<PAGE>
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, 1998.
[ ] 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)
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, 1998 were $20,805,000.
The aggregate market value as of November 23, 1998 (based on the closing price
as reported by The Nasdaq National Market) of the voting stock held by
non-affiliates was approximately $21,000,000.
As of November 23, 1998, 4,095,195 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, 1998 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 20, 1999 are incorporated by reference into 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 the hearing, medical,
telecommunications and industrial 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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Customer 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
Customer A 59% 27% 38%
Customer B 14%
Customer C 55% 16%
Customer D 10%
</TABLE>
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
$852,000 and $843,000 for the years ended August 31, 1998 and 1997,
respectively.
Employees - At August 31, 1998, the Company employed approximately 130
persons of which one was part-time.
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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.
Item 3. LEGAL PROCEEDINGS
As of November 23, 1998 there are no legal proceedings pending against the
Company or its properties.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On August 4, 1998, a special meeting of shareholders was held. Matters voted on,
total number of votes cast and votes for were as follows:
1. Removal of incumbent Directors.
<TABLE>
<CAPTION>
In Favor of Removal Against/Abstain Total
------------------- --------------- ---------
<S> <C> <C> <C>
William R. Franta 2,149,306 1,381,578 3,530,884
Robert L. Brueck 2,149,206 1,381,678 3,530,884
Frederick M. Zimmerman 2,149,206 1,381,678 3,530,884
</TABLE>
2. Election of Directors.
<TABLE>
<CAPTION>
In Favor Withheld Total
--------- -------- ---------
<S> <C> <C> <C>
David W. Ortlieb 2,080,133 17,464 2,097,597
Anthony J. Fant 2,080,026 17,571 2,097,597
Edwin W. Finch, III 2,079,776 17,821 2,097,597
Steve E. Tondera, Jr. 2,079,776 17,821 2,097,597
Robert L. Brueck 1,363,051 70,236 1,433,287
William R. Franta 1,363,051 70,236 1,433,287
Frederick M. Zimmerman 1,362,451 70,836 1,433,287
</TABLE>
3. Approval of an amendment to the Company's Bylaws to opt out of the
Minnesota Control Share Acquisition Statute (2,203,392 for, 1,302,899
against, 24,593 abstain and 3,530,884 total).
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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.
The Company has a limited market risk in terms of the variability of the
interest rate on its Industrial Development Revenue Bonds. The bonds bear
interest at a rate which varies weekly, based on comparative tax exempt issues,
and is limited to a maximum of 10%.
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:
<TABLE>
<CAPTION>
Page in
Annual Report:
-------------
<S> <C>
Balance Sheets as of August 31, 1998 and 1997 9
Statements of Operations for the Years Ended
August 31, 1998, 1997 and 1996 10
Statements of Changes in Shareholders' Equity
for the Years Ended August 31, 1998, 1997 and 1996 11
Statements of Cash Flows for the Years Ended
August 31, 1998, 1997 and 1996 12
Notes to Financial Statements 13-17
Report of KPMG Peat Marwick LLP 18
</TABLE>
The Report of PricewaterhouseCoopers LLP is filed herewith as an exhibit.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by Item 8 is incorporated by reference from the Proxy
Statement on page 21.
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 "Item No. 1 Election of Directors" and is
incorporated herein by reference.
The following is a list of HEI, Inc. executive officers, their ages, positions
and offices as of November 23, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ---------
<S> <C> <C>
Anthony J. Fant 38 Chief Executive Officer
Donald R. Reynolds 40 President
Jerald H. Mortenson 64 Vice President of Finance and Administration, Chief Financial
Officer and Treasurer
Dale A. Nordquist 44 Vice President of Sales and Marketing
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BUSINESS EXPERIENCE
ANTHONY J. FANT became Chief Executive Officer of the Company in November 1998.
Mr. Fant has been a director, President and Chief Executive Officer of Fant
Broadcasting Company (including, for these purposes, various affiliated
companies engaged primarily in television and radio broadcasting) since 1986.
From 1986 to 1996, Fant Broadcasting Company acquired, built or managed a number
of television and radio stations. From 1993 to 1996, a total of eight television
and radio properties were purchased in seven states. Each of the eight
properties have been sold for aggregate proceeds in excess of $53 million. Mr.
Fant currently owns a number of businesses in diverse industries.
DONALD R. REYNOLDS joined the Company in March 1998 as Executive Vice President
and was appointed President in April 1998. Before joining the Company, he was
employed with BF Goodrich Aerospace in senior executive positions in product
engineering, marketing and business unit management, and most recently as
Business Unit Director for a business unit having approximately $30 million in
revenues. This business unit designed and manufactured high technology products
(sensors, electronics, software) for the aerospace industry.
JERALD H. MORTENSON joined the Company in March 1990. Before joining the Company
he was employed for 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 in July 1981 as Western Regional Manager.
He has served as Vice President of Sales and Marketing since December 1986.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by Item 10 is contained in the Proxy Statement under
the captions "Executive Compensation" and "Item No. 1 Election of Directors" and
is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 11 is contained in the Proxy Statement under
the caption "Shares and Principal Shareholders" and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 12 is contained in the Proxy Statement and is
incorporated herein by reference under the caption "Executive Officers and
Executive Compensation - Change in Control Agreements".
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, 1998.
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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/ Anthony J. Fant
----------------------------------------
Anthony J. Fant, Chief Executive Officer
Date: November 25, 1998
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/ Anthony J. Fant November 25, 1998
- ---------------------------------------------- -----------------
Anthony J. Fant, Chairman Date
/s/ Jerald H. Mortenson November 25, 1998
- ---------------------------------------------- -----------------
Jerald H. Mortenson, Vice President of Finance Date
and Administration, Chief Financial Officer and
Treasurer
/s/ Craig E. Roble November 25, 1998
- ---------------------------------------------- -----------------
Craig E. Roble, Company Controller Date
/s/ Eugene W. Courtney November 25, 1998
- ---------------------------------------------- -----------------
Eugene W. Courtney, Director Date
/s/ Edwin W. Finch, III November 25, 1998
- ---------------------------------------------- -----------------
Edwin W. Finch, Director Date
/s/ David W. Ortlieb November 25, 1998
- ---------------------------------------------- -----------------
David W. Ortlieb, Director Date
/s/ Steve E. Tondera, Jr. November 25,1998
- ---------------------------------------------- -----------------
Steve E. Tondera, Jr., Director Date
/s/ Mack V. Traynor, III November 25,1998
- ---------------------------------------------- -----------------
Mack V. Traynor, III, Director Date
</TABLE>
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EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Page Number or
Incorporated by
Exhibit Number Description Reference
- -------------- ----------- ---------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended. Note 1
3.2+ Bylaws, as amended.
4.1a+ Credit Agreement with Norwest Bank Minnesota, N.A. dated May 14, 1998.
4.1b+ Current Note with Norwest Bank Minnesota, N.A. dated May 14, 1998.
4.2a Reimbursement Agreement by and between HEI, Inc. and Norwest Bank Note 2
Minnesota, N.A. dated April 1, 1996.
4.2b Mortgage Security Agreement Fixture Financing Statement and Assignment Note 2
of Leases and Rents by HEI, Inc. as Mortgagor to Norwest Bank
Minnesota, N.A. as Mortgagee dated April 1, 1996.
4.2c Security Agreement by HEI, Inc. in favor of Norwest Bank Minnesota, Note 2
N.A. dated April 1, 1996.
10.1 Form of Indemnification Agreement between HEI and officers and Note 3
directors.
*10.2 HEI 1989 Omnibus Stock Compensation Plan adopted April 3, 1989, as Note 4
amended to date.
*10.3 1991 Stock Option Plan for Non-employee Directors, as amended to date. Note 5
*10.4+ 1998 Stock Option Plan adopted November 18, 1998.
*10.5+ 1998 Stock Option Plan for Non-employee Directors adopted
November 18, 1998.
*10.6 Form of Agreement regarding Employment/Compensation upon change in Note 5
control with Messrs. Mortenson, Nordquist and Reynolds.
*10.7+ Agreement regarding Employment/Compensation upon change in control with
Mr. Courtney, dated November 20, 1998.
13+ Annual Report to Shareholders for the year ended August 31, 1998.
15 Report of PricewaterhouseCoopers LLP.
23 Consent of KPMG Peat Marwick LLP.
24 Consent of PricewaterhouseCoopers LLP.
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 Form 10-QSB for the quarter ended June 1,
1996, and incorporated herein by reference.
[3] Filed as an exhibit to Registration Statement on Form S-2 (SEC no.
33-37285) filed October 15, 1990, and incorporated herein by
reference.
[4] Filed as an exhibit to Annual Report on Form 10-KSB for the year
ended August 31, 1996 and incorporated herein by reference.
[5] Filed as an exhibit to Annual Report on Form 10-KSB for the year
ended August 31, 1997 and incorporated herein by reference.
* Denotes management contract or compensation plan or arrangement.
+ Filed herewith.
8
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Exhibit 3.2
BYLAWS OF HEI, INC.
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
<PAGE>
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 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
2
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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 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.
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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 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,
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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.
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
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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 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.
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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.
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
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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.
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
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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.
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;
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(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;
(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
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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, 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
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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
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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ARTICLE XII
CONTROL SHARE ACT
Section 12.01. The provisions of Section 302A.671 of the Minnesota
Business Corporation Act shall not apply to control share acquisitions of shares
of this corporation.
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Exhibit 4.1a
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of the 14 day of May, 1998, and is by
and between HEI, INC., a Minnesota corporation with offices located in Victoria,
Minnesota (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a
national banking association with offices located in Wayzata, Minnesota (the
"Bank").
RECITALS:
WHEREAS, the Borrower desires to renew its revolving credit line in the
principal amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) (the
"Credit") for working capital purposes; and,
WHEREAS, the Bank is willing to make the Credit available to the
Borrower subject to the provisions of this Credit Agreement, which shall replace
any prior Credit Agreements between the Borrower and the Bank.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein, the parties agree as follows:
SECTION 1 Definitions
1.1 In addition to those terms defined in the above recitals, as used herein:
"Acceptable Accounts Receivable" shall mean Borrower's accounts
receivable which are: (i) less than ninety (90) days in age; (ii) not part of an
account, ten percent (10.0%) or more of which is ninety (90) days past due;
(iii) not subject to offset or dispute; (iv) not due from the U.S. Government,
foreign entities (unless supported by letters of credit or from those entities
listed on Exhibit A hereto), Subsidiaries or affiliates of the Borrower; and (v)
not representing booked but unfilled orders.
"Agreement" shall mean this Credit Agreement and all amendments and
supplements hereto which may from time to time become effective hereafter in
accordance with the terms hereof.
"Business Day" shall mean a day on which banks are generally open for
business in Wayzata, Minnesota.
"Base Rate" shall mean the "base" or "prime" rate of interest as
announced by Norwest Bank Minnesota, National Association, at its principal
office located in Minneapolis, Minnesota, as in effect from time to time.
"Borrowed Money" shall mean funds obtained by incurring contractual
indebtedness and shall not include trade accounts payable or money borrowed from
the Bank.
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"Borrowing Base" shall mean 80% of Acceptable Accounts Receivable,
except that Acceptable Accounts Receivable from those entities listed on Exhibit
A shall be included at a 65% rate.
"Borrowing Base Certificate" shall mean a schedule of Borrower's
accounts receivable and Acceptable Accounts Receivable, which certificate is
prepared and furnished to Bank pursuant to Sections 2.1 and 3.2(C), and which is
executed by an authorized officer of Borrower.
"Cash Flow" shall mean, for the fiscal year of the Borrower, the
aggregate amount of the following items properly shown on its year-end income
statement, determined in accordance with generally accepted accounting
principles consistently applied: (i) net income after taxes; (ii) amortization
expense; (iii) depreciation and depletion expense; (iv) deferred tax expense;
and (v) similar types of noncash charges against income which the Bank
determines, in its reasonable discretion, to be appropriate "add-backs."
"Closing Date" shall mean the date on which documents are signed.
"Collateral Documents" mean all those certain documents specified in
Sections 4.1 through 4.5.
"Credit" shall mean the conditional revolving credit line established
hereby, which shall not in any event exceed the aggregate principal amount of
THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) outstanding at any one time.
"Current Maturities of Long-Term Debt" shall mean that portion of the
Borrower's "Long-Term Debt" that matures or that is scheduled to be paid during
the current fiscal year of the Borrower. For the purposes of this definition,
"Long-Term Debt" shall mean the following: (i) the aggregate amount of the
Borrower's liabilities properly shown as non-current liabilities on its balance
sheet, determined in accordance with generally accepted accounting principles
consistently applied, as of the last day of its preceding fiscal year; and (ii)
any new liabilities of the Borrower incurred during its current fiscal year
that, in accordance with generally accepted accounting principles consistently
applied, should be shown as non-current liabilities on its balance sheet at
fiscal year-end.
"Current Note" shall mean the promissory Current Note of the Borrower
substantially in the form of attached Exhibit B, evidencing borrowings under
Section 2.1 hereof.
"Events of Default" shall mean any and all events of default described
in Section 8 hereof.
"Indebtedness" shall mean, as to the Borrower, or any Subsidiary, all
items of indebtedness, obligation or liability, whether matured or unmatured,
liquidated or unliquidated, direct or contingent, joint or several.
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"Interest Period" shall mean, relative to any LIBOR Rate election, the
period which shall begin on (and include) the date on which such election is
effective or continued and, unless the maturity of the Current Note is
accelerated, shall end on (but exclude) a day which is 30, 60 or 90 days
thereafter, provided, however, that:
A. If such Interest Period would otherwise end on a day which
is not a Banking Day, such Interest Period shall end on the next
following banking day; or
B. The Borrower may not select, and there shall not be
applicable, any Interest Period that would end later than the Maturity
Date.
"LIBOR Rate" shall mean the average rate per annum (rounded up to the
nearest one-sixteenth of one percent) of which U.S. Dollar deposits are offered
to Norwest in the London Interbank Market with a term equal to the applicable
Interest Period, in an amount equal to the outstanding principal balance of the
Current Note.
"Maturity Date" shall mean January 31, 1999.
"Permitted Liens" shall mean:
A. Liens in favor of the Bank or in favor of U.S. Bank Trust,
National Association, (f/k/a First Trust National Association), as
Trustee.
B. Existing liens disclosed to the Bank in writing prior to
the date of this Agreement;
C. Liens for taxes not delinquent or which Borrower is
contesting in good faith; and
D. Purchase money liens.
E. Other liens, or aggregate sum of liens, securing
obligations not to exceed $500,000.00 in any fiscal year.
"Security Agreement" shall mean the security agreement pursuant to
which, among other things, Borrower grants Bank a security interest in the
accounts receivable of the Borrower.
