<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
****
FORM 10-QSB
****
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended May 29, 1999.
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to .
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Commission File Number 0-10078
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HEI, Inc.
-----------------------------
(Exact name of Small Business Issuer in Its Charter)
Minnesota 41-0944876
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612)443-2500
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None
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Former name, former address and former fiscal
year, if changed since last report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: as of July 12, 1999,
4,101,965 shares of common stock, par value $.05.
Transitional Small Business Disclosure Format (Check one): Yes No X.
--- ---
This Form 10-QSB consists of 11 pages.
<PAGE>
2
Table of Contents HEI, Inc.
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<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . 3
Statements of Operations . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 8-10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS
HEI, INC.
BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MAY 29, 1999 August 31, 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,951 $297
Short-term investments 4,557 7,984
Restricted cash 295 -
- -------------------------------------------------------------------------------------------------------------------------
6,803 8,281
Accounts receivable, net 2,818 3,434
Inventories 2,173 1,538
Income taxes receivable - 1,176
Other current assets 1,033 1,176
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 12,827 15,605
- -------------------------------------------------------------------------------------------------------------------------
Property and equipment:
Land 216 216
Building and improvements 3,915 3,897
Fixtures and equipment 10,712 9,018
Accumulated depreciation (7,835) (6,859)
- -------------------------------------------------------------------------------------------------------------------------
Net property and equipment 7,008 6,272
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Restricted cash 146 -
Long-term investments - 186
Deferred financing costs 110 110
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Total assets $20,091 $22,173
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $700 $700
Accounts payable 313 1,834
Accrued employee related costs 696 612
Accrued liabilities 483 595
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Total current liabilities 2,192 3,741
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Long-term debt, less current maturities 3,281 3,835
Deferred tax liability 310 256
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Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized;
none issued
Common stock, $.05 par; 10,000,000 shares authorized;
4,101,965 and 4,095,195 shares issued and
outstanding, respectively 205 205
Paid-in capital 7,528 7,491
Retained earnings 6,575 6,645
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Total shareholders' equity 14,308 14,341
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $20,091 $22,173
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
4
HEI, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
MAY 29, 1999 May 30, 1998 MAY 29, 1999 May 30, 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $5,032 $6,026 $18,220 $14,738
Cost of sales 4,393 4,612 14,802 11,795
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 639 1,414 3,418 2,943
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 787 594 2,467 1,873
Research, development and engineering 346 210 935 589
Proxy/change of control costs - 274 - 274
Severance costs - - 490 -
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (494) 336 (474) 207
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Other income 224 167 368 440
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Income (loss) before income taxes (270) 503 (106) 647
Income tax expense (benefit) (94) 156 (36) 200
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Net income (loss) ($176) $347 ($70) $447
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share
Basic ($0.04) $0.08 ($0.02) $0.11
Diluted ($0.04) $0.08 ($0.02) $0.11
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic 4,100 4,091 4,097 4,082
Diluted 4,100 4,300 4,097 4,196
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- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
5
HEI, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Nine Months Ended
MAY 29, 1999 May 30, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow provided by operating activities:
Net income (loss) ($70) $447
Depreciation 1,036 1,016
Amortization 41 47
Accounts receivable and inventory allowances (48) 31
Deferred income tax expense (benefit) 15 (123)
Other 4 -
Changes in current operating items:
Accounts receivable 666 (272)
Inventories (637) 350
Other current assets 141 (222)
Accounts payable (1,521) 297
Accrued employee related costs and accrued liabilities (84) (247)
Income taxes 1,232 376
- ---------------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 775 1,700
- ---------------------------------------------------------------------------------------------------------------------
Cash flow provided by (used in) investing activities:
Purchases of investments (7,919) (13,541)
Maturities of investments 11,532 11,358
Additions to property and equipment (1,776) (814)
Proceeds from sales of product lines 41 190
(Increase) decrease in restricted cash (441) 389
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Net cash flow provided by (used in) investing activities 1,437 (2,418)
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Cash flow used in financing activities:
Issuance of long-term debt 271 -
Repayment of long-term debt (825) (650)
Increase in deferred financing fees (41) (48)
Issuance of common stock and other 37 198
Repurchase of common shares - (186)
- ---------------------------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (558) (686)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,654 (1,404)
Cash and cash equivalents, beginning of period 297 3,458
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,951 $2,054
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------
Interest paid $120 $154
Income taxes paid 50 100
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) HEI, INC.
