<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
***
FORM 10-QSB
***
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended November 29, 1997.
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from ______ to ______.
Commission File Number 0-10078
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HEI, INC.
----------------------------
(Exact name of Small Business Issuer in Its Charter)
Minnesota 41-0944876
- --------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
----- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of December 16, 1997, 4,068,576
shares of common stock, par value $.05.
Transitional Small Business Disclosure Format (Check one): Yes No X .
---- -----
This Form 10-QSB consists of 11 pages.
<PAGE>
2
Table of Contents HEI, Inc.
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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
Report of Independent Accountants . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 8-10
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)
- --------------------------------------------------------------------------------
NOVEMBER 29, 1997 August 31, 1997
- --------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $3,705 $3,458
Short-term investments 9,606 9,175
- --------------------------------------------------------------------------------
13,311 12,633
Accounts receivable, net 1,271 2,325
Inventories 1,307 1,575
Other, principally deferred tax assets 796 860
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Total current assets 16,685 17,393
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Property and equipment:
Land 216 216
Building and improvements 3,866 3,790
Fixtures and equipment 8,301 8,158
Accumulated depreciation (5,901) (5,558)
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Net property and equipment 6,482 6,606
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Restricted cash 394 389
Long-term Investments 202 -
Deferred financing costs 107 123
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Total assets $23,870 $24,511
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $648 $648
Accounts payable 594 728
Accrued liabilities 1,061 1,233
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Total current liabilities 2,303 2,609
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Long-term debt 4,537 4,537
Deferred tax liability 325 370
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Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized;
none issued
Common stock, $.05 par; 10,000,000 shares
authorized; 4,068,576 and 4,103,176 shares
issued and outstanding 203 205
Paid-in capital 7,334 7,518
Retained earnings 9,168 9,272
- --------------------------------------------------------------------------------
Total shareholders' equity 16,705 16,995
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $23,870 $24,511
- --------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements.
<PAGE>
4
HEI, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Three Months Ended
NOV. 29, 1997 Nov. 30, 1996
- --------------------------------------------------------------------------------
Net sales $4,080 $6,258
Cost of sales 3,543 3,875
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Gross profit 537 2,383
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Operating expenses:
Selling, general and administrative 635 607
Research, development and engineering 168 213
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Operating income (loss) (266) 1,563
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Other income, principally interest income (107) (57)
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Income (Loss) before income taxes (159) 1,620
Income taxes (benefit) (55) 610
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Net income (loss) ($104) $1,010
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Net income (loss) per common share ($0.03) $0.24
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Weighted average number of common and common
equivalent shares outstanding 4,099,532 4,259,846
- --------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements.
<PAGE>
5
HEI, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
Three Months Ended
NOVEMBER 29, 1997 November 30, 1996
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Cash flow provided by operating activities:
Net income (loss) ($104) $1,010
Depreciation 343 329
Amortization 16 19
Accounts receivable and inventory allowances 59 53
Deferred income tax expense (benefit) (85) (67)
Changes in current operating items:
Accounts receivable 1,054 681
Inventories 209 (519)
Other current assets 40 (41)
Accounts payable (134) 762
Accrued liabilities (172) 76
Income taxes payable 0 237
- --------------------------------------------------------------------------------
Net cash flow provided by operating activities 1,226 2,540
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Cash flow used for investing activities:
Purchases of short-term investments (3,256) (2,393)
Maturities of short-term investments 2,825 1,720
Additions to property and equipment (219) (607)
Purchases of long-term investments (202) (1,036)
Proceeds on sales of product lines 64 17
(Increase) Decrease in restricted cash (5) 574
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Net cash flow used for investing activities (793) (1,725)
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Cash flow provided by (used for) financing activities:
Issuance of common stock - 158
Repurchase of common shares (186) -
- --------------------------------------------------------------------------------
Net cash flow provided by (used for) financing
activities (186) 158
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Net increase in cash and cash equivalents 247 973
Cash and cash equivalents, beginning of period 3,458 1,186
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Cash and cash equivalents, end of period $3,705 $2,159
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------------------------------------
Interest paid $54 $54
Income taxes paid 0 440
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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 was derived from audited financial
statements, but does 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, 1997.
Interim results of operations for the three month period ended November 29, 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) November 29, 1997 August 31, 1997
----------------- ---------------
(unaudited)
Purchased parts $1,167 $1,557
Work in process 863 556
Finished goods 94 220
Allowance for excess or obsolete stock (817) (758)
---- ----
$1,307 $1,575
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(3) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) 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 (loss) 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
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF HEI, INC.:
We have reviewed the accompanying balance sheet of HEI, Inc. as of November 29,
1997, and the related statements of operations and cash flows for the
three-month periods ended November 29, 1997 and November 30, 1996. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of August 31, 1997, and the related statements
of operations and cash flows for the year then ended (not presented herein); and
in our report dated September 26, 1997, we expressed an unqualified opinion on
those financial statements. In our opinion, the information set forth in the
accompanying balance sheet as of August 31, 1997, is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
December 12, 1997
<PAGE>
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS HEI, INC.
----------------------------------------------------------------------
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow provided by operating activities was $1,226,000 for
the three months ended November 29, 1997. This included a net loss of $104,000,
non-cash depreciation and amortization of $359,000, and a net reduction of
$997,000 in current operating items for the first three months of fiscal 1997.
The current operating item reduction included decreased accounts receivable of
$1,054,000 due to reduced sales in the three month period ended November 29,
1997 as compared to the three month period ended August 31, 1997.