"Subsidiary" shall mean any corporation of which more than fifty
percent (50%) of the outstanding voting securities shall, at the time of
determination, be owned directly, or indirectly through one or more
intermediaries, by the Borrower.
"Tangible Net Worth" shall mean the sum of the contributed capital,
surplus and undivided profits of the Borrower, less any amounts attributable to
treasury stock, good will, patents, copyrights, mailing lists, catalogues,
trademarks, bond discount and underwriting expenses, organization expenses,
leasehold improvements and loans to officers or employees and other like
intangibles (not including prepaid expenses classified as current assets or
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intangible assets offset by equal related liabilities), all as determined in
accordance with generally accepted accounting principles.
1.2 Computation of Time Periods. In this Agreement in the computation of periods
of time from a specified date to a later specified date, the word "from" means
"from and including" and the words "to" and "until" each means "to but
excluding."
1.3 Accounting Terms. All accounting terms not specifically defined herein shall
be construed in accordance with generally accepted accounting principles
consistent with those applied in the preparation of the financial statements
referred to in Section 5.6.
SECTION 2 The Loan
2.1 Credit. Subject to the other provisions of this Agreement, the Bank agrees
to lend to the Borrower from time to time from the effective date hereof until
the Maturity Date sums not to exceed the lesser of the Borrowing Base or THREE
MILLION AND NO/100 DOLLARS ($3,000,000) in aggregate principal amount at any one
time outstanding. Each borrowing under this Section 2.1 will be requested in
writing or in person by an authorized officer of the Borrower, or telephonically
by any person reasonably believed by the Bank to be an authorized officer of the
Borrower. Each borrowing under this Section 2.1 will be evidenced by a notation
on the Bank's records, which shall be conclusive evidence of such borrowing, and
by the Current Note. The officer making the request must present the Bank with
its most current Borrowing Base Certificate. Within the limits of the Credit and
subject to the terms and conditions hereof, the Borrower may borrow, prepay
pursuant to Section 2.6 hereof and reborn pursuant to this Section 2.1.
2.2 Interest Rate: Upon two business days prior notice (before the end of the
applicable Interest Period for a prior LIBOR Rate election) Borrower may elect
or convert all or a portion of its outstanding balance under the Credit to one
of the following interest rates:
A. Base Rate Option. Interest on the unpaid principal of the
Current Note shall be calculated at an annual rate equal to the Base
Rate in effect from time, to time, which rate shall change as and when
the Base Rate changes, on the basis of the actual number of days
elapsed in a year of 360 days, and shall change as and when the Base
Rate changes.
B. LIBOR Rate Option. Subject to the terms and conditions of
this Agreement, the Borrower may elect that the principal balance
outstanding under the Current Note in increments of $100,000.00 bear
interest at an annual rate equal to two hundred (200) basis points
(2.0%) in excess of the LIBOR Rate as determined as of approximately
11:00 A. M., London time, two business days before the beginning of the
Interest Period selected by the Borrower.
If two business days prior to the end of an Interest Period, Borrower does not
elect a new interest rate option, then the Base Rate Option shall apply.
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2.3 Interest Payment. Interest on the Current Note shall be payable monthly,
commencing April 30, 1998, and continuing on the same day of each succeeding
month until the Current Note is paid; provided, however, if a LIBOR Rate Option
has been selected, then interest shall be due and payable at the end of each
Interest Period.
2.4 Principal Repayment. The principal of the Current Note shall be repayable on
the Maturity Date.
2.5 Prepayment. The Borrower may at any time prepay the Current Note in whole or
from time to time in part without premium or penalty.
2.6 Mandatory Prepayment. The Borrower shall be required to make prepayments of
amounts due under the Current Note at any time the aggregate amount of borrowing
outstanding is found to exceed the Borrowing Base. Such required prepayments
shall be in an amount equal to the difference between borrowings outstanding and
the Borrowing Base.
2.7 Sums Payable. All sums payable to the Bank hereunder shall be paid directly
to the Bank in immediately available funds. The Bank shall send the Borrower
statements of all amounts due hereunder, which statements shall be considered
correct and conclusively binding on the Borrower unless the Borrower notifies
the Bank to the contrary within ninety days of its receipt of any statement
which it deems to be incorrect. Alternatively, at its sole discretion, the Bank
may charge against any deposit account of the Borrower all or any part of any
amount due hereunder.
SECTION 3 Conditions Precedent
3.1 The Borrower shall deliver the following to the Bank on or before the
Closing Date:
A. The Current Note, duly executed by Borrower.
3.2 The Bank shall not be obligated to lend hereunder on the occasion for any
borrowing unless:
A. The representations and warranties contained in Section 5
hereof are true and accurate on and as of such date;
B. No Event of Default, and no event which might become an
Event of Default after the lapse of time or the giving of notice and
the lapse of time, has occurred and is continuing or will exist upon
the disbursement of such loan; and,
C. The Borrower shall have delivered to the Bank a Borrowing
Base Certificate as provided in Section 2.1 hereof, and a certification
by an appropriate officer of the Borrower as to the matters set forth
in Sections 3.2(A) and 3.2(B) hereof.
SECTION 4 Security
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4.1 Security Interest. To secure the Current Note and the performance of its
additional obligations as set forth hereunder, the Borrower has executed and
delivered to the Bank before the Closing Date the Security Agreement and
financing statements, in form and substance satisfactory to the Bank, granting
to the Bank a first security interest in accounts receivable, now owned or
hereafter acquired.
4.2 Deposit Accounts. As additional security for the prompt satisfaction of all
obligations of Borrower under the Current Note and Security Agreement, the
Borrower hereby assigns, transfers and sets over to the Bank all of its right,
title and interest in and to, and grants the Bank a lien on and a security
interest in, all amounts that may be owing from time to time by the Bank to the
Borrower in any capacity, including, but without limitation, any balance or
share belonging to the Borrower, of any deposit or other account with the Bank,
which lien and security interest shall be independent of any right of set-off
which the Bank may have.
4.3 Collateral. The property in which a security interest is granted pursuant to
the provisions of Sections 4.1 and 4.2 is herein collectively called the
"Collateral". The Collateral, together with all of the Borrower's other property
of any kind held by the Bank, shall stand as one general, continuing collateral
security for all Indebtedness to the Bank and may be retained by the Bank until
all Indebtedness owed to the Bank has been paid in full.
4.4 Additional Documents. At any time requested by the Bank, the Borrower shall
execute and deliver or cause to be executed and delivered to the Bank such
additional documents as the Bank may consider to be necessary or desirable to
evidence or perfect the security interests referred to in Section 4.1 hereof.
4.5 Liens. The foregoing liens shall be first and prior liens except for
Permitted Liens.
SECTION 5 Representations and Warranties
To induce the Bank to enter into this Agreement, the Borrower
represents and warrants to the Bank as follows:
5.1 Corporate Status. The Borrower is a corporation duly organized, existing and
in good standing under the laws of the State of Minnesota.
5.2 Authority. The execution, delivery and performance of this Agreement, the
Current Note and Security Agreement by the Borrower are within its corporate
powers, have been duly authorized, and are not in contravention of law, or the
terms of Borrower's Articles of Incorporation or by-laws or of any undertaking
to which the Borrower is a party or by which it is bound.
5.3 Consent. No consent, approval or authorization of or declaration or filing
with any governmental authority on the part of the Borrower is required in
connection with the execution and delivery of this Agreement or the borrowings
by the Borrower hereunder or on the part of the Borrower in connection with the
consummation of any transaction contemplated hereby.
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5.4 Liens. The property of the Borrower is not subject to any lien except
Permitted Liens.
5.5 Litigation. No litigation or governmental proceeding is pending or, to the
knowledge of the officers of the Borrower, threatened against the Borrower which
could have a material adverse effect on the Borrower's financial condition or
business, except as previously disclosed to the Bank.
5.6 Financial Statements. All financial statements delivered to Bank by or on
behalf of Borrower, including any schedules and notes pertaining thereto, have
been prepared in accordance with generally accepted accounting principles
consistently applied, and fully and fairly present the financial condition of
the Borrower at the dates thereof and the results of operations for the periods
covered thereby. There have been no material adverse changes in the consolidated
financial condition or business of the Borrower from February 28, 1998 to the
date hereof, except as previously disclosed to the Bank.
5.7 Licenses. The Borrower possesses adequate licenses, permits, franchises,
patents, copyrights, trademarks and trade names, or rights thereto, to conduct
its business substantially as now conducted and as presently proposed to be
conducted.
5.8 ERISA. The Borrower does not have any unfunded liabilities in any pension
plan, as such terms is defined in the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import ("ERISA"),
together with the regulations thereunder. As used in this section, "unfunded
liabilities" means with regard to any plan, the excess of the current value of
the plan's benefits guaranteed under ERISA over the current value of the plan's
assets allocable to such benefits.
5.9 Environmental. The Borrower has obtained all permits, licenses and other
authorizations which are required under federal, state and/or local laws
("Environmental Laws") relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, hazardous or toxic materials or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Matters"). The Borrower is in compliance in
all material respects with all terms and conditions of such required permits,
licenses and authorizations and is also in compliance, in all material respects,
with all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in the
Environmental Laws or contained in any plan, order, decree, judgment or notice.
The Borrower is not aware of, nor has the Borrower received notice of, any
events, conditions, circumstances, activities, practices, incidents, actions or
plans which may interfere with or prevent continued compliance or which may give
rise to any liability under any Environmental Laws or the common law. The
Borrower has not received any summons, citation, directive, letter or other
communication, written or oral, from any agency or department of any state,
federal or local government relating to any Environmental Matters or any alleged
Environmental Matters. No investigation, administrative order, consent order and
agreement, litigation or settlement with respect to any Environmental Matters or
any alleged
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Environmental Matters has been received by the Borrower or is proposed,
threatened, anticipated or in existence with respect to the Borrower.
5.10 Validity. This Agreement is, and the Current Note when issued will be,
valid and binding in accordance with their terms.
5.11 Good Standing. The Borrower is duly qualified to do business and is in good
standing in any additional jurisdictions where, on advice of legal counsel,
registration was deemed necessary.
5.12 Default. The Borrower is not in default of a material provision under any
material agreement, instrument, decree or order to which it is a party or by
which it or its property is bound or affected.
SECTION 6 Affirmative Covenants
The Borrower covenants and agrees that so long as any indebtedness
remains outstanding to the Bank, unless the Bank shall otherwise consent in
writing, it will:
6.1 Taxes. Pay, when due, all taxes assessed against it or its property except
to the extent and so long as contested in good faith.
6.2 Corporate Existence. Maintain its corporate existence and comply with all
laws and regulations applicable thereto.
6.3 Reports. Furnish to the Bank:
A. Within 90 days after the end of each fiscal year of the
Borrower a detailed report of audit of the Borrower for such fiscal
year including the balance sheet of the Borrower as of the end of such
fiscal year and the statements of profit and loss and surplus of the
Borrower for the fiscal year then ended, prepared by independent
certified public accountants satisfactory to the Bank.
B. Within 30 days after the end of each quarter, or month if
there are outstanding borrowings under the Credit, (i) the balance
sheet of the Borrower as of the end of such quarter or month, (ii) the
statement of profit and loss and surplus of the Borrower from the
beginning of such fiscal year to the end of such quarter or month,
(iii) an aged listing of Borrower's accounts receivable, and (iv) a
Borrowing Base Certificate current through the end of the previous
quarter or month, all in a form acceptable to Bank. All of the
foregoing shall be unaudited, but certified as correct (subject to year
end adjustments) by an appropriate officer of the Borrower.
C. No later than 30 days prior to the beginning of each fiscal
year, projected financial statements in form acceptable to the Bank.
D. Annually, within 90 days after the end of each fiscal
year, a listing of Borrower's existing equipment, in a form acceptable
to the Bank.
8
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E. Promptly upon knowledge thereof, notice to the Bank in
writing of the occurrence of any event which has or might, after the
lapse of time or the giving of notice and the lapse of time, become an
Event of Default.
F. Promptly, such other information as the Bank may reasonably
request.
6.4 Maintenance of Property. Maintain its inventory, equipment, real estate and
other properties in good condition and repair (normal wear and tear excepted),
and pay and discharge or cause to be paid and discharged when due, the cost of
repairs to or maintenance of the same, and pay or cause to be paid all rental or
mortgage payments due on such real estate.
6.5 Insurance. Cause its properties of an insurable nature to be adequately
insured by reputable and solvent insurance companies against loss or damages
customarily insured against by persons operating similar properties, and
similarly situated, and carry such other insurance as usually carried by persons
engaged in the same or similar businesses and similarly situated.
6.6 Records. Keep true, complete and accurate books, records and accounts in
accordance with generally accepted accounting principles consistently applied.
6.7 Inspection. Permit any of Bank's duly authorized employees or agents the
right, at any reasonable time and from time to time, to visit and inspect the
properties of Borrower and to examine and take abstracts from its books and
records.
6.8 Compliance. Continue to conduct the same general type of business as is now
being carried on in compliance with all applicable statutes, laws, rules and
regulations.
6.9 Collateral Audits. Permit the Bank, at its discretion, to conduct annual
collateral audits, the cost for shall be paid by the Bank.
6.10 Primary Depository. Maintain its primary deposit accounts with the Bank.
SECTION 7 Negative Covenants
Without the Bank's written consent, so long as any indebtedness remains
outstanding under the Credit or any other obligation to the Bank, the Borrower
will not:
7.1 Liens. Permit any lien or aggregate sum of liens in excess of $500,000.00
including, without limitation, any pledge, assignment, mortgage, title retaining
contract or other type of security interest to exist on its property, real or
personal, except Permitted Liens.
7.2 Merger. Enter into any transaction of merger or consolidation, or transfer,
sell, assign, lease or otherwise dispose of (other than sales in the ordinary
course of business) all or a substantial part of its properties or assets, or
any of its notes or accounts receivable, or any stock (other than directors
qualifying shares) or any assets or properties necessary or desirable
9
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for the proper conduct of its business, or change the nature of its business, or
wind up, liquidate or dissolve, or agree to do any of the foregoing.
7.3 Borrowed Money. Create, incur, assume or suffer to exist, contingently or
otherwise, indebtedness in excess of $500,000.00 for Borrowed Money, except
indebtedness disclosed to the Bank in writing as existing at the time of
execution of this Agreement.
7.4 Guarantee. Become or remain a guarantor or surety, or pledge its credit or
become liable in any manner (except by endorsement for deposit in the ordinary
course of business) on undertakings of another.
7.5 Acquisitions. Purchase or otherwise acquire all or substantially all of the
assets of any person, firm, corporation or other entity.
7.6 Minimum Tangible Net Worth. Permit its Tangible Net Worth to be less than
$17,372,000.00, less any amounts disbursed for stock-repurchase, for its fiscal
year ending August 31, 1998.
