<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
****
FORM 10-QSB
****
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended May 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
-------------
None
----
Former name, former address and former
fiscal year, if changed since last report.
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 .
-- ---
As of June 18, 1997, 4,207,476 Common Shares (par value $.05) were outstanding.
This Form 10-QSB consists of 11 pages.
<PAGE>
2
Table of Contents HEI, Inc.
- -----------------------------------------------------------
Part I - Financial Information
Item 1. Financial Statements
Balance Sheet . . . . . . . . . . .. . . . . . . . . . . . . . . 3
Statement of Operations . . . . . . . . . . . . . . . . . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 7-9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
PART 1. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS
HEI, INC.
BALANCE SHEET
- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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MAY 31, 1997 August 31, 1996
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<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $4,578 $1,186
Short-term investments 6,850 5,488
- -----------------------------------------------------------------------------------------------------
11,428 6,674
Accounts receivable, net 3,121 4,039
Inventories 2,642 1,561
Other, principally deferred tax assets 1,113 764
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Total current assets 18,304 13,038
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Property and equipment:
Land 216 216
Building and improvements 3,790 3,767
Fixtures and equipment 8,981 7,667
Accumulated depreciation (5,807) (4,868)
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Net property and equipment: 7,180 6,782
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Restricted cash 583 2,455
Deferred financing costs 139 139
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Total assets $26,206 $22,414
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $620 $354
Accounts payable 2,199 673
Accrued liabilities 1,380 1,354
Income taxes payable 105 569
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Total current liabilities 4,304 2,950
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Long-term debt 4,566 5,271
Deferred tax liability 405 377
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Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized;
none issued
Common stock, $.05 par; 10,000,000 shares authorized;
4,207,476 and 4,030,427 shares issued and outstanding 210 202
Paid-in capital 7,859 6,892
Retained earnings 8,862 6,722
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Total shareholders' equity 16,931 13,816
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Total liabilities and shareholders' equity $26,206 $22,414
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
4
HEI, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
MAY 31, 1997 June 1, 1996 MAY 31, 1997 June 1, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $9,067 $4,656 $24,522 $14,283
Cost of sales 7,539 3,563 18,982 10,885
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Gross profit 1,528 1,093 5,540 3,398
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Operating expenses:
Selling, general and administrative 579 578 1,780 1,736
Research, development and engineering 205 231 644 629
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Operating income 744 284 3,116 1,033
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Other income, net 79 58 230 211
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Income before income taxes 823 342 3,346 1,244
Income taxes 284 124 1,206 460
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Net income $539 $218 $2,140 $784
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Net income per common share $0.13 $0.05 $0.50 $0.19
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Weighted average number of common and common
equivalent shares outstanding 4,275,244 4,149,099 4,308,446 4,073,187
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
5
HEI, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
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(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
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Nine Months Ended
MAY 31, 1997 June 1, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow provided by operating activities:
Net income $2,140 $784
Depreciation and amortization 1,100 620
Allowance for doubtful accounts and inventories 137 (6)
Deferred income taxes (17) -
Changes in current operating items:
Accounts receivable 905 528
Inventories (1,205) (560)
Other current assets (304) (39)
Accounts payable 1,726 99
Accrued liabilities 26 155
Income taxes payable (464) (52)
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Net cash flow provided by operating activities 4,044 1,529
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Cash flow used for investing activities:
Purchases of short-term investments (6,437) (4,313)
Maturities of short-term investments 5,075 3,160
Additions to property and equipment (1,709) (3,556)
Proceeds from sale of property and equipment 65 -
Decrease (Increase) in restricted cash 1,872 (3,211)
Increase in deferred financing fees (54) (102)
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Net cash flow used for investing activities (1,188) (8,022)
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Cash flow provided by financing activities:
Proceeds from long-term debt - 5,625
Repayment of long-term debt (439) -
Issuance of common stock 808 648
Tax benefit of nonqualified stock options 167 -
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Net cash flow provided by financing activities 536 6,273
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Net increase (decrease) in cash and cash equivalents 3,392 (220)
Cash and cash equivalents, beginning of period 1,186 1,438
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Cash and cash equivalents, end of period $4,578 $1,218
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) HEI, INC.