Accounts receivable average days outstanding were 31 days as of November 29,
1997 compared to 45 days for the same period a year ago. Inventory turns were
9.7 for the first three months of fiscal 1998 compared to 8.5 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 approximately $3,864,000 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 and in April 1998, another $648,000 is expected
to be repaid. 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 November 29, 1997 and August 31, 1997 was 4.30% and 3.75%,
respectively. The bonds are collateralized by two irrevocable letters of credit
and essentially all of the Company's property and equipment. The letter of
credit reimbursement agreement, as amended on November 27, 1997, 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.
The Company has a $3,000,000 revolving line of credit which expires in April
1998. As of November 29, 1997, there were no borrowings under the amended
revolving line of credit. Any borrowings under this agreement would be
collateralized by the Company's accounts receivable. The agreement requires
compliance with certain financial covenants and restricts obtaining other
borrowings. Interest on the revolving line of credit is based, at the Company's
option, on the lender's prime rate of interest or 2% above the lender's LIBOR
rate.
Capital equipment expenditures for the three months ended November 29, 1997 were
$219,000, primarily for production equipment.
During fiscal 1998, the Company intends to expend approximately $1.4 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 primarily from internally generated funds and the
remaining funds available from the Industrial Development Revenue Bonds
discussed above.
<PAGE>
9
REVIEW OF OPERATIONS
NET SALES
1998 VS. 1997: HEI, Inc.'s net sales for the three months ended November 29,
1997 decreased 35%, compared to the same period a year ago reflecting the phase
out in the last quarter of fiscal 1997 of volume production of a device for use
in high density disk drives.
Because the Company's sales 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.
GROSS PROFIT
1998 VS. 1997: For the three months ended November 29, 1997, gross profit
decreased $1,846,000 from last year, and the gross profit rate decreased to 13%
from 38% last year. The decreased gross profit rate primarily reflects the
impact of the first quarter in over a year without a significant contribution
from the disk drive market. Last year's gross profit rate, at 38%, was
relatively high due to the impact of products shipped utilizing customer
supplied materials.
OPERATING EXPENSES
1998 VS. 1997: Operating expenses for the three month period ended November 29,
1997 decreased slightly from last year's comparable period. The decrease in
research, development and engineering expenses was primarily due to reduced
payroll costs. Operating expenses were 20% of net sales compared to 13% for the
first quarter of last year. The increase in the percentage to net sales is
primarily due to the effect of lower sales on fixed costs.
INCOME TAXES (BENEFIT)
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 1998 is approximately 35% compared to 36% for fiscal 1997. Income tax
benefit for the first quarter of fiscal 1998 was $55,000 as compared to income
tax expense of $610,000 for the same period a year ago.
NET INCOME (LOSS)
1998 VS. 1997: The Company had a net loss of $104,000 for the first quarter of
fiscal 1998 compared to net income of $1,010,000 for the same period a year ago.
The net loss was principally the result of decreased sales and lower gross
profit margins.
<PAGE>
10
FORWARD-LOOKING INFORMATION
INFORMATION IN THIS DOCUMENT WHICH IS NOT HISTORICAL INCLUDES FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE MADE BASED ON THE COMPANY'S
CURRENT ASSUMPTIONS REGARDING TECHNOLOGY, MARKETS, GROWTH AND EARNINGS
EXPECTATIONS, AND ALL OF SUCH FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES. THERE ARE CERTAIN IMPORTANT FACTORS THAT CAN CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
INCLUDING WITHOUT LIMITATION, ADVERSE BUSINESS OR MARKET CONDITIONS, THE ABILITY
OF THE COMPANY TO SECURE AND SATISFY CUSTOMERS, THE AVAILABILITY AND COST OF
MATERIALS FROM HEI'S SUPPLIERS, ADVERSE COMPETITIVE DEVELOPMENTS AND CHANGE IN
OR CANCELLATION OF CUSTOMER REQUIREMENTS. FOR FURTHER DISCUSSION OF FACTORS
THAT MAY INFLUENCE THE COMPANY'S OPERATING RESULTS, PLEASE REFER TO THE
COMPANY'S REPORT ON FORM 10-KSB FOR THE YEAR ENDED AUGUST 31, 1997, AND OTHER
COMPANY 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.
PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 15 Letter Regarding Unaudited Interim Information
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
November 29, 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: 01/12/98 /s/ Jerald H. Mortenson
--------------- -----------------------------------
Jerald H. Mortenson
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(a duly authorized officer)
<PAGE>
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated December 12, 1997 on our reviews of interim
financial information of HEI, Inc. (the Company) for the three-month periods
ended November 29, 1997 and November 30, 1996, and included in the Company's
Form 10-QSB for the quarter ended November 29, 1997, is incorporated by
reference in the Company's registration statements on Form S-8 (Registration
Nos. 33-33322, 33-46928 and 33-46929). Pursuant to Rule 436 (c), under the
Securities Act of 1993, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
January 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-29-1997
<CASH> 3,705
<SECURITIES> 0
<RECEIVABLES> 1,271
<ALLOWANCES> 0
<INVENTORY> 1,307
<CURRENT-ASSETS> 16,685
<PP&E> 12,383
<DEPRECIATION> 5,901
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<BONDS> 4,537
0
0
<COMMON> 203
<OTHER-SE> 16,502
<TOTAL-LIABILITY-AND-EQUITY> 23,870
<SALES> 4,080
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<OTHER-EXPENSES> 642
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<INCOME-TAX> (55)
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