7.7 Debt Ratio. Permit its long-term debt to Tangible Net Worth ratio to exceed
1.0 to 1.0 as of its fiscal year ending August 31, 1998.
7.8 Minimum Net Profit. Fail to produce a net profit after taxes quarterly and
of at least $500,000.00 as of its fiscal year ending August 31, 1998.
7.9 Cash Flow Ratio. Maintain a ratio of Cash Flow to Current Maturities of Long
Term Debt of at least 1.5 to 1.0 for its fiscal year ending August 31, 1998.
7.10 Management. Make any changes in management that would result in either
Eugene W. Courtney or Jerald H. Mortenson, or both, having a materially reduced
role in the management of the Borrower, except due to death or disability,
unless the Bank shall consent in writing, which consent shall not be
unreasonably withheld.
7.11 Accounting. Make a material change in its accounting procedures, whether
for tax purposes or otherwise, including, but not limited to, making a
Subchapter S election under the United States Internal Revenue Code.
SECTION 8 Events of Default
8.1 Upon the occurrence of any of the following Events of Default:
A. Payment. Default in any payment of interest or of principal
on any obligations to the bank when due, and continuance thereof for 10
calendar days;
B. Performance. Default in the observance or performance of
any other agreement of the Borrower set forth herein or in the Security
Agreement and continuance thereof for 30 days;
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<PAGE>
C. Borrowed Money. Default by the Borrower in the payment of
any other indebtedness for Borrowed Money or in the observance or
performance of any term, covenant or agreement of the Borrower in any
agreement relating to any indebtedness of the Borrower, the effect of
which default is to permit the holder of such indebtedness to declare
the same due prior to the date fixed for its payment under the terms
thereof;
D. Representations. Any representation or warranty made by the
Borrower herein, or in any statement or certificate furnished by the
Borrower hereunder, is untrue in any material respect; or
E. Litigation. The occurrence of any litigation or
governmental proceeding which is pending or threatened against the
Borrower, which could have a material adverse effect on the Borrower's
financial condition or business, and which is not settled or dismissed
within a reasonable period of time (a reasonable period of time not to
exceed 30 days) after notice thereof to the Borrower or is not being
contested by the Borrower based upon reasonable grounds;
then, or at any time thereafter, unless such Event of Default is remedied, the
Bank or the holder of the Current Note may, by notice in writing to the
Borrower, terminate the Credit or declare the Current Note to be due and
payable, or both, whereupon the Credit shall terminate forthwith or the Current
Note shall immediately become due and payable, or both, as the case may be.
8.2 Upon the occurrence of any of the following Events of Default:
Bankruptcy. The Borrower becomes insolvent or bankrupt, or makes an
appointment for the benefit of creditors or consents to the appointment
of a custodian, trustee or receiver for itself or for the greater part
of its properties; or a custodian, trustee or receiver is appointed for
the Borrower, or for the greater part of its properties without its
consent and is not discharged within 60 days; or bankruptcy,
reorganization or liquidation proceedings are instituted by or against
the Borrower and, if instituted against it, are consented to by it or
remain undismissed for 60 days;
then the Credit shall automatically terminate and the Current Note shall
automatically become immediately due and payable, without notice.
SECTION 9 Miscellaneous
9.1 Other Agreements. The provisions of this Agreement shall be in addition to
those of any guaranty, pledge or security agreement, Current Note or other
evidence of liability held by the Bank, all of which shall be construed as
complementary to each other. Nothing herein contained shall prevent the Bank
from enforcing any or all other notes, guaranties, pledges or security
agreements in accordance with their respective terms.
9.2 Waiver. The Bank shall have the right at all times to enforce the provisions
of this Agreement and the Collateral Documents in strict accordance with the
terms hereof and thereof, notwithstanding any conduct or custom on the part of
the Bank in refraining from so
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doing at any time or times. The failure of the Bank at any time or times to
enforce its rights under such provisions, strictly in accordance with the same,
shall not be construed as having created a custom in any way or manner contrary
to specific provisions of this Agreement or as having in any way or manner
modified or waived the same. All rights and remedies of the Bank are cumulative
and concurrent and the exercise of one right or remedy shall not be deemed a
waiver or release of any other right or remedy.
9.3 Expenses. The Borrower will pay all expenses, including the reasonable fees
and expenses of legal counsel for the Bank, incurred in connection with the
enforcement of this Agreement and the Security Agreement, and the collection or
attempted collection of the Current Note.
9.4 Notices. Any notices or consents required or permitted by this Agreement
shall be in writing and shall be deemed delivered if delivered in person or if
sent by certified mail, postage prepaid, return receipt requested, or telegraph,
as follows, unless such address is changed by written notice hereunder:
A. If to the Borrower:
HEI, INC.
1495 Steiger Lake Lane
Victoria, Minnesota 55386
Attention: Jerald H. Mortenson
B. If to the Bank:
Norwest Bank Minnesota, National Association
900 East Wayzata Boulevard
Wayzata, Minnesota 55391
Attention: Judy Wenderoth
9.5 State Law. The substantive Laws of the State of Minnesota shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
9.6 Successors. This Agreement shall inure to the benefit of, and shall be
binding upon, the respective successors and permitted assigns of the parties
hereto. The Borrower has no right to assign any of its rights or obligations
hereunder without the prior written consent of the Bank. This Agreement, and the
documents executed and delivered pursuant hereto,
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constitute the entire agreement between the parties, and may be amended only in
a writing signed by each party.
9.7 Validity. If any provision of this Agreement shall be held invalid under any
applicable Laws, such invalidity shall not affect any other provision of this
Agreement that can be given effect without the invalid provision, and, to this
end, the provisions hereof are severable.
9.8 Banking Day. Whenever any installment of the interest on the Current Note
becomes due and payable on a day which is not a Banking Day, the maturity or due
date shall be extended to the next succeeding Banking Day and, in the case of
principal of the Current Note, interest shall be payable thereon at the rate per
annum specified in the Current Note during such extension.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
HEI, INC.
By:
--------------------------------
Its:
--------------------------------
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:
--------------------------------
Its:
--------------------------------
13
<PAGE>
Exhibit 4.1b
CURRENT NOTE
$3,000,000.00 May 14, 1998
On January 31, 1999, for value received, HEI, Inc. (the
"Borrower") promises to pay to the order of Norwest Bank Minnesota, National
Association (the "Bank") at its office in Wayzata, Minnesota or at any other
place designated at any time by the holder hereof, in lawful money of the United
States of America, the principal sum of Three Million and no/100 Dollars
($3,000,000.00), or so much thereof as is disbursed and remains outstanding
thereunder on the due date hereof, as shown by the Bank's liability record,
together with interest (calculated on the basis of actual days elapsed in a 360
day year) on the unpaid balance hereof from the date hereof until this Note is
fully paid, at one of the following rates:
(a) Base Rate Option: A variable rate of interest equal to
the Base Rate in effect from time to time. The interest
rate under this option shall change as and when the
Base Rate changes.
(b) LIBOR Rate Option: The "LIBOR Rate" plus two percent
(2.0%). The "LIBOR Rate" means the rate per annum
(rounded up, if necessary, to the nearest
one-sixteenth of one percent) equal to the offered
quotation to the Bank in the London interbank
Eurodollar market for United States dollar deposits
for delivery on the date specified by the Borrower,
in the approximate amount of the loan and for the
period specified by the Borrower (which period must
be 30, 60, or 90 days), determined as of
approximately 11:00 A.M., London time, two business
days prior to the delivery date. If the Borrower
selects this LIBOR Rate Option, it must notify the
Bank at least two business days prior to the date on
which it wishes to receive the loan proceeds. Unless
the Borrower shall otherwise notify the Bank at least
two business days prior to the end of an Interest
Period, each advance bearing interest at the LIBOR
Rate shall continue to bear interest at the Base
Rate. The LIBOR Rate Option may only be selected for
minimum principal amounts of $100,000 or multiples
thereof.
As used herein, "Base Rate" means the rate of interest established by
the Bank from time to time as its "base" or "prime" rate.
Interest shall by payable monthly, commencing May 31, 1998 and
continuing on the same day of each succeeding month and also at maturity.
<PAGE>
The Borrower may at any time prepay the Current Note in whole or
in part without premium or penalty; except that any prepayment of amounts based
on the LIBOR Rate where such prepayment is made on a day other than the final
day of an Interest Period shall require a prepayment penalty in an amount equal
to the difference between the amount of interest that would have been payable
for the remainder of the Interest Period at the rate then in effect and the
yield on a hypothetical U.S. Treasury Security that could be purchased on the
date of prepayment and maturing on the last day of the Interest Period.
Unless prohibited by law, the undersigned agree(s) to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred by
the holder hereof in the event this Note is not duly paid. The holder hereof may
at any time renew this Note or extend its maturity date for any period and
release any security for, or any party to, this Note, all without notice to or
consent of and without releasing any accommodation maker, endorser or guarantor
from liability on this Note. Presentment or other demand for payment, notice of
dishonor and protest are hereby waived by the undersigned and each endorser and
guarantor. This Note shall be governed by the substantive laws of the State
named as part of the Bank's address above.
This Note is issued pursuant to a Credit Agreement dated May ____, 1998,
between the Borrower and the Bank and is subject to the terms and conditions
thereof.
HEI, Inc.
By:
---------------------------
Its:
---------------------------
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Exhibit 10.4
HEI, INC.
1998 STOCK OPTION PLAN
1. Purpose. The purpose of this Plan is to attract and retain qualified
officers, directors and other key employees of, and consultants to, HEI, Inc.
(the "Company") and its Subsidiaries and to provide such persons with
appropriate incentives. The Company has adopted the Plan effective as of
November 18, 1998, subject to the approval of the Company's shareholders, and
unless extended by amendment in accordance with the terms of the Plan, no Option
Rights, Appreciation Rights, Restricted Shares or Deferred Shares will be
granted hereunder after the tenth anniversary of such effective date.
2. Definitions. As used in this Plan,
"Appreciation Right" means a right granted pursuant to Section 5 of
this Plan, including a Free-standing Appreciation Right and a Tandem
Appreciation Right.
"Base Price" means the price to be used as the basis for determining
the Spread upon the exercise of a Free-standing Appreciation Right.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Compensation Committee of the Board of Directors,
as described in Section 13(a) of this Plan, or, in the absence of a Compensation
Committee, the full Board.
"Common Shares" means (i) shares of the voting common stock of the
Company and (ii) any security into which Common Shares may be converted by
reason of any transaction or event of the type referred to in Section 9 of this
Plan.
"Date of Grant" means the date specified by the Committee on which a
grant of Option Rights or Appreciation Rights or a grant or sale of Restricted
Shares or Deferred Shares shall become effective, which shall not be earlier
than the date on which the Committee takes action with respect thereto.
"Deferral Period" means the period of time during which Deferred Shares
are subject to deferral limitations under Section 7 of this Plan.
"Deferred Shares" means an award pursuant to Section 7 of this Plan of
the right to receive Common Shares at the end of a specified Deferral Period.
<PAGE>
"Free-standing Appreciation Right" means an Appreciation Right granted
pursuant to Section 5 of this Plan that is not granted in tandem with an Option
Right or similar right.
"Incentive Stock Option" means an Option Right that is intended to
qualify as an "incentive stock option" under Section 422 of the Code or any
successor provision thereto.
"Market Value per Share" means the fair market value of the Common
Shares as determined by the Committee from time to time.
"Nonqualified Option" means an Option Right that is not intended to
qualify as an Incentive Stock Option.
"Optionee" means the person so designated in an agreement evidencing an
outstanding Option Right.
"Option Price" means the purchase price payable upon the exercise of an
Option Right.
"Option Right" means the right to purchase Common Shares from the
Company upon the exercise of a Nonqualified Option or an Incentive Stock Option
granted pursuant to Section 4 of this Plan.
"Participant" means a person who is selected by the Committee to
receive benefits under this Plan and (i) is at that time an officer, director or
other key employee of, or a consultant to, the Company or any Subsidiary or (ii)
has agreed to commence serving in any such capacity.
"Reload Option Rights" means additional Option Rights automatically
granted to an Optionee upon the exercise of Option Rights pursuant to Section
4(f) of this Plan.
"Restricted Shares" means Common Shares granted or sold pursuant to
Section 6 of this Plan as to which neither the substantial risk of forfeiture
nor the restriction on transfer referred to in Section 6 hereof has expired.
"Rule 16b-3" means Rule 16b-3, as promulgated and amended from time to
time by the Securities and Exchange Commission under the Securities Exchange Act
of 1934, or any successor rule to the same effect.
"Spread" means, in the case of a Free-standing Appreciation Right, the
amount by which the Market Value per Share on the date when the Appreciation
Right is exercised exceeds the Base Price specified therein or, in the case of a
Tandem Appreciation Right, the amount by which the Market Value per Share on the
date when the Appreciation Right is exercised exceeds the Option Price specified
in the related Option Right.
"Subsidiary" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Company has a direct or
indirect ownership or other equity interest; provided, however, that for
2
<PAGE>
purposes of determining whether any person may be a Participant for purposes of
any grant of Incentive Stock Options, "Subsidiary" means any corporation in
which the Company owns or controls directly or indirectly more than 50% of the
total combined voting power represented by all classes of stock issued by such
corporation at the time of the grant.
"Tandem Appreciation Right" means an Appreciation Right granted
pursuant to Section 5 of this Plan that is granted in tandem with an Option
Right or any similar right granted under any other plan of the Company.
"10% Shareholder" means an individual who, at the time an Option Right
is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock issued by the Company or by any parent or
subsidiary corporation, within the meaning of Section 422(b)(6) of the Code or
any successor provision thereto.
3. Shares Available under the Plan.
(a) Subject to adjustment as provided in Section 9 of this
Plan, the number of Common Shares which may be (i) issued or transferred upon
the exercise of Option Rights or Appreciation Rights, or (ii) awarded as
Restricted Shares and released from substantial risk of forfeiture thereof or
Deferred Shares, shall not in the aggregate exceed 400,000 Common Shares, which
may be Common Shares of original issuance or Common Shares held in treasury or a
combination thereof. For the purposes of this Section 3(a):
(i) Upon payment in cash of the benefit provided by
any award granted under this Plan, any Common Shares that were covered
by that award shall again be available for issuance or transfer
hereunder; and
(ii) Upon the full or partial payment of any Option
Price by the transfer to the Company of Common Shares or upon
satisfaction of tax withholding obligations in connection with any such
exercise or any other payment made or benefit realized under this Plan
by the transfer or relinquishment of Common Shares, there shall be
deemed to have been issued or transferred under this Plan only the net
number of Common Shares actually issued or transferred by the Company
less the number of Common Shares so transferred or relinquished.