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(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited interim financial statements have been prepared by the Company,
under the rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements contain all normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation in
accordance with generally accepted accounting principles.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under such rules and regulations, although the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. The year-end balance sheet data were derived from
audited financial statements, but do not include all disclosures required by
generally accepted accounting principles. These unaudited financial statements
should be read in conjunction with the financial statements and notes included
in the Company's Annual Report to Shareholders on Form 10-KSB for the year ended
August 31, 1998. Interim results of operations for the three and nine month
periods ended May 29, 1999 may not necessarily be indicative of the results to
be expected for the full year.
Th Company is currently in the process of determining the impact of Statement of
Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting of Derivative
Instruments and Hedging Activities."
The Company's quarterly periods end on the last Saturday of each quarter of its
fiscal year ending August 31.
(2) INVENTORIES
Inventories are stated at the lower of cost or market and include materials,
labor and overhead costs. The first-in, first-out cost method is used in valuing
inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) MAY 29, 1999 August 31, 1998
------------ ---------------
<S> <C> <C>
Purchased parts $2,078 $1,590
Work in process 521 681
Finished goods 385 76
Allowance for excess or obsolete stock (811) (809)
---- ----
$2,173 $1,538
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</TABLE>
<PAGE>
7
(3) NET INCOME (LOSS) PER COMMON SHARE
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 unless
the effect is antidilutive. 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.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
MAY 29, 1999 May 30, 1998 MAY 29, 1999 May 30, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic common shares 4,100 4,091 4,097 4,082
Dilutive effect of stock options - 209 - 114
----- ----- ----- -----
Diluted common shares 4,100 4,300 4,097 4,196
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
(4) SUBSEQUENT EVENTS
On June 24, 1999 the Company obtained an exclusive, worldwide license from Micro
Substrates Corporation to manufacture and market a new high-frequency chip
carrier for applications in Local Multipoint Distribution Services, ultra
high-speed Internet routing and satellite communications. In a related
transaction, the Company made a cash equity investment of $1.5 million in Micro
Substrates Corporation and will supply goods and services, such as thin film
substrate processing, to Micro Substrates Corporation.
<PAGE>
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS HEI, INC.
----------------------------------------------------------------------
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow provided by operating activities was $775,000 for
the nine months ended May 29, 1999. This included primarily a net loss of
$70,000, adjusted for non-cash depreciation and amortization of $1,077,000, and
a net decrease of $203,000 in working capital investment during the first nine
months of fiscal 1999. The lower working capital investment resulted primarily
from increased inventories of $637,000 and decreased accounts payable of
$1,521,000 partially offset by decreased accounts receivable of $666,000 and an
income tax payable and receivable change of $1,232,000.
Inventory increase is primarily due to increased purchased parts and finished
goods in conjunction with meeting customer delivery requirements. Annualized
inventory turns were 6.0 for the third quarter of fiscal 1999 compared to 12.3
turns for the same period a year ago.
Accounts receivable average days outstanding were 43 days as of May 29, 1999
compared to 37 days for May 30, 1998.
In April 1996, the Company received proceeds of $5,625,000 from the issuance of
Industrial Development Revenue Bonds. The bonds related to the facility
expansion require annual principal payments of $90,000 in the first year and
$95,000 on April 1 of each year thereafter through 2011. The bonds related to
the purchased equipment require payments over seven years from the date of
purchase of the equipment through no later than April 1, 2006. In April 1999 and
1998, the Company repaid $700,000 and $650,000 of the construction and equipment
bonds, respectively. The Company has limited market risk in terms of the
variability of the interest rate on these 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 both May 29, 1999 and August 31,
1998 was 3.70%. The bonds are collateralized by two irrevocable letters of
credit and essentially all property and equipment. The letter of credit
reimbursement agreement contains certain restrictive covenants including
limitations on other borrowings and maintenance of specified financial levels
and ratios for net income, tangible net worth, debt to tangible net worth, cash
flow and indebtedness. Restricted cash on the balance sheet represents an
investment pledged as payment on a severance agreement, is held in a separate
account, and will be released to the Company's regular accounts over the next
two years as the obligation is paid.