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(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements have been prepared by the Company, under the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements contain all normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of such
financial statements.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented not
misleading. The year-end balance sheet data were derived from audited financial
statements, but do not include all disclosures required by generally accepted
accounting principles. These unaudited financial statements should be read in
conjunction with the financial statements and notes included in the Company's
Annual Report to Shareholders on Form 10-KSB for the year ended August 31, 1996.
Interim results of operations for the three and nine month periods ended May 31,
1997 may not necessarily be indicative of the results to be expected for the
full year.
The Company's quarterly periods end on the last Saturday of each quarter of its
fiscal year ending August 31.
(2) INVENTORIES
Inventories are stated at the lower of cost or market and include materials,
labor and overhead costs. The first-in, first-out cost method is used in
valuing inventories. Inventories consist of the following:
(Dollars in thousands) May 31, 1997 August 31, 1996
------------ ---------------
(unaudited)
Purchased parts $2,079 $1,394
Work in process 1,151 697
Finished goods 248 182
Allowance for excess or obsolete stock (836) (712)
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$2,642 $1,561
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(3) 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>
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS HEI, INC.
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FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow provided by operating activities was $4,044,000 for
the nine months ended May 31, 1997. This primarily included net income of
$2,140,000, non-cash depreciation and amortization of $1,100,000, and a net
change of $684,000 in current operating items for the first nine months of
fiscal 1997. The current operating item change included decreased accounts
receivable of $905,000 and increased accounts payable of $1,726,000, partially
offset by increased inventories of $1,205,000 and decreased income taxes payable
of $464,000.
The inventory increase is primarily due to increased purchased parts resulting
from decreased utilization of customer supplied material.
Accounts receivable average days outstanding were 34 days as of May 31, 1997
compared to 44 days for the same period a year ago. Annualized inventory turns
were 10.9 for the third quarter of fiscal 1997 compared to 5.6 turns for the
same period a year ago.
In April 1996, the Company received proceeds of $5,625,000 from the issuance of
Industrial Development Revenue Bonds. Of these funds, approximately $1,500,000
has been used for the construction of the new addition to the Company's
manufacturing facility, and the remainder will be or has been used for equipment
purchases. The bonds related to the facility expansion require annual principal
payments of $90,000 in the first year and $95,000 on April 1 of each year
thereafter through 2011. The bonds related to the purchased equipment require
payments over seven years from the date of purchase of the equipment through no
later than April 1, 2006. The bonds bear interest at a rate which varies
weekly, based on comparable tax exempt issues, and is limited to a maximum rate
of 10%. The interest rate at May 31, 1997 and August 31, 1996 was 4.57% and
3.95%, respectively. The agreement contains certain restrictive covenants
including limitations on other borrowings and maintenance of specified financial
levels and ratios for net income, tangible net worth, debt to tangible net
worth, cash flow and indebtedness. The bonds are collateralized by two
irrevocable letters of credit and essentially all of the Company's property and
equipment. Restricted cash on the balance sheet represents cash advanced under
the bonds which is held by the bond trustee in an interest bearing account and
will be released to the Company over the next three years for equipment
purchases. To the extent such funds are not expended, they will revert back to
the bond holders.
The Company has a $3,000,000 revolving line of credit which expires in April
1998. Borrowings under this agreement would be collateralized by accounts
receivable. The agreement requires compliance with certain financial covenants
and restricts obtaining other borrowings. Interest on the revolving line of
credit is, at the Company's option, based on the lender's prime rate of interest
or 2% above the lender's LIBOR rate. As of May 31, 1997, there were no
borrowings under the revolving line of credit.
Capital equipment expenditures for the nine months ended May 31, 1997 were
$1,709,000, primarily for production equipment.
During fiscal 1997, the Company intends to expend approximately $2.2 million for
capital equipment to increase manufacturing capacity to meet anticipated
requirements for continued revenue growth. It is expected that these
expenditures will be funded from multiple sources including the restricted cash
available from the Industrial Development Revenue Bonds discussed above.