(b) Notwithstanding anything in Section 3(a) hereof, or
elsewhere in this Plan, to the contrary, the aggregate number of Common Shares
actually issued or transferred by the Company upon the exercise of the Incentive
Stock Options shall not exceed the total number of Common Shares first specified
in Section 3(a) hereof.
(c) Notwithstanding any other provision of this Plan to the
contrary, no Participant shall be granted Option Rights and Appreciation Rights,
in the aggregate, for more than 200,000 Common Shares during any calendar year,
subject to adjustment as provided in Section 9 of this Plan.
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<PAGE>
(d) Notwithstanding any other provision of this Plan to the contrary,
no Participant shall be granted Deferred Shares, in the aggregate, for more than
200,000 Common Shares during any calendar year, subject to adjustment as
provided in Section 9 of this Plan.
4. Option Rights. The Committee may from time to time authorize grants
to Participants of options to purchase Common Shares upon such terms and
conditions as the Committee may determine in accordance with the following
provisions:
(a) Each grant shall specify the number of Common Shares to
which it pertains.
(b) Each grant shall specify an Option Price per Common Share,
which may not be less than the Market Value per Share on the Date of Grant. In
the case of any grant of Incentive Stock Options to a 10% Shareholder, such
Option Price per Common Share may not be less than 110% of the Market Value per
Share on the Date of Grant.
(c) Each grant shall specify the form of consideration to be
paid in satisfaction of the Option Price and the manner of payment of such
consideration, which may include (i) cash in the form of currency or check or
other cash equivalent acceptable to the Company, (ii) nonforfeitable,
unrestricted Common Shares, which are already owned by the Optionee, (iii) any
other legal consideration that the Committee may deem appropriate, including
without limitation any form of consideration authorized under Section 4(d)
below, on such basis as the Committee may determine in accordance with this Plan
and (iv) any combination of the foregoing.
(d) Any grant of a Nonqualified Option may provide that
payment of the Option Price may also be made in whole or in part in the form of
Restricted Shares or other Common Shares that are subject to a risk of
forfeiture or restrictions on transfer. Unless otherwise determined by the
Committee on or after the Date of Grant, whenever any Option Price is paid in
whole or in part by means of any of the forms of consideration specified in this
Section 4(d), the Common Shares received by the Optionee upon the exercise of
the Nonqualified Option shall be subject to the same risks of forfeiture or
restrictions on transfer as those that applied to the consideration surrendered
by the Optionee; provided, however, that such risks of forfeiture and
restrictions on transfer shall apply only to the same number of Common Shares
received by the Optionee as applied to the forfeitable or restricted Common
Shares surrendered by the Optionee.
(e) Any grant may, if there is then a public market for the
Common Shares, provide for deferred payment of the Option Price from the
proceeds of sale through a broker of some or all of the Common Shares to which
the exercise relates.
(f) Any grant may provide for the automatic grant to the
Optionee of Reload Option Rights upon the exercise of Option Rights, including
Reload Option Rights, for Common Shares or any other noncash consideration
authorized under Sections 4(c) and (d) above; provided, however, that the term
of any Reload Option Right shall not extend beyond the term of the Option Right
originally exercised.
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(g) Successive grants may be made to the same Optionee
regardless of whether any Option Rights previously granted to the Optionee
remain unexercised.
(h) Each grant shall specify the period or periods of
continuous employment, or continuous engagement of the consulting services, of
the Optionee by the Company or any Subsidiary that are necessary and/or the
individual or aggregate performance criteria that must be satisfied before the
Option Rights or installments thereof shall become exercisable, and any grant
may provide for the earlier exercise of the Option Rights in the event of a
change in control of the Company or other similar transaction or event.
Notwithstanding the foregoing, in the case of any grant of Incentive Stock
Options, the aggregate Market Value per Share on the Date of Grant of the Common
Shares subject to such Incentive Stock Options (and all other incentive stock
options granted by the Company or any parent or subsidiary corporation) that are
exercisable for the first time by the Optionee during any calendar year shall
not exceed $100,000.
(i) Option Rights granted pursuant to this Section 4 may be
Nonqualified Options or Incentive Stock Options or combinations thereof.
(j) Any grant of an Option Right may provide for the payment
to the Optionee of dividend equivalents thereon in cash or Common Shares on a
current, deferred or contingent basis, or the Committee may provide that any
dividend equivalents shall be credited against the Option Price.
(k) No Option Right granted pursuant to this Section 4 may be
exercised more than 10 years from the Date of Grant. In the case of any
Incentive Stock Option granted to a 10% Shareholder, such Incentive Stock Option
may not be exercised more than five years from the Date of Grant.
(l) Each grant shall be evidenced by an agreement, which shall
be executed on behalf of the Company by any designated officer thereof and
delivered to and accepted by the Optionee and shall contain such terms and
provisions as the Committee may determine consistent with this Plan.
5. Appreciation Rights. The Committee may also authorize grants to
Participants of Appreciation Rights. An Appreciation Right shall be a right of
the Participant to receive from the Company an amount, which shall be determined
by the Committee and shall be expressed as a percentage (not exceeding 100%) of
the Spread at the time of the exercise of an Appreciation Right. Any grant of
Appreciation Rights under this Plan shall be upon such terms and conditions as
the Committee may determine in accordance with the following provisions:
(a) Any grant may specify that the amount payable upon the
exercise of an Appreciation Right may be paid by the Company in cash, Common
Shares or any combination thereof and may (i) either grant to the Participant or
reserve to the Committee the right to elect among those alternatives or (ii)
preclude the right of the Participant to receive and the Company to issue Common
Shares or other equity securities in lieu of cash.
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(b) Any grant may specify that the amount payable upon the
exercise of an Appreciation Right shall not exceed a maximum specified by the
Committee on the Date of Grant.
(c) Each grant shall specify (i) the period or periods of
continuous employment, or continuous engagement of the consulting services, of
the Optionee by the Company or any Subsidiary that are necessary and/or the
individual or aggregate performance criteria that must be satisfied before the
Appreciation Rights or installments thereof shall become exercisable and (ii)
permissible dates or periods on or during which Appreciation Rights shall be
exercisable.
(d) Any grant may specify that an Appreciation Right may be
exercised only in the event of a change in control of the Company or other
similar transaction or event.
(e) Any grant may provide for the payment to the Participant
of dividend equivalents thereon in cash or Common Shares on a current, deferred
or contingent basis.
(f) Each grant shall be evidenced by an agreement, which shall
be executed on behalf of the Company by any designated officer thereof and
delivered to and accepted by the Optionee and shall describe the subject
Appreciation Rights, identify any related Option Rights, state that the
Appreciation Rights are subject to all of the terms and conditions of this Plan
and contain such other terms and provisions as the Committee may determine
consistent with this Plan.
(g) Regarding Tandem Appreciation Rights only: Each grant
shall provide that a Tandem Appreciation Right may be exercised only (i) at a
time when the related Option Right (or any similar right granted under any other
plan of the Company) is also exercisable and the Spread is positive and (ii) by
surrender of the related Option Right (or such other right) for cancellation.
(h) Regarding Free-standing Appreciation Rights only:
(i) Each grant shall specify in respect of each
Free-standing Appreciation Right a Base Price per Common Share, which
shall be equal to or greater than the Market Value per Share on the
Date of Grant;
(ii) Successive grants may be made to the same
Participant regardless of whether any Free-standing Appreciation Rights
previously granted to the Participant remain unexercised; and
(iii) No Free-standing Appreciation Right granted
under this Plan may be exercised more than 10 years from the Date of
Grant.
6. Restricted Shares. The Committee may also authorize grants or sales
to Participants of Restricted Shares upon such terms and conditions as the
Committee may determine in accordance with the following provisions:
(a) Each grant or sale shall constitute an immediate transfer
of the ownership of Common Shares to the Participant in consideration of the
performance of services, entitling such
6
<PAGE>
Participant to dividend, voting and other ownership rights, subject to the
substantial risk of forfeiture and restrictions on transfer hereinafter referred
to.
(b) Each grant or sale may be made without additional
consideration from the Participant or in consideration of a payment by the
Participant that is less than the Market Value per Share on the Date of Grant.
(c) Each grant or sale shall provide that the Restricted
Shares covered thereby shall be subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code for a period to be determined by
the Committee on the Date of Grant, and any grant or sale may provide for the
earlier termination of such period in the event of a change in control of the
Company or other similar transaction or event.
(d) Each grant or sale shall provide that, during the period
for which such substantial risk of forfeiture is to continue, the
transferability of the Restricted Shares shall be prohibited or restricted in
the manner and to the extent prescribed by the Committee on the Date of Grant.
Such restrictions may include without limitation rights of repurchase or first
refusal in the Company or provisions subjecting the Restricted Shares to a
continuing substantial risk of forfeiture in the hands of any transferee.
(e) Any grant or sale may require that any or all dividends or
other distributions paid on the Restricted Shares during the period of such
restrictions be automatically sequestered and reinvested on an immediate or
deferred basis in additional Common Shares, which may be subject to the same
restrictions as the underlying award or such other restrictions as the Committee
may determine.
(f) Each grant or sale shall be evidenced by an agreement,
which shall be executed on behalf of the Company by any designated officer
thereof and delivered to and accepted by the Participant and shall contain such
terms and provisions as the Committee may determine consistent with this Plan.
Unless otherwise directed by the Committee, all certificates representing
Restricted Shares, together with a stock power that shall be endorsed in blank
by the Participant with respect to the Restricted Shares, shall be held in
custody by the Company until all restrictions thereon lapse.
7. Deferred Shares. The Committee may also authorize grants or sales of
Deferred Shares to Participants upon such terms and conditions as the Committee
may determine in accordance with the following provisions:
(a) Each grant or sale shall constitute the agreement by the
Company to issue or transfer Common Shares to the Participant in the future in
consideration of the performance of services, subject to the fulfillment during
the Deferral Period of such conditions as the Committee may specify.
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<PAGE>
(b) Each grant or sale may be made without additional
consideration from the Participant or in consideration of a payment by the
Participant that is less than the Market Value per Share on the Date of Grant.
(c) Each grant or sale shall provide that the Deferred Shares
covered thereby shall be subject to a Deferral Period, which shall be fixed by
the Committee on the Date of Grant, and any grant or sale may provide for the
earlier termination of the Deferral Period in the event of a change in control
of the Company or other similar transaction or event.
(d) During the Deferral Period, the Participant shall not have
any right to transfer any rights under the subject award, shall not have any
rights of ownership in the Deferred Shares and shall not have any right to vote
the Deferred Shares, but the Committee may on or after the Date of Grant
authorize the payment of dividend equivalents on the Deferred Shares in cash or
additional Common Shares on a current, deferred or contingent basis.
(e) Each grant or sale shall be evidenced by an agreement,
which shall be executed on behalf of the Company by any designated officer
thereof and delivered to and accepted by the Participant and shall contain such
terms and provisions as the Committee may determine consistent with this Plan.
8. Transferability.
(a) No Option Right or Appreciation Right granted under this
Plan may be transferred by a Participant, except (i) by will or the laws of
descent and distribution, (ii) to one or more members of the Participant's
immediate family, or (iii) to a trust established for the benefit of the
Participant and/or one or more members of the Participant's immediate family.
Option Rights and Appreciation Rights granted under this Plan may not be
exercised during a Participant's lifetime except by (i) the Participant, (ii) a
transferee of the Participant described in the preceding sentence, or (iii) in
the event of the legal incapacity of the Participant or any such transferee, by
the guardian or legal representative of the Participant or such transferee (as
applicable) acting in a fiduciary capacity on behalf thereof under state law and
court supervision.
(b) Any grant made under this Plan may provide that all or any
part of the Common Shares that are to be issued or transferred by the Company
upon the exercise of Option Rights or Appreciation Rights or upon the
termination of the Deferral Period applicable to Deferred Shares, or are no
longer subject to the substantial risk of forfeiture and restrictions on
transfer referred to in Section 6 of this Plan, shall be subject to further
restrictions upon transfer.
9. Adjustments.
(a) The Committee may make or provide for such adjustments in
the number of Common Shares covered by outstanding Option Rights, Appreciation
Rights and Deferred Shares granted hereunder, the Option Prices per Common Share
or Base Prices per Common Share applicable to any such Option Rights and
Appreciation Rights, and the kind of shares (including
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<PAGE>
shares of another issuer) covered thereby, as the Committee may in good faith
determine to be equitably required in order to prevent dilution or expansion of
the rights of Participants that otherwise would result from (i) any stock
dividend, stock split, combination of shares, recapitalization or similar change
in the capital structure of the Company or (ii) any merger, consolidation,
spin-off, spin-out, split-off, split-up, reorganization, partial or complete
liquidation or other distribution of assets, issuance of warrants or other
rights to purchase securities or any other corporate transaction or event having
an effect similar to any of the foregoing. In the event of any such transaction
or event, the Committee may provide in substitution for any or all outstanding
awards under this Plan such alternative consideration as it may in good faith
determine to be equitable under the circumstances and may require in connection
therewith the surrender of all awards so replaced. Moreover, the Committee may
on or after the Date of Grant provide in the agreement evidencing any award
under this Plan that the holder of the award may elect to receive an equivalent
award in respect of securities of the surviving entity of any merger,
consolidation or other transaction or event having a similar effect, or the
Committee may provide that the holder will automatically be entitled to receive
such an equivalent award. The Committee may also make or provide for such
adjustments in the maximum numbers of Common Shares specified in Section 3 of
this Plan as the Committee may in good faith determine to be appropriate in
order to reflect any transaction or event described in this Section 9.
(b) If another corporation is merged into the Company or the
Company otherwise acquires another corporation, the Committee may elect to
assume under this Plan any or all outstanding stock options or other awards
granted by such corporation under any stock option or other plan adopted by it
prior to such acquisition. Such assumptions shall be on such terms and
conditions as the Committee may determine; provided, however, that the awards as
so assumed do not contain any terms, conditions or rights that are inconsistent
with the terms of this Plan. Unless otherwise determined by the Committee, such
awards shall not be taken into account for purposes of the limitations contained
in Section 3 of this Plan.
10. Fractional Shares. The Company shall not be required to issue any
fractional Common Shares pursuant to this Plan. The Committee may provide for
the elimination of fractions or for the settlement thereof in cash.
11. Withholding Taxes. To the extent that the Company is required to
withhold federal, state, local or foreign taxes in connection with any payment
made or benefit realized by a Participant or other person under this Plan, and
the amounts available to the Company for the withholding are insufficient, it
shall be a condition to the receipt of any such payment or the realization of
any such benefit that the Participant or such other person make arrangements
satisfactory to the Company for payment of the balance of any taxes required to
be withheld. At the discretion of the Committee, any such arrangements may
without limitation include voluntary or mandatory relinquishment of a portion of
any such payment or benefit or the surrender of outstanding Common Shares. The
Company and any Participant or such other person may also make similar
arrangements with respect to the payment of any taxes with respect to which
withholding is not required.
