 $575
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment $(263) $(377)
Deferred gain on sales of product lines (107)
- --------------------------------------------------------------------------------
$(370) $(377)
- --------------------------------------------------------------------------------
In fiscal 1996, the Company eliminated the valuation allowance of $274,000
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:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Federal statutory tax rate 34.0% 34.0% 34.0%
State income tax rate
(net of federal tax effect) 2.4 2.7 3.2
Reversal of valuation allowance (9.7)
Other (.5) (1.6)
- --------------------------------------------------------------------------------
Effective tax rate 35.9% 25.4% 37.2%
- --------------------------------------------------------------------------------
NOTE 6
- --------------------------------------------------------------------------------
STOCK BENEFIT PLANS
<PAGE>
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 pursuant to
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 average closing market price of the common stock for the
five days preceding 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 1997, 1996 and 1995,
12,049, 26,330 and 22,077 shares at prices of $5.08, $3.96 and $3.95,
respectively, were purchased under the 1989 Plan.
DIRECTORS' PLAN. Under the directors' 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 average closing market
price of the common stock for the five days preceding 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 $11.325 per share, $6.00 per share and
$4.71 per share in 1997, 1996 and 1995, respectively. At August 31, 1997,
options for 155,000 shares remain outstanding and 160,000 shares are available
for grant.
SUMMARY OF ACTIVITY. The following is a summary of all activity involving
options:
- ---------------------------------------------------------------------------
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
PER SHARE
- ---------------------------------------------------------------------------
BALANCE, AUGUST 31, 1994 398,500 $2.884
Granted 377,500 4.713
Exercised (84,000) 1.406
- ---------------------------------------------------------------------------
BALANCE, AUGUST 31, 1995 692,000 4.061
- ---------------------------------------------------------------------------
Granted 110,000 5.920
Exercised (212,500) 2.473
- ---------------------------------------------------------------------------
BALANCE, AUGUST 31, 1996 589,500 4.980
- ---------------------------------------------------------------------------
Granted 40,000 11.325
Exercised (165,000) 4.527
Cancelled (17,500) 4.713
- ---------------------------------------------------------------------------
BALANCE, AUGUST 31, 1997 447,000 $5.680
- ---------------------------------------------------------------------------
At August 31, 1997, 1996 and 1995, the number of shares available for grant
were 179,681, 214,230 and 350,560, respectively.
The weighted average exercise price and remaining life of the stock options
at August 31, 1997 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------
EXERCISE PRICE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
REMAINING EXERCISE EXERCISE PRICE
CONTRACTUAL LIFE PRICE
(YEARS)
<S> <C> <C> <C> <C> <C>
$4.71 - $6.60 407,000 2.52 $5.13 254,500 $5.19
$11.33 40,000 4.42 $11.33
- ---------------------------------------------------------------------------------------------------------
$4.71 - $11.33 447,000 254,500
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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 has adopted the disclosure provisions of the new standard in
fiscal 1997. The Company has continued to measure compensation cost, if any,
for its stock option plans using the intrinsic value based method of accounting
it has historically used and, therefore, the new standard has no effect on the
Company's operating results.
Had the Company used the fair-value-based method of accounting for its
stock option plans beginning in fiscal year 1996 and charged compensation cost
against income over the vesting period, net income for fiscal years 1997 and
1996 would have been reduced to the following pro forma amounts:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Net income $2,384,000 $2,023,000
Net income per share $.56 $.49
- --------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted during 1997
and 1996 was $5.59 and $2.92, respectively. The weighted average grant-date
fair value of options was determined separately for each grant under the
Company's various plans by using the fair value of each option grant on the date
of grant, utilizing the Black-Scholes option-pricing model and the following key
assumptions:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Risk-free interest rates 6.00% TO 6.35% 5.22% to 6.31%
Expected life .5 TO 5 YEARS .5 to 5 years
Expected volatility 62% 58%
Expected dividends NONE None
- --------------------------------------------------------------------------------
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
<PAGE>
contribution by the Company. During fiscal years 1997, 1996 and 1995, the
Company contributed $100,000, $96,000 and $75,000, respectively, to the plan.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF HEI, INC.:
We have audited the accompanying balance sheet of HEI, Inc. as of August 31,
1997 and 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the years ended August 31, 1997, 1996
and 1995. 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, 1997
and 1996, and the results of its operations and its cash flows for the years
ended August 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
Minneapolis, Minnesota
September 26, 1997
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.
<PAGE>
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 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.
SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
FISCAL YEAR 1997 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
Net sales $6,258 $9,197 $9,067 $6,440
Gross profit 2,383 1,629 1,528 898
Operating income 1,563 809 744 417
Net income 1,010 591 539 410
- --------------------------------------------------------------------------------
Net income per share $.24 $.14 $.13 $.10
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
NOTE:
The summation of quarterly net income per share on a primary basis for 1997 and
1996 do not equate to the calculation for the year since the quarterly
calculations are performed on a discrete basis.
CORPORATE INFORMATION
HEI INC
BOARD OF DIRECTORS
ROBERT L. BRUECK
Consultant
EUGENE W. COURTNEY
President and
<PAGE>
Chief Executive Officer
HEI, Inc.
WILLIAM R. FRANTA
Consultant
KENNETH A. SCHOEN
Executive Vice President (ret.)
3M Company
FREDERICK M. ZIMMERMAN
Professor of Manufacturing Systems Engineering
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
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
<PAGE>
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 21, 1998 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 1997 and 1996, as reported by Nasdaq.
1997 HIGH LOW
First Quarter $9-1/2 $6-3/8
Second Quarter 12 8
Third Quarter 9-1/4 4-1/4
Fourth Quarter 6 4-9/16
1996 HIGH LOW
First Quarter $6-7/8 $4-3/4
Second Quarter 6-5/8 5-1/4
<PAGE>
Third Quarter 8 5-1/2
Fourth Quarter 8 5-1/2
As of August 31, 1997, the Company had approximately 3,150 shareholders of which
approximately 490 are shareholders of record. The Company has not declared cash
dividends.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 3,458
<SECURITIES> 0
<RECEIVABLES> 2,325
<ALLOWANCES> 0
<INVENTORY> 1,575
<CURRENT-ASSETS> 17,393
<PP&E> 12,164
<DEPRECIATION> 5,558
<TOTAL-ASSETS> 24,511
<CURRENT-LIABILITIES> 2,609
<BONDS> 4,537
0
0
<COMMON> 205
<OTHER-SE> 16,790
<TOTAL-LIABILITY-AND-EQUITY> 24,511
<SALES> 30,962
<TOTAL-REVENUES> 30,962
<CGS> 24,524
<TOTAL-COSTS> 24,524
<OTHER-EXPENSES> 2,230
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 218
<INCOME-PRETAX> 3,980
<INCOME-TAX> 1,430
<INCOME-CONTINUING> 2,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,550
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