<PAGE>
8
REVIEW OF OPERATIONS
NET SALES
1997 VS. 1996: HEI, Inc.'s net sales for the three and nine month periods ended
May 31, 1997 increased 95% and 72%, respectively, compared to the same periods a
year ago. Microelectronic sales increased 117% from the same three month period
last year as a result of increased shipments in the high density disk drive
business primarily due to one customer program. Shipments to this customer
reached 67% of total Company sales for the third quarter of this fiscal year and
represent 58% of total sales for the nine month period. The increase in
microelectronic sales was partially offset by the reduction in revenue due to
the sale of the light pen product line in August 1996.
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 sales. In
addition, production for one customer may conclude while production for a new
customer has not yet begun or is not yet at full volume. These factors may
result in significant fluctuations in sales from quarter to quarter.
On April 7, 1997 the Company announced that it had received notice from its
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 will be complete by the end of the
fourth quarter. The phase out is expected to result in significantly decreased
revenues and operating income relative to the past two quarters of this year
beginning the fourth quarter of fiscal 1997 and continuing through at least the
first quarter of fiscal 1998 until equivalent replacement business is secured.
GROSS PROFIT
1997 VS. 1996: For the three month and nine month periods ended May 31, 1997,
gross profit increased $435,000 and $2,142,000, respectively, from the same
periods last year. The gross profit rate for the nine months ended May 31, 1997
decreased to 23% from 24% last year. The gross profit rate for the third
quarter of fiscal 1997 was 17% versus 23% for the comparable period last year as
a result of volume pricing with lower gross margin rates for sales on a high
density disk drive program. The gross margin rates for the remainder of this
year are likely to be reduced from the third quarter as a result of the expected
phase out of the disk drive program.
OPERATING EXPENSES
1997 VS. 1996: Operating expenses for the third quarter ended May 31, 1997
decreased 3% from last year's comparable period due to the sale of the light pen
product line. Operating expenses for the nine months ended May 31, 1997
increased 2% from last year's comparable period due to increased product
development and support expenses partially offset by the sale of the light pen
product line. Operating expenses were 9% and 10% of net sales compared to 17%
for the three and nine month periods of last year. The decrease in the
percentage of net sales is primarily due to the effect of spreading fixed costs
over a higher volume of sales.
<PAGE>
9
INCOME TAXES
1997 VS. 1996: The Company records income tax expense for interim periods based
on the expected effective rate for the full year. The expected effective income
tax rate for fiscal 1997 is approximately 36% compared to the full year fiscal
1996 effective rate of 25.4%. The 1996 rate benefited from elimination of a
deferred tax asset valuation allowance. Income tax expense was $284,000 and
$1,206,000 for the three and nine month periods ended May 31, 1997 compared to
$124,000 and $460,000 for the same periods a year ago.
NET INCOME
1997 VS. 1996: The Company had net income of $539,000 and $2,140,000 for the
three and nine month periods ended May 31, 1997 compared to $218,000 and
$784,000 for the same periods a year ago. The increase in net income
principally was the result of increased sales partially offset by lower gross
profit rates in the second and third quarters.
FORWARD-LOOKING STATEMENTS
THIS 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.
<PAGE>
10
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
On April 25, 1997, the Company reported that its Board of Directors
authorized the repurchase of up to 250,000 of its common shares. The
repurchases are to be made from time to time, based upon market conditions
at the discretion of management.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27-Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended May 31,
1997.
<PAGE>
11
SIGNATURES
- ----------
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized
HEI, INC.
(Registrant)
Date: 06/18/97 /s/ Jerald H. Mortenson
- -------------------- -----------------------------------
Jerald H. Mortenson
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(a duly authorized officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 4,578
<SECURITIES> 0
<RECEIVABLES> 3,121
<ALLOWANCES> 0
<INVENTORY> 2,642
<CURRENT-ASSETS> 18,304
<PP&E> 12,987
<DEPRECIATION> 5,807
<TOTAL-ASSETS> 26,206
<CURRENT-LIABILITIES> 4,304
<BONDS> 4,566
0
0
<COMMON> 210
<OTHER-SE> 16,721
<TOTAL-LIABILITY-AND-EQUITY> 26,206
<SALES> 24,522
<TOTAL-REVENUES> 24,522
<CGS> 18,982
<TOTAL-COSTS> 18,982
<OTHER-EXPENSES> 2,019
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 3,346
<INCOME-TAX> 1,206
<INCOME-CONTINUING> 2,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,140
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