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<PAGE>
12. Certain Terminations of Employment or Consulting Services,
Hardship, and Approved Leaves of Absence. Notwithstanding any other provision of
this Plan to the contrary, in the event of termination of employment or
consulting services by reason of death, disability, normal retirement, early
retirement with the consent of the Company, termination of employment or
consulting services to enter public or military service with the consent of the
Company or leave of absence approved by the Company, or in the event of hardship
or other special circumstances, of a Participant who holds an Option Right or
Appreciation Right that is not immediately and fully exercisable, any Restricted
Shares as to which the substantial risk of forfeiture or the prohibition or
restriction on transfer has not lapsed, any Deferred Shares as to which the
Deferral Period is not complete, or any Common Shares that are subject to any
transfer restriction pursuant to Section 8(b) of this Plan, the Committee may
take any action that it deems to be equitable under the circumstances or in the
best interests of the Company, including without limitation waiving or modifying
any limitation or requirement with respect to any award under this Plan.
13. Administration of the Plan.
(a) This Plan shall be administered by the Compensation
Committee of the Board, which shall be composed of not less than two members of
the Board, or, in the absence of a Compensation Committee, by the full Board. At
any time that awards under the Plan are subject to Rule 16b-3, each member of
the Compensation Committee shall be a "non-employee director" within the meaning
of such Rule. In addition, at any time that the Company is subject to Section
162(m) of the Code, each member of the Compensation Committee shall be an
"outside director" within the meaning of such Section. A majority of the
Committee shall constitute a quorum, and the acts of the members of the
Committee who are present at any meeting thereof at which a quorum is present,
or acts unanimously approved by the members of the Committee in writing, shall
be the acts of the Committee.
(b) The interpretation and construction by the Committee of
any provision of this Plan or any agreement, notification or document evidencing
the grant of Option Rights, Appreciation Rights, Restricted Shares or Deferred
Shares, and any determination by the Committee pursuant to any provision of this
Plan or any such agreement, notification or document, shall be final and
conclusive. No member of the Committee shall be liable for any such action taken
or determination made in good faith.
14. Amendments and Other Matters.
(a) This Plan may be amended from time to time by the
Committee; provided, however, that except as expressly authorized by this Plan,
no such amendment shall cause this Plan to cease to satisfy any applicable
condition of Rule 16b-3 or cause any award under the Plan to cease to qualify
for any applicable exception under Section 162(m) of the Code, without the
further approval of the stockholders of the Company.
(b) With the concurrence of the affected Participant, the
Committee may cancel any agreement evidencing Option Rights or any other award
granted under this Plan. In the event
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<PAGE>
of any such cancellation, the Committee may authorize the granting of new Option
Rights or other awards hereunder, which may or may not cover the same number of
Common Shares as had been covered by the cancelled Option Rights or other award,
at such Option Price, in such manner and subject to such other terms, conditions
and discretion as would have been permitted under this Plan had the cancelled
Option Rights or other award not been granted.
(c) The Committee may condition the grant of any award or
combination of awards authorized under this Plan on the surrender or deferral by
the Participant of his or her right to receive a cash bonus or other
compensation otherwise payable by the Company or a Subsidiary to the
Participant.
(d) This Plan shall not confer upon any Participant any right
with respect to continuance of employment or other service with the Company or
any Subsidiary and shall not interfere in any way with any right that the
Company or any Subsidiary would otherwise have to terminate any Participant's
employment or other service at any time.
(e) To the extent that any provision of this Plan would
prevent any Option Right that was intended to qualify as an Incentive Stock
Option from so qualifying, any such provision shall be null and void with
respect to any such Option Right; provided, however, that any such provision
shall remain in effect with respect to other Option Rights, and there shall be
no further effect on any provision of this Plan.
(f) Any award that may be made pursuant to an amendment to
this Plan that shall have been adopted without the approval of the stockholders
of the Company shall be null and void if it is subsequently determined that such
approval was required under the terms of the Plan or applicable law.
(g) Unless otherwise determined by the Committee, this Plan is
intended to comply with Rule 16b-3 at all times that awards hereunder are
subject to such Rule.
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Exhibit 10.5
HEI, INC.
1998 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
1. Purpose. The purpose of this Plan is to attract and retain
qualified individuals to serve as nonemployee members of the Board of Directors
of HEI, Inc. (the "Company") and to provide such persons with appropriate
incentives. The Company has adopted the Plan effective as of November 18, 1998,
subject to the approval of the Company's stockholders, and unless extended by
amendment in accordance with the terms of the Plan, no Option Rights will be
granted hereunder after the tenth anniversary of such effective date. Upon the
approval of the adoption of the Plan by the Company's stockholders, the Plan
will replace and supersede the Company's prior Stock Option Plan for Nonemployee
Directors (the "1991 Plan").
2. Definitions. As used in this Plan,
"Board" means the Board of Directors of the Company.
"Change in Control" means a change in control of the Company, which
will be deemed to have occurred after the effective date of this Plan if:
(i) any "person" as such term is used in Section
3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof except that such term shall not include (A) the Company
or any of its subsidiaries, (B) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
affiliates, (C) an underwriter temporarily holding securities pursuant
to an offering of such securities, (D) any corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of Common Shares, or (E) any person
or group as used in Rule 13d-1(b) under the Exchange Act, is or becomes
the Beneficial Owner, as such term is defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such person any
securities acquired directly from the Company or its affiliates other
than in connection with the acquisition by the Company or its
affiliates of a business) representing 50% or more of the combined
voting power of the Company's then outstanding securities.
(ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board,
and any new director (other than (A) a director designated by a person
who has entered into an agreement with the Company to effect a
transaction described in clause (i), (iii), or (iv) of this definition
or (B) a director whose initial assumption of office is in connection
with an actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election of
directors of the Company) whose election by the Board or nomination for
election by the
<PAGE>
Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute
at least a majority thereof;
(iii) there is consummated a merger or consolidation
of the Company or any direct or indirect subsidiary of the Company with
any other corporation, other than (A) a merger or consolidation which
would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) in combination with the
ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the Company,
at least 75% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no person (as defined above) is or
becomes the beneficial owner, directly or indirectly, of securities of
the Company (not including in the securities beneficially owned by such
person any securities acquired directly from the Company or its
affiliates other than in connection with the acquisition by the Company
or its affiliates of a business) representing 25% or more of the
combined voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan
of complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets (or any transaction
having a similar effect) other than a sale or disposition by the
Company of all or substantially all of the Company's assets to an
entity, at least 75% of the combined voting power of the voting
securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company
immediately prior to such sale.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Common Shares" means (i) shares of the voting common stock of the
Company and (ii) any security into which Common Shares may be converted by
reason of any transaction or event of the type referred to in Section 6 of this
Plan.
"Date of Grant" means the date specified by the Board on which a grant
of Option Rights shall become effective, which shall not be earlier than the
date on which the Board takes action with respect thereto.
"Disability" means any physical or mental illness, injury or condition
that would qualify a Participant for benefits under any long-term disability
benefit plan maintained by the Company
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<PAGE>
or any Subsidiary and applicable to such Participant (or, if the Participant is
not eligible for any such plan, to senior executive officers of the Company).
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Market Value per Share" means the fair market value of the Common
Shares as determined by the Board from time to time.
"Option Price" means the purchase price payable upon the exercise of an
Option Right.
"Option Right" means the right to purchase Common Shares from the
Company upon the exercise of a nonqualified stock option granted pursuant to
Section 4 of this Plan.
"Participant" means an individual who, at the time of any automatic
award of Option Rights pursuant to Section 4 below, is a member of the Board and
both a "non-employee director" within the meaning of Rule 16b-3 and an "outside
director" within the meaning of Section 162(m) of the Code.
"Rule 16b-3" means Rule 16b-3, as promulgated and amended from time to
time by the Securities and Exchange Commission under the Exchange Act, or any
successor rule to the same effect.
"Subsidiary" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Company has a direct or
indirect ownership or other equity interest.
3. Shares Available under the Plan.
(a) Subject to adjustment as provided in Section 6 of this
Plan, the number of Common Shares which may be issued or transferred upon the
exercise of Option Rights shall not in the aggregate exceed 425,000 Common
Shares (including any Common Shares remaining under the 1991Plan), which may be
Common Shares of original issuance or Common Shares held in treasury or a
combination thereof. For the purposes of this Section 3(a):
(i) Upon payment in cash of the benefit provided by
any award granted under this Plan, any Common Shares that were covered
by that award shall again be available for issuance or transfer
hereunder; and
(ii) Upon the full or partial payment of any Option
Price by the transfer to the Company of Common Shares or upon
satisfaction of tax withholding obligations in connection with any such
exercise or any other payment made or benefit realized under this Plan
by the transfer or relinquishment of Common Shares, there shall be
deemed to have been issued or transferred under this Plan only the net
number of Common Shares actually issued or transferred by the Company
less the number of Common Shares so transferred or relinquished.
3
<PAGE>
4. Option Rights. Subject to adjustment as provided in Section 6 of
this Plan, the Board shall automatically grant to each Participant Option Rights
to purchase Common Shares upon such terms and conditions as the Board may
determine in accordance with the following provisions:
(a) Effective as of November 18, 1998, each individual who was
then a Participant shall be granted Option Rights to purchase 55,000 Common
Shares. Thereafter, commencing with the annual meeting of the Company's
stockholders in January 2000, each individual who is a Participant upon the
adjournment of an annual meeting of the Company's stockholders shall be granted
Option Rights to purchase 10,000 Common Shares, effective as of the date of such
annual meeting.
(b) Each grant shall specify an Option Price per Common Share,
which shall equal the Market Value per Share on the Date of Grant.
(c) Each grant shall specify the form of consideration to be
paid in satisfaction of the Option Price and the manner of payment of such
consideration, which may include (i) cash in the form of currency or check or
other cash equivalent acceptable to the Company, (ii) nonforfeitable,
unrestricted Common Shares, which are already owned by the Participant, (iii)
any other legal consideration that the Board may deem appropriate, on such basis
as the Board may determine in accordance with this Plan and (iv) any combination
of the foregoing.
(d) Any grant may, if there is then a public market for the
Common Shares, provide for deferred payment of the Option Price from the
proceeds of sale through a broker of some or all of the Common Shares to which
the exercise relates.
(e) Successive grants may be made to the same Participant
regardless of whether any Option Rights previously granted to the Participant
remain unexercised.
(f) Each grant shall specify that the Option Rights awarded
thereby shall become exercisable in full upon the earliest to occur of (i) the
ninth anniversary of the Date of Grant, (ii) the first date after the Date of
Grant on which the Market Value per Share of the Common Shares (as adjusted as
provided in Section 6 of this Plan) equals or exceeds $25.00, (iii) the date of
the Participant's death or Disability, and (iv) the effective date of a Change
in Control, provided, in each case, that the Participant remains in continuous
service with the Company until such date.
(g) Option Rights granted pursuant to this Section 4 shall be
nonqualified stock options.
(h) No Option Right granted pursuant to this Section 4
may be exercised more than 10 years from the Date of Grant.
4
<PAGE>
(i) Each grant shall be evidenced by an agreement, which shall
be executed on behalf of the Company by any designated officer thereof and
delivered to and accepted by the Participant and shall contain such terms and
provisions as the Board may determine consistent with this Plan.
5. Transferability. No Option Right granted under this Plan may be
transferred by a Participant, except (i) by will or the laws of descent and
distribution, (ii) to one or more members of the Participant's immediate family,
or (iii) to a trust established for the benefit of the Participant and/or one or
more members of the Participant's immediate family. Option Rights granted under
this Plan may not be exercised during a Participant's lifetime except by (i) the
Participant, (ii) a transferee of the Participant described in the preceding
sentence, or (iii) in the event of the legal incapacity of the Participant or
any such transferee, by the guardian or legal representative of the Participant
or such transferee (as applicable) acting in a fiduciary capacity on behalf
thereof under state law and court supervision.
6. Adjustments.
(a) The Board may make or provide for such adjustments in the
number of Common Shares covered by outstanding Option Rights granted hereunder,
the Option Prices per Common Share applicable to any such Option Rights, and the
kind of shares (including shares of another issuer) covered thereby, as the
Board may in good faith determine to be equitably required in order to prevent
dilution or expansion of the rights of Participants that otherwise would result
from (i) any stock dividend, stock split, combination of shares,
recapitalization or similar change in the capital structure of the Company or
(ii) any merger, consolidation, spin-off, spin-out, split-off, split-up,
reorganization, partial or complete liquidation or other distribution of assets,
issuance of warrants or other rights to purchase securities or any other
corporate transaction or event having an effect similar to any of the foregoing.
In the event of any such transaction or event, the Board may provide in
substitution for any or all outstanding awards under this Plan such alternative
consideration as it may in good faith determine to be equitable under the
circumstances and may require in connection therewith the surrender of all
awards so replaced. Moreover, the Board may on or after the Date of Grant
provide in the agreement evidencing any award under this Plan that the holder of
the award may elect to receive an equivalent award in respect of securities of
the surviving entity of any merger, consolidation or other transaction or event
having a similar effect, or the Board may provide that the holder will
automatically be entitled to receive such an equivalent award. The Board may
also make or provide for such adjustments in the maximum numbers of Common
Shares specified in Section 3 of this Plan as the Board may in good faith
determine to be appropriate in order to reflect any transaction or event
described in this Section 6.
(b) If another corporation is merged into the Company or the
Company otherwise acquires another corporation, the Board may elect to assume
under this Plan any or all outstanding stock options or other awards granted by
such corporation under any stock option or other plan adopted by it prior to
such acquisition. Such assumptions shall be on such terms and conditions as the
Board may determine; provided, however, that the awards as so assumed do not
contain any terms, conditions or rights that are inconsistent with the terms of
this Plan. Unless
5
<PAGE>
otherwise determined by the Board, such awards shall not be taken into account
for purposes of the limitations contained in Section 3 of this Plan.
7. Fractional Shares. The Company shall not be required to issue any
fractional Common Shares pursuant to this Plan. The Board may provide for the
elimination of fractions or for the settlement thereof in cash.
8. Withholding Taxes. To the extent that the Company is required to
withhold federal, state, local or foreign taxes in connection with any payment
made or benefit realized by a Participant or other person under this Plan, and
the amounts available to the Company for the withholding are insufficient, it
shall be a condition to the receipt of any such payment or the realization of
any such benefit that the Participant or such other person make arrangements
satisfactory to the Company for payment of the balance of any taxes required to
be withheld. At the discretion of the Board, any such arrangements may without
limitation include voluntary or mandatory relinquishment of a portion of any
such payment or benefit or the surrender of outstanding Common Shares. The
Company and any Participant or such other person may also make similar
arrangements with respect to the payment of any taxes with respect to which
withholding is not required.
9. Administration of the Plan.
(a) This Plan shall be administered by the Board. A majority
of the Board shall constitute a quorum, and the acts of the members of the Board
who are present at any meeting thereof at which a quorum is present, or acts
unanimously approved by the members of the Board in writing, shall be the acts
of the Board.
(b) The interpretation and construction by the Board of any
provision of this Plan or any agreement, notification or document evidencing the
grant of Option Rights, and any determination by the Board pursuant to any
provision of this Plan or any such agreement, notification or document, shall be
final and conclusive. No member of the Board shall be liable for any such action
taken or determination made in good faith.
10. Amendments and Other Matters.
(a) This Plan may be amended from time to time by the Board;
provided, however, that except as expressly authorized by this Plan, no such
amendment shall cause this Plan to cease to satisfy any applicable condition of
Rule 16b-3 without the further approval of the stockholders of the Company.
(b) With the concurrence of the affected Participant, the
Board may cancel any agreement evidencing Option Rights or any other award
granted under this Plan. In the event of any such cancellation, the Board may
authorize the granting of new Option Rights or other awards hereunder, which may
or may not cover the same number of Common Shares as had been covered by the
cancelled Option Rights or other award, at such Option Price, in such manner and
subject to
6
<PAGE>
such other terms, conditions and discretion as would have been permitted under
this Plan had the cancelled Option Rights or other award not been granted.
(c) This Plan shall not confer upon any Participant any right
with respect to continuance of service with the Board, the Company or any
Subsidiary and shall not interfere in any way with any right that the Company,
its stockholders or any Subsidiary would otherwise have to terminate any
Participant's service at any time.
(e) Any award that may be made pursuant to an amendment to
this Plan that shall have been adopted without the approval of the stockholders
of the Company shall be null and void if it is subsequently determined that such
approval was required under the terms of the Plan or applicable law.
(f) Unless otherwise determined by the Board, this Plan is
intended to comply with Rule 16b-3 at all times that awards hereunder are
subject to such Rule.
<PAGE>
Exhibit 10.7
Reference is made to that certain Agreement regarding
Employment/Compensation upon Change in Control, dated April 23, 1997 (the
"Agreement") between HEI, Inc., a Minnesota corporation, and Eugene W. Courtney,
an executive thereof.
In consideration of $1.00 and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Agreement is
hereby amended and restated in its entirety as follows:
This Agreement is entered into as of November 20, 1998, by and between
HEI, Inc., a Minnesota corporation ("HEI"), and Eugene W. Courtney, an
individual.
In consideration of the mutual promises and covenants contained herein,
the parties hereto agree as follows:
1. HEI shall pay to Mr. Courtney the amount of $540,000 as follows:
(i) $40,000 upon the execution of this amendment and
restatement of this Agreement, and
(ii) $500,000 over the 24 month period commencing January 1999
in equal monthly installments of $20,833.33 payable on the
first business day of each month.
The foregoing payments shall be in lieu of all other payments or
benefits of any kind whatsoever for which HEI shall be obligated to pay to Mr.
Courtney, and such payments shall be unconditionally due to Mr. Courtney
irrespective of any claim of breach of this Agreement or otherwise. The
remaining payments of such amounts as may be outstanding from time to time
<PAGE>
shall be unconditionally secured by a pledge of an equivalent principal balance
of certificates of deposit, government securities, letters of credit or other
comparable instruments, with such form of security to be reasonably acceptable
to Mr. Courtney, all as provided in that Assignment/Pledge Agreement of even
date herewith (the "Assignment/Pledge Agreement").
2. For the three month period (the "First Three Month Period")
commencing on the date hereof, Mr. Courtney shall devote 80% of his professional
time to HEI as a consultant and advisor, and for the three month period
immediately following the First Three Month Period, Mr. Courtney shall devote
40% of his professional time to such services; provided that during the six week
period commencing on the date hereof, Mr. Courtney shall continue to appear at
HEI's offices on business days consistent with his past practices.
3. Mr. Courtney shall be nominated to serve, and agrees to serve if
elected, as a director of HEI for a one-year term commencing at the 1999 annual
meeting of HEI shareholders.
4. HEI, Anthony J. Fant, and his affiliates ("HEI/Fant") hereby release
and discharge, to the fullest extent permitted by law, Mr. Courtney from all
known actions, suits, causes of action, rights, demands, and claims, fixed or
contingent, that HEI/Fant now have, or in the past had, against Mr. Courtney
based on, arising out of, or related to any matters arising up to the date
hereof.
Mr. Courtney hereby releases and discharges, to the fullest extent
permitted by law, HEI/Fant from all known actions, suits, causes of action,
rights, demands, and claims, fixed or
2
<PAGE>
contingent, that Mr. Courtney now has, or in the past had, against HEI/Fant, or
any of them, based on, arising out of, or related to any matters arising up to
the date hereof.
5. 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 and any other agreements
relating to Mr. Courtney's employment or severance, other than the
Assignment/Pledge Agreement and such agreements between HEI and Mr. Courtney
regarding confidentiality and non-competition. The parties represent that no
other such agreements or understandings exist.
Additionally, this Agreement shall in no manner affect Mr. Courtney's
rights to indemnification as a director, officer or employee of HEI.
6. This Agreement may not be changed, modified or amended except in
writing signed by both parties.
7. 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.
8. This Agreement shall be binding upon, and inure to the benefit of,
the Company, its successors and assigns, and Mr. Courtney, his heirs, legal
representatives and assigns.
9. 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.
10. This Agreement may be executed in counterparts.
3
<PAGE>
Dated: November 20, 1998 AGREED UPON AND ACKNOWLEDGED:
/s/ Eugene W. Courtney
-------------------------------------
Eugene W. Courtney, individually
HEI, INC.
By: /s/ Anthony J. Fant
-------------------------------------
Name: Anthony J. Fant
Title: Chairman
/s/ Anthony J. Fant
-------------------------------------
Anthony J. Fant, individually
and for his affiliates
4
<PAGE>
Exhibit 13
HEI, Inc.
Five Year Summary of Selected Financial Information
- ---------------------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Years Ended August 31 1998 1997 1996 1995 1994
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Net sales $20,805 $30,962 $20,680 $23,423 $17,295
Cost of sales 16,592 24,524 14,957 17,263 12,497
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Gross profit 4,213 6,438 5,723 6,160 4,798
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Operating expenses:
Selling, general and administrative 2,375 2,277 2,342 2,401 2,094
Research, development and engineering 852 843 849 754 679
Proxy/change of control costs 5,664 - - - -
Gain on sale of product line, net - (215) (45) - -
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Operating income (loss) (4,678) 3,533 2,577 3,005 2,025
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Income (loss) before income taxes (4,098) 3,980 2,833 3,250 2,102
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Income taxes (benefit) (1,471) 1,430 720 1,210 777
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Net income (loss) $(2,627) $ 2,550 $ 2,113 $ 2,040 $ 1,325
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Net income (loss) per basic share $ (.64) $ .62 $ .54 $ .54 $ .36
Net income (loss) per diluted share $ (.64) $ .60 $ .52 $ .52 $ .34
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Weighted average common shares
Outstanding
Basic 4,085 4,135 3,942 3,748 3,665
Diluted 4,085 4,279 4,098 3,899 3,858
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
Balance sheet:
Working capital $11,864 $14,784 $10,088 $ 8,380 $ 5,927
Total assets 22,173 24,511 22,414 12,857 10,905
Long-term debt, less current maturities 3,835 4,537 5,271 - -
Shareholders' equity 14,341 16,995 13,816 10,982 8,671
- --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
</TABLE>
<PAGE>
To Our Shareholders
Fiscal year 1998 was a year of fundamental transition for your Company. HEI
successfully completed a transition to new leadership and direction. It also
completed a transition from a business strategy that concentrated on building
our financial and technology foundations to a focus on strategic markets,
consistency of growth and expansion of capabilities. We eliminated our heavy
dependence on revenues from the volatile disk drive market--approximately 55% of
net sales in fiscal 1997 -- and built a revenue base founded on more diverse and
stable long-term growth opportunities. We also absorbed a one-time charge of
$5.7 million for the expenses associated with both parties' costs in the
Company's recent proxy contest and the related change of control costs.
1998: Successful Transition
HEI achieved 60% growth in revenues from targeted applications in the hearing,
medical and communications markets during fiscal 1998. This growth demonstrates
HEI's ability to successfully apply and expand our state-of-the-art
ultraminiature microelectronic packaging capabilities in these areas. The
Company reported net income from operations for the past fiscal year, excluding
the one-time costs related to the proxy contest and change of control, of
approximately $.25 per share diluted, almost all from non-disk drive business.
In fiscal 1998, HEI added significant top management expertise with the hiring
of Donald Reynolds as President and Stephen Petersen as Director of
Manufacturing. Mr. Reynolds came to us with 17 years' experience in electronics
engineering, marketing and senior management with BF Goodrich Aerospace. Mr.
Peterson brings over 20 years' experience in high technology engineering and
manufacturing, most recently with the Interconnect Division of Sheldahl, Inc. We
are pleased by their addition to our management team and look forward to their
ongoing contributions to our growth. Eugene Courtney resigned as Chief Executive
Officer, but remains a director of HEI and will also serve the Company in an
advisory role.
1999: Growth and Expansion
In fiscal 1999, with the strengthening of our focus on hearing, medical and
communications markets, we expect to further demonstrate HEI's growth potential
in these markets which have been carefully selected for their current and future
requirements for our core competencies.
In addition, we have begun a process of expanding those competencies to add
applications-specific design expertise and sales coverage. This effort will
provide differentiation in our markets and better position HEI for future growth
and profitability. We believe that the combination of leading edge packaging
knowledge and expanded circuit design expertise will provide value-added
services that more fully serve the needs of our prospects and customers.
As we pursue the strategies set out in fiscal 1998, we intend to expand our
technology base, adding and broadening HEI's capabilities through selective
partnering and/or acquisitions, particularly in the areas of flexible and
laminate substrates. This will enable us to provide optimum packaging
alternatives and serve new applications areas. We will also investigate further
expansion of our manufacturing capacity and capabilities, to provide additional
lower cost assembly services, where such services naturally complement and add
value to our leading edge capabilities in ultraminiature device manufacturing.
We believe that fiscal 1999 will be a year of growth in revenues and expansion
of capabilities and resources. Despite the uncertain economic conditions, we
remain optimistic, hopeful that these factors will not override our growth
prospects for fiscal 1999, particularly the latter half. We believe we have the
dynamic leadership and strategic direction, the identified applications and
customers, and the means and capability to create long-term growth and
expansion.
<PAGE>
New Directions and Opportunities
On August 4, 1998, HEI's shareholders elected a new Board of Directors to
lead your Company into the 21st century. HEI's strength comes from its
experienced staff, its leading edge technology and the outstanding customer
base it serves. Management and the new board are committed to building on
this foundation, setting aggressive objectives, and seeking new opportunities
to broaden and expand HEI's prospects.
HEI is well positioned to take advantage of exciting new opportunities in
microelectronics design and manufacturing, particularly in our strategic markets
of hearing and medical instrumentation and communications. We thank you for your
loyalty and confidence in HEI, and assure you of our dedication to growth,
diversity and increased shareholder value. We look forward to a bright future
for the Company and all its stakeholders.
Sincerely,
Anthony J. Fant Eugene W. Courtney Donald R. Reynolds
Chairman of the Board Director President
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; the year 2000 issue; 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>
Management's Discussion and
Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
The Company's net cash flow used for operating activities for the year
ended August 31, 1998, was $3,043,000. The significant components of this
operating net cash flow were negative cash flow of $1,451,000 from operations
before changes in current operating items, a $1,056,000 increase in accounts
receivable, a $1,089,000 increase in income taxes receivable and a $512,000
increase in other current assets partially offset by a $1,106,000 increase in
accounts payable. The increase in accounts receivable is attributable primarily
to increased sales in the last month of the current fiscal year versus the same
period of last fiscal year. The income tax receivable is a result of the carry
back effect of the pre-tax loss on fiscal year 1998 results. The increase in
other current assets is mainly due to deposits made on equipment that will be
converted to operating lease agreements. The increase in accounts payable is
primarily due to an accrual of invoiced proxy/change of control costs not paid
until September 1998.
Accounts receivable average days outstanding was 40 days for the year
ended August 31, 1998 compared to 36 days for the same period a year ago.
Inventory turns were 12.0 turns and 10.9 turns for the years ended August 31,
1998 and 1997, respectively.
The Company decreased short-term investments, primarily commercial
paper, to $7,984,000, down $1,191,000 from a year ago, primarily to pay
proxy/change of control costs. The current ratio at the end of fiscal 1998 was
4.2:1 as compared to 6.7:1 at the end of fiscal 1997. The reduced current ratio
is principally due to decreased cash and cash equivalents and short-term
investments and increased accounts payable partially offset by increased
accounts receivable and other current assets.
In May 1998, the Company extended the due date of its $3,000,000
revolving line of credit to January 1999 (see Note 5 under Notes to Financial
Statements). As of August 31, 1998, there were no borrowings under the line.
During fiscal 1998, the Company purchased $1,025,000 of property and
equipment to increase manufacturing capacity to meet anticipated requirements.
These expenditures were funded primarily by internally generated funds and the
remaining proceeds of the Industrial Development Revenue Bonds issued in April
1996. The Company also entered into operating leases for an additional $694,000
of equipment over a three year period.
During fiscal 1999, the Company intends to expend approximately $2.0
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 operations.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SALES BY PRODUCT LINE
- ------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------ --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Microelectronics $20,805 $30,962 $18,545
Light pens - - 2,135
- ------------------------------------------ --------------------- --------------------- ---------------------
Total $20,805 $30,962 $20,680
- ------------------------------------------ --------------------- --------------------- ---------------------
</TABLE>
Sales. 1998 vs. 1997: Sales in fiscal 1998 decreased $10,157,000, or 33%, as
compared to fiscal 1997. This decrease reflects the phase out during the last
quarter of fiscal 1997 of volume production of a device for use in high-density
disk drives. In the previous fiscal year, this disk drive program accounted for
55% of total sales. However, sales to the Company's other market areas (hearing
and medical instruments, telecommunications and industrial applications)
collectively increased 60% in fiscal 1998 as compared to sales to such markets
in fiscal 1997. In fiscal 1998, one large multinational customer accounted for
59% of total sales. The business with
<PAGE>
this customer has grown steadily over the last five years, and currently the
Company is producing 21 different devices for this customer for shipment to
multiple locations, both domestic and international. <TABLE> <CAPTION>
PERCENTAGE OF SALES
- ------------------------------------------------- ------------------- ------------------ -------------------
1998 1997 1996
- ------------------------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Sales 100% 100% 100%
Gross profit 20% 21% 28%
Selling, general and
administrative 11% 7% 11%
Research, development
and engineering 4% 3% 4%
Proxy/change of control costs 27% - -
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
1997 vs. 1996: Sales in fiscal 1997 increased $10,282,000, or 50%, as
compared to fiscal 1996. This increase was primarily 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 were
generally tied to the customers' projected sales and production of the related
product, the Company's sales levels were 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, 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 fiscal year 1997 and was
completed by the end of the fourth quarter.
Gross Profit. 1998 vs. 1997: The Company's gross profit as a percentage of sales
was 20% in fiscal 1998, as compared to 21% in fiscal 1997. The reduction in
gross profit and gross profit as a percentage of sales was primarily due to the
decrease in sales and the impact of relatively fixed manufacturing support
costs.
1997 vs. 1996: The Company's gross profit as a percentage of sales was
21% in fiscal 1997, as compared to 28% in fiscal 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.
Operating Expenses. 1998 vs. 1997: Fiscal 1998 selling, general and
administrative and research, development and engineering expenses increased
$107,000, or 3%, over the previous year. In addition to these costs, the Company
incurred $5,664,000 of one-time expenses related to proxy contest and change of
control costs which resulted from the efforts of Fant Industries Inc. in the
second half of this year to gain control of the Board of Directors. These
expenses included preparation of proxy materials and other information to
shareholders and litigation expenses related to the takeover activity, cash-out
payments made to all stock option holders which were required as a result of the
change of control and reimbursement to Fant Industries Inc. for its expenses as
agreed to by the shareholders. These one-time expenses of $5,664,000 were
entirely a cash outlay with the final amounts paid out in the first quarter of
fiscal 1999.
1997 vs. 1996: Selling, general and administrative expenses decreased
$65,000, or 3%, in fiscal 1997 from the previous year primarily due to the sale
of the light pen product line at the end of fiscal 1996 and the leveraging
effects of a significantly higher sales level. Research, development and
engineering expenses remained fairly constant in fiscal 1997 versus fiscal 1996.
<PAGE>
Gain on sale of product line of $215,000 in fiscal 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 fiscal 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 4
of Notes to Financial Statements).
Other, Principally Interest Income. 1998 vs. 1997: Other income increased
$133,000, or 30%, in fiscal 1998 as compared to fiscal 1997 primarily due to
cash received from previously reserved notes receivable.
1997 vs. 1996: Other income increased $191,000, or 75%, in fiscal 1997
as compared to fiscal 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.
Net Income (Loss). 1998 vs. 1997: The Company had a net loss of $2,627,000 in
fiscal 1998 compared to net income of $2,550,000 in fiscal 1997. The loss in
fiscal 1998 was a result of decreased revenues and proxy/change of control costs
of $5,664,000. The fiscal 1998 loss also resulted in an income tax benefit of
$1,471,000 and an effective rate of 36%.
1997 vs. 1996: The Company had net income of $2,550,000 in fiscal 1997
as compared to net income of $2,113,000 in fiscal 1996. Operating income of
$3,533,000 increased $956,000 in fiscal 1997 as compared to fiscal 1996
reflecting the significant 1997 sales increase. The effective tax rate in fiscal
1997 was 36% as compared to 25% in fiscal 1996. The reduced rate in fiscal year
1996 was due to the elimination of a deferred tax asset valuation allowance.
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, that the Company does not anticipate a significant financial
impact relating to year 2000 issues, 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
<PAGE>
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 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 is 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 has
had significant dependence on a single market. In fiscal 1998, 69% of the
Company's revenues came from sales to hearing instrument manufacturers. In
addition, the Company has made significant sales in the medical products
industry. 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 1998, 1997 and 1996, the Company's two largest customers accounted for
73%, 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
<PAGE>
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 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 microelectronics market 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 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
<PAGE>
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
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 hearing, 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 demand for the
Company's products decreases. 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 non-competition 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
<PAGE>
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.
Impact of Year 2000: The Company has considered the impact of Year 2000 on the
computer systems and applications and developed a remediation plan. Conversion
activities are in process and we expect conversion and testing to be completed
by March 1999. Expenditures in 1998 for the Year 2000 project amounted to
approximately $60,000 and the Company expects that completion of the project
will result in additional expenditures of approximately $50,000. The Company is
also assessing the Year 2000 readiness of key material and service providers.
The Company believes that with modifications to existing systems and
conversions to new systems, the Year 2000 issue will not pose significant
operational problems. However, there can be no assurance that all Year 2000
issues will be identified and resolved in a timely manner, particularly those
issues involving key material and service providers' and other business
affiliates' computer systems outside of the Company's control. If the Company's
remediation plan is not successful, or if these outside systems should fail,
there could be a significant disruption of the Company's ability to transact
business with its customers and suppliers.
<PAGE>
HEI, Inc.
Balance Sheets
- --------------
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
As of August 31 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 297 $ 3,458
Short-term investments 7,984 9,175
- ----------------------------------------------------------------------------
8,281 12,633
Accounts receivable, net 3,434 2,325
Inventories 1,538 1,575
Income taxes receivable 1,176 87
Other current assets 1,176 773
- ----------------------------------------------------------------------------
Total current assets 15,605 17,393
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Property and equipment
Land 216 216
Building and improvements 3,897 3,790
Fixtures and equipment 9,018 8,158
Accumulated depreciation (6,859) (5,558)
- ----------------------------------------------------------------------------
Net property and equipment 6,272 6,606
- ----------------------------------------------------------------------------
Restricted cash -- 389
Long-term investments 186 --
Deferred financing costs 110 123
- ----------------------------------------------------------------------------
Total assets $22,173 $24,511
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt $ 700 $ 648
Accounts payable 1,834 728
Accrued employee related costs 612 680
Accrued liabilities 595 553
- ----------------------------------------------------------------------------
Total current liabilities 3,741 2,609
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Long-term debt, less current maturities 3,835 4,537
Deferred tax liability 256 370
- ----------------------------------------------------------------------------
Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized,
none issued
Common stock, $.05 par: 10,000,000 shares
authorized; 4,095,195 and 4,103,176 shares
issued and outstanding, respectively 205 205
Paid-in capital 7,491 7,518
Retained earnings 6,645 9,272
- ----------------------------------------------------------------------------
Total shareholders' equity 14,341 16,995
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $22,173 $24,511
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEI, Inc.
Statements of Operations
- ------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Years Ended August 31 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $20,805 $30,962 $20,680
Cost of sales 16,592 24,524 14,957
- ----------------------------------------------------------------------------
Gross profit 4,213 6,438 5,723
- ----------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,375 2,277 2,342
Research, development and engineering 852 843 849
Proxy/change of control costs 5,664 -- --
Gain on sale of product line, net -- (215) (45)
- ----------------------------------------------------------------------------
Operating income (loss) (4,678) 3,533 2,577
- ----------------------------------------------------------------------------
Other, principally interest income 580 447 256
- ----------------------------------------------------------------------------
Income (loss) before income taxes (4,098) 3,980 2,833
- ----------------------------------------------------------------------------
Income tax expense (benefit) (1,471) 1,430 720
- ----------------------------------------------------------------------------
Net income (loss) $(2,627) $ 2,550 $ 2,113
- ----------------------------------------------------------------------------
Net income (loss) per common share
Basic $ (0.64) $ 0.62 $ 0.54
Diluted $ (0.64) $ 0.60 $ 0.52
- ----------------------------------------------------------------------------
Weighted average common shares outstanding
Basic 4,085 4,135 3,942
Diluted 4,085 4,279 4,098
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEI, Inc.
Statements of Changes in
Shareholders' Equity
- ----------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Common Stock Common Stock
Shares Amount Paid-in Retained
Outstanding Outstanding Capital Earnings
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Net loss...................................... -- -- -- (2,627)
Issuance of common shares
under employee stock purchase
and option plans............................ 26,819 1 159 --
Common shares repurchased and retired ........ (34,600) (1) (186) --
- -----------------------------------------------------------------------------------------------------------
Balance, August 31, 1998 4,095,195 $ 205 $7,491 $ 6,645
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEI, Inc.
Statements of Cash Flows
- ------------------------
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Years Ended August 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow provided by operating activities:
Net income (loss) $ (2,627) $ 2,550 $ 2,113
Depreciation 1,358 1,376 907
Amortization 60 70 31
Accounts receivable and inventory allowances (1) 59 (222)
Deferred income tax expense (benefit) (242) 8 (198)
Gain on sale of product line, net -- (215) (45)
Other 1 35 51
Change in current operating items:
Accounts receivable (1,056) 1,701 (1,539)
Inventories (15) (60) 537
Income taxes (1,089) (656) 394
Other current assets (512) (133) (112)
Accounts payable 1,106 256 88
Accrued employee related costs and accrued liabilities (26) (121) 311
- -----------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) operating activities (3,043) 4,869 2,316
- -----------------------------------------------------------------------------------------------------
Cash flow used for investing activities:
Purchases of investments (15,185) (10,892) (7,033)
Maturities of investments 16,170 7,205 5,365
Additions to property and equipment (1,025) (1,605) (4,621)
Proceeds on sales of product lines and equipment 237 494 --
Decrease (increase) in restricted cash 389 2,066 (2,455)
- -----------------------------------------------------------------------------------------------------
Net cash flow provided by (used by) investing activities 606 (2,732) (8,744)
- -----------------------------------------------------------------------------------------------------
Cash flow provided by financing activities:
Proceeds from long-term debt -- -- 5,625
Repayment of long-term debt (650) (440) --
Increase in deferred financing costs (47) (54) (170)
Issuance of common stock and other 159 807 648
Tax benefit of nonqualified stock options -- 422 73
Repurchase of common shares (186) (600) --
- -----------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) financing activities (724) 135 6,175
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,161) 2,272 (252)
Cash and cash equivalents, beginning of year 3,458 1,186 1,438
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 297 $ 3,458 $ 1,186
- -----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
- -----------------------------------------------------------------------------------------------------
Interest paid $ 201 $ 218 $ 80
Income taxes paid 100 1,656 515
- -----------------------------------------------------------------------------------------------------
</TABLE>
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 high quality commercial
paper with maturities of less than one year. The short-term investments are
carried at amortized cost which approximates fair value and are classified as
held to maturity in accordance with Statement of Financial Accounting Standards
No. 115 (SFAS No. 115).
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. The approximate useful lives of
building and improvements are 10-39 years and fixtures and equipment are 3-10
years.
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.
Long-Lived Assets. The Company evaluates the recoverability of long-lived assets
in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". This statement requires
long-lived assets and certain identifiable intangibles to be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. As of August 31, 1998, the
Company did not consider any of its assets to be impaired.
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 (benefit) is the tax payable
(receivable) for the periods and the change during the period in deferred income
tax assets and liabilities.
Accounting for Stock-based Compensation. In October 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123 "Accounting for
Stock-based Compensation", a new standard of accounting and reporting for
stock-based compensation plans. The Company adopted the disclosure provisions 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
<PAGE>
accounting it has historically used and, therefore, the new standard has no
effect on the Company's operating results.
Revenue Recognition. Revenue is recognized at the time of shipment.
Net Income (Loss) Per Weighted Average Common Share. In February 1997, SFAS No.
128, "Earnings per Share" (EPS) was issued by the FASB. This standard, which the
Company adopted effective with its second quarter of fiscal 1998, requires dual
presentation of basic and diluted EPS on the face of the statement of
operations.
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding assuming the exercise of dilutive stock options.
The dilutive effect of the stock options is computed using the average market
price of the Company's stock during each period under the treasury stock method.
All prior period earnings per share have been recalculated in accordance with
SFAS No. 128.
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
- --------------------------------------------------------------------------------
Proxy/Change of Control Costs
The Company incurred $5,664,000 of one-time expenses related to proxy contest
and change of control costs which resulted from the efforts of Fant Industries
Inc. in the second half of this year to gain control of the Board of Directors.
These expenses included preparation of proxy materials and other information to
shareholders and litigation expenses related to the takeover activity, cash-out
payments made to all stock option holders which were required as a result of the
change of control and reimbursement to Fant Industries Inc. for its expenses as
agreed to by the shareholders. These one-time expenses of $5,664,000 were
entirely a cash outlay with the final amounts paid out in the first quarter of
fiscal 1999.
NOTE 3
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
- ------------------- ------------------ ----------------- ------------------
1998 1997 1996
- ------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Customer A 59% 27% 38%
Customer B 14% - -
Customer C - 55% 16%
Customer D - - 10%
- ------------------- ------------------ ----------------- ------------------
</TABLE>
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 are often dependent upon the continuance of
the customers' product programs. Customer C's product program was completed
during the fourth quarter of
<PAGE>
fiscal 1997. The Company's ten largest customers accounted for approximately 96%
of net sales in fiscal 1998, 95% in fiscal 1997, and 88% in fiscal 1996 and
approximately 96% and 87% of accounts receivable at August 31, 1998 and 1997,
respectively.
The Company had net sales of $10,407,000, $6,647,000 and $5,924,000 to
Singapore in fiscal 1998, 1997, and 1996, respectively, and $14,970,000 to
Thailand in fiscal 1997. Net export sales were $11,819,000, $22,604,000 and
$7,278,000 in fiscal 1998, 1997 and 1996, respectively. The majority of the
international sales were to multinational companies who instructed HEI to ship
products to their own off-shore assembly facilities.
NOTE 4
- --------------------------------------------------------------------------------
Other Financial Statement Data
The following provides additional information concerning selected balance sheet
accounts at August 31, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------- ----------------------- ----------------------
(In thousands) 1998 1997
- ------------------------------------------- ----------------------- ----------------------
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable $3,664 $2,608
Less allowance for doubtful accounts (230) (283)
- ------------------------------------------- ----------------------- ----------------------
$3,434 $2,325
- ------------------------------------------- ----------------------- ----------------------
Inventories:
Purchased parts $1,590 $1,557
Work in process 681 556
Finished goods 76 220
Less allowance for excess
or obsolete stock (809) (758)
- ------------------------------------------- ----------------------- ----------------------
$1,538 $1,575
- ------------------------------------------- ----------------------- ----------------------
Other current assets:
Deferred tax assets $ 688 $ 560
Deposits on operating leases 456 -
Receivable on sale of product line, net 12 114
Other current assets 20 99
- ------------------------------------------- ----------------------- ----------------------
$1,176 $ 773
- ------------------------------------------- ----------------------- ----------------------
Accrued liabilities:
Real estate taxes $ 90 $ 136
Other 505 417
- ------------------------------------------- ----------------------- ----------------------
$ 595 $ 553
- ------------------------------------------- ----------------------- ----------------------
</TABLE>
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 5
- --------------------------------------------------------------------------------
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
<PAGE>
construction of the new addition to the Company's manufacturing facility, and
the remainder was 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 April 1, 2005. In April 1998 and
1997 the Company repaid $650,000 and $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, 1998 was 3.70%. 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. Due to the
Company's one-time $5,664,000 proxy/change of control costs, the Company was
in default of certain of these covenants. The Company received waivers for
its covenant defaults. Restricted cash on the balance sheet represented cash
advanced under the bonds which was held by the bond trustee in an interest
bearing account and was released to the Company in fiscal 1998.
Also in fiscal 1998, the Company extended the due date of its
$3,000,000 revolving line of credit to January 1999. At August 31, 1998 and
1997, 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. Due to the
Company's one-time $5,664,000 proxy/change of control costs, the Company was in
default of certain of these covenants. The Company received waivers for its
covenant defaults. 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 at August 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending August 31,
<S> <C>
1999 $ 700
2000 700
2001 700
2002 700
2003 700
Thereafter 1,035
------------------------------------- -----------------------------
$4,535
------------------------------------- -----------------------------
</TABLE>
NOTE 6
- --------------------------------------------------------------------------------
Income Taxes
Income tax expense (benefit) for the years ended August 31 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------- ----------------- ----------------- -----------------
(In thousands) 1998 1997 1996
- --------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal $(1,234) $1,279 $829
State 5 143 89
Deferred (242) 8 (198)
- --------------------------------- ----------------- ----------------- -----------------
Income tax expense (benefit) $(1,471) $1,430 $720
- --------------------------------- ----------------- ----------------- -----------------
</TABLE>
<PAGE>
The components of the deferred tax assets and liabilities at August 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------- ----------------------- -----------------------
(In thousands) 1998 1997
- --------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
Deferred tax assets:
Receivables $ 105 $ 160
Inventories 324 282
Accrued liabilities 151 118
Net operating loss carry-forward 108 -
- --------------------------------------------- ----------------------- -----------------------
- --------------------------------------------- ----------------------- -----------------------
$ 688 $ 560
- --------------------------------------------- ----------------------- -----------------------
Deferred tax liabilities:
Property and equipment $(238) $(263)
Deferred gain on sales of product lines (18) (107)
- --------------------------------------------- ----------------------- -----------------------
$(256) $(370)
- --------------------------------------------- ----------------------- -----------------------
</TABLE>
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 more
likely than not be recoverable.
A reconciliation of the statutory federal income tax rate for the years
ended August 31 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------- ------------------ ------------------- ------------------
1998 1997 1996
- ----------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
Federal statutory tax rate (34.0)% 34.0% 34.0%
State income tax rate
(net of federal tax effect) (3.0) 2.4 2.7
Reversal of valuation allowance - - (9.7)
Other 1.1 (.5) (1.6)
- ----------------------------------- ------------------ ------------------- ------------------
Effective tax rate (35.9)% 35.9% 25.4%
- ----------------------------------- ------------------ ------------------- ------------------
</TABLE>
NOTE 7
- --------------------------------------------------------------------------------
Stock Benefit Plans
1989 Plan. Under the Company's 1989 Omnibus Stock Compensation Plan (the "1989
Plan"), a maximum of 2,000,000 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.
Generally, 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 1998, 1997 and 1996,
11,619, 12,049 and 26,330 shares at prices of $5.79, $5.08 and $3.96,
respectively, were purchased under the 1989 Plan.
At August 31, 1998, 1997 and 1996, the number of shares available for
grant were 428,062, 179,681 and 214,230, respectively.
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 ten years
after the grant
<PAGE>
date. Options to purchase 40,000 shares were granted each year to the four
non-employee directors at $11.325 per share and $6.00 per share in 1997 and
1996, respectively. Options to purchase 30,000 shares were granted to the three
non-employee directors at $4.925 in 1998. At August 31, 1998, no options for
shares remain outstanding and 130,000 shares are available for grant.
Change of Control. Under the terms and conditions of the Company's 1989 Plan and
the directors' plan, a change of control in the Company's Board of Directors,
under certain circumstances, requires a liquidation of all unexercised stock
options. In fiscal 1998, all stock options were liquidated under this provision.
The required payments relating to stock options outstanding due to the change of
control liquidation made in fiscal 1998 were approximately $3,700,000 which are
included in proxy/change of control costs in the statement of operations.
Summary of Activity. The following is a summary of all activity involving
options:
<TABLE>
<CAPTION>
- ---------------------------------- ---------------- ---------------------
Weighted Average
Options Exercise Price
Outstanding Per Share
- ---------------------------------- ---------------- ---------------------
<S> <C> <C>
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
- ---------------------------------- ---------------- ---------------------
Granted 575,000 5.160
Exercised (15,000) 5.308
Change of control liquidation (972,000) 5.397
Cancelled (35,000) 5.305
- ---------------------------------- ---------------- ---------------------
Balance, August 31, 1998 0 $0.000
- ---------------------------------- ---------------- ---------------------
</TABLE>
During fiscal 1998, terms of all outstanding stock options were
modified to extend the expiration to ten years after date of grant.
Accounting for Stock-based Compensation. 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 (loss) for fiscal years 1998, 1997 and 1996 would have been
changed to the following pro forma amounts:
<TABLE>
<CAPTION>
- --------------------------------------- ------------------- -------------------- ---------------------
1998 1997 1996
- --------------------------------------- ------------------- -------------------- ---------------------
<S> <C> <C> <C>
Net income (loss) $(2,636,000) $2,384,000 $2,023,000
Net income (loss) per share, diluted $ (.65) $ .56 $ .49
- --------------------------------------- ------------------- -------------------- ---------------------
</TABLE>
The weighted average grant-date fair value of options granted during
1998, 1997 and 1996 was $1.22, $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 weighted average assumptions:
<TABLE>
<CAPTION>
- ---------------------------------------------- -------------------- ------------------- --------------------
1998 1997 1996
- ---------------------------------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C>
Risk-free interest rates 5.00% to 5.50% 6.00% to 6.35% 5.22% to 6.31%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------- -------------------- ------------------- --------------------
1998 1997 1996
- ---------------------------------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C>
Expected life .5 to 3 years .5 to 5 years .5 to 5 years
Expected volatility 62% 62% 58%
Expected dividends None None None
- ---------------------------------------------- -------------------- ------------------- --------------------
</TABLE>
NOTE 8
- --------------------------------------------------------------------------------
Employee Benefit Plans
The Company has a 401(k) plan covering all eligible employees. Employees can
make voluntary contributions to the plan of up to 20% of their compensation not
to exceed the maximum specified by the Internal Revenue Code. The plan also
provides for a discretionary contribution by the Company. During fiscal years
1998, 1997 and 1996, the Company contributed $93,000, $100,000 and $96,000,
respectively, to the plan.
NOTE 9
- --------------------------------------------------------------------------------
Commitments
Future commitments under non-cancelable operating leases, primarily for
manufacturing equipment, are approximately $216,000 in 1999, $198,000 in 2000
and $72,000 in 2001. Total expense under non-cancelable operating leases was
approximately $153,000 in 1998, $66,000 in 1997 and $64,000 in 1996.
NOTE 10
- --------------------------------------------------------------------------------
Net Income (Loss) Per Weighted Average Share Computation
The components of net income (loss) per basic and diluted share are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------- ------------------ ---------------
(In thousands, except per share amounts) 1998 1997
- -------------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Basic:
Net income (loss) $(2,627) $2,550
Net income (loss) per share $ (.64) $ .62
Weighted average number of common shares outstanding 4,085 4,135
- -------------------------------------------------------- ------------------ ---------------
Diluted:
Net income (loss) $(2,627) $2,550
Net income (loss) per share $ (.64) $ .60
Weighted average number of common shares outstanding 4,085 4,135
Assumed conversion of stock options - 144
- -------------------------------------------------------- ------------------ ---------------
Weighted average common and assumed conversion shares 4,085 4,279
- -------------------------------------------------------- ------------------ ---------------
</TABLE>
<PAGE>
Report of Independent Accountants
To the Shareholders of HEI, Inc.:
We have audited the accompanying balance sheet of HEI, Inc. as of August 31,
1998 and the related statement of operations, changes in shareholders' equity,
and cash flows for the year then ended. 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 audit. The accompanying
financial statements of HEI, Inc. as of and for the years ended August 31, 1997
and 1996 were audited by other auditors whose report, dated September 26, 1997,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of HEI, Inc. as of August 31,
1998 and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 12, 1998
<PAGE>
Statement of Financial Responsibility
The accompanying financial statements, including the notes thereto, and other
financial information presented in this Annual Report, were prepared by
management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon management's best
estimates and judgments.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that the Company's assets are protected and that
transactions are executed in accordance with established authorizations and are
recorded properly. The reasonable assurance concept is based on recognition that
the cost of a system of internal accounting controls should not exceed the
benefit derived.
The Audit Committee of the Board of Directors is responsible for recommending
the independent accounting firm to be retained for the coming year. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, and financial reporting
matters.
On September 25, 1998, the Company's Board of Directors took action to approve
the engagement of KPMG Peat Marwick LLP (KPMG) as the Company's independent
accountants following the September 3, 1998 resignation of
PricewaterhouseCoopers LLP (PwC), the Company's independent accountants for the
past five years. The report by PwC on the Company's financial statements for
fiscal years ended August 31, 1997 and 1996 did not contain an adverse opinion
or disclaimer of opinion nor were they qualified or modified as to uncertainty,
scope, or accounting principles. During the Company's fiscal years ended August
31, 1997 and 1996, and the period from September 1, 1997 to September 3, 1998,
there were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, that
if not resolved to the satisfaction of PwC would have caused it to make a
reference to such disagreement in its report nor any reportable events as
defined in Item 304(a) (1) (v) of Regulation S-K. Prior to the engagement of
KPMG, neither the Company nor anyone acting on its behalf consulted KPMG on any
matter of accounting principles or the application of such principles to a
particular transaction.
The Company's independent accountants, KPMG, are engaged to audit the financial
statements of the Company and to issue their report thereon. See the
accompanying Report of Independent Accountants.
<PAGE>
Summary of Quarterly Operating Results (unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------- -------------- -------------- -------------- --------------
Fiscal Year 1998 First Second Third Fourth
- ----------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $4,080 $4,632 $6,026 $6,067
Gross profit 537 992 1,414 1,270
Proxy/change of control costs - - 274 5,390
Operating income (loss) (266) 137 336 (4,885)
Net income (loss) (104) 204 347 (3,074)
- ----------------------------------- -------------- -------------- -------------- --------------
Net income (loss) per share
Basic $ (.03) $ .05 $ .08 $ (.75)
Diluted $ (.03) $ .05 $ .08 $ (.75)
- ----------------------------------- -------------- -------------- -------------- --------------
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
Basic $ .25 $ .14 $ .13 $ .10
Diluted $ .24 $ .14 $ .13 $ .10
- ----------------------------------- -------------- -------------- -------------- --------------
</TABLE>
NOTE:
The summation of quarterly net income (loss) per share for 1998 and on a diluted
basis for 1997 does 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
Anthony J. Fant, Chairman
Chief Executive Officer
of the Company, President
and Chief Executive Officer
Fant Industries Inc.
Eugene W. Courtney
Business Consultant
Edwin W. Finch, III
President
FHL Capital Corporation
David W. Ortlieb
Independent Management Consultant
Steve E. Tondera, Jr.
Senior Vice President
and Chief Financial Officer
Fant Industries Inc.
Mack V. Traynor, III
President and
<PAGE>
Chief Executive Officer
NEO Networks
Corporate Officers
and Management
Anthony J. Fant
Chief Executive Officer
Donald R. Reynolds
President
Jerald H. Mortenson
Vice President of Finance
and Administration,
Chief Financial Officer
and Treasurer
Dale A. Nordquist
Vice President of Sales
and Marketing
Stephen K. Petersen
Director of Manufacturing
Scott J. Kazle
Director of Research and Development
Wray A. Wentworth
Director of Corporate Quality
General Counsel
Brown & Wood LLP
New York, New York
Independent Accountants
KPMG Peat Marwick LLP
Minneapolis, Minnesota
Stock Transfer Agent
and Registrar
Norwest Bank Minnesota, N.A.
Box 738
161 North Concord Exchange
South St. Paul
Minnesota 55075-0738
Corporate Headquarters
HEI, Inc.
P.O. Box 5000
1495 Steiger Lake Lane
Victoria, Minnesota 55386-5000
(612) 443-2500
E-mail: [email protected]
Internet: www.heii.com
<PAGE>
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 20, 1999 at 3:00 PM at
The Planets (50th floor),
IDS Center, 80 South Eighth Street,
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 1998 and 1997, as reported by Nasdaq.
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
First Quarter $ 5-3/4 $4-11/32
Second Quarter 7-3/8 4-1/4
Third Quarter 7-1/4 6-1/8
Fourth Quarter 6-15/16 4-3/4
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
</TABLE>
As of August 31, 1998, the Company had approximately 2,500 shareholders of which
approximately 525 are shareholders of record. The Company has not declared cash
dividends.
<PAGE>
Exhibit 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of HEI, Inc.:
We have audited the balance sheet of HEI, Inc. as of August 31, 1997, and the
related statements of operations, changes in shareholders' equity, and cash
flows for the years ended August 31, 1997 and 1996. 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 the results of its operations and its cash flows for the years ended
August 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 26, 1997
<PAGE>
Exhibit 23
The Board of Directors
HEI, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-33322, 33-46928, 33-46929, and 333-49489) on Form S-8 of HEI, Inc. of our
report dated October 12, 1998, relating to the balance sheet of HEI, Inc. as of
August 31, 1998 and for the year ended August 31, 1998, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the year ended August 31, 1998, which report appears in the August 31, 1998,
annual report on Form 10-KSB of HEI, Inc.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 25, 1998
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
HEI, Inc. on Forms S-8 (File Nos. 33-33322, 33-46928, 33-46929 and 333-49489) of
our report dated September 26, 1997, on our audits of the financial statements
of HEI, Inc. as of August 31, 1997, and for the years ended August 31, 1997 and
1996, which report is incorporated by reference in its Annual Report on Form
10-KSB for the year ended August 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
November 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 297
<SECURITIES> 0
<RECEIVABLES> 3,434
<ALLOWANCES> 0
<INVENTORY> 1,538
<CURRENT-ASSETS> 15,605
<PP&E> 13,131
<DEPRECIATION> 6,859
<TOTAL-ASSETS> 22,173
<CURRENT-LIABILITIES> 3,741
<BONDS> 3,835
0
0
<COMMON> 205
<OTHER-SE> 14,136
<TOTAL-LIABILITY-AND-EQUITY> 22,173
<SALES> 20,805
<TOTAL-REVENUES> 20,805
<CGS> 16,592
<TOTAL-COSTS> 16,592
<OTHER-EXPENSES> 8,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> (4,098)
<INCOME-TAX> (1,471)
<INCOME-CONTINUING> (2,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,627)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