The Company has available a $5,000,000 revolving line of credit which expires in
April 2000. As of May 29, 1999, there were no borrowings under this revolving
line of credit. Any borrowings under this agreement are subject to the extent of
and collateralized by the Company's accounts receivable. The agreement requires
compliance with certain financial covenants and restricts obtaining other
borrowings. Interest on the revolving line of credit is based, at the Company's
option, on the lender's prime rate of interest or 1.5% to 2% above the lender's
LIBOR rate.
Capital equipment expenditures for the nine months ended May 29, 1999 were
$1,776,000, primarily for production equipment.
During fiscal 1999, the Company intends to expend approximately $3,000,000 for
capital equipment to increase manufacturing capacity to meet anticipated
requirements for continued revenue growth, including the start up of assembly
operations in Mexico. Some of this equipment will be financed through operating
leases in lieu of capital expenditures.
<PAGE>
9
REVIEW OF OPERATIONS
NET SALES
FISCAL 1999 VS. 1998: HEI, Inc.'s net sales for the three month period ended May
29, 1999 decreased 16% from the same period a year ago primarily due to two
large customers temporarily reducing demand to bring their own inventory levels
down. Net sales for the nine month period increased 24% from the same period a
year ago reflecting increases from new customers and existing business in each
of the Company's core markets.
Because the Company's sales are generally tied to the customers' projected sales
and production of the related products, the Company's sales levels are subject
to fluctuations beyond the Company's control. To the extent that sales to any
one customer represent a significant portion of the Company's sales, any change
in the level of sales to that customer can have a significant impact on the
Company's total sales. In addition, production for one customer may conclude
while production for a new customer has not yet begun or is not yet at full
volume. These factors may result in significant fluctuations in sales from
quarter to quarter.
GROSS PROFIT
FISCAL 1999 VS. 1998: For the three month and nine month periods ended May 29,
1999, gross profit decreased $775,000 and increased $475,000, respectively, from
the same periods last year as a result of revenue fluctuations in fiscal 1999.
The gross profit rate for the third quarter of fiscal 1999 decreased to 13% from
23% for the comparable period last year primarily due to the impact of lower
revenues on fixed costs in the third quarter. The gross profit rate for the nine
months ended May 29, 1999 decreased slightly to 19% from 20% last year.
OPERATING EXPENSES
FISCAL 1999 VS. 1998: Operating expenses for the three and nine month periods
ended May 29, 1999 increased from last year's comparable periods. The
increase in selling, general and administrative expenses of $193,000 and
$594,000 for the three and nine month periods, respectively, was due to
higher legal expense, increased selling expenses and start up costs related
to Mexican operations which are expensed as incurred. The increases in
research, development and engineering expenses of $136,000 and $346,000 for
the three and nine month periods, respectively, were primarily due to
increased development costs to support future business opportunities. In
addition, during the first quarter the Company incurred $490,000 of costs
related to the severance agreement between the Company and Eugene W.
Courtney, former Chief Executive officer. These costs are being paid over a
two-year period. Operating expenses in total were 23% and 21% of net sales
for the three and nine month periods, respectively, compared to 18% and 19%
for the same periods last year. During the third quarter of fiscal year 1998,
the Company incurred $274,000 of special proxy/legal expenses relating to the
control contest in which Fant Industries, Inc. gained control of the
Company's Board of Directors. These special proxy/legal expenses continued
during the fourth quarter of last fiscal year.
OTHER INCOME
FISCAL 1999 VS. 1998: Other income for the three and nine month periods ended
May 29, 1999 included $168,000 from an insurance reimbursement of certain
litigation costs related to the proxy contest incurred during fiscal year 1998.
Other income for the previous fiscal year was principally interest income.
<PAGE>
10
INCOME TAXES
FISCAL 1999 VS. 1998: The Company records income tax expense for interim periods
based on the expected effective rate for the full year. The expected effective
income tax rate for fiscal 1999 is approximately 34% compared to the full year
fiscal 1998 effective rate of 31%. Income tax benefit was $94,000 and $36,000
for the three and nine month periods ended May 29, 1999 compared to income tax
expense of $156,000 and $200,000 for the same periods a year ago.
NET INCOME
FISCAL 1999 VS. 1998: The Company had a net loss of $176,000 and $70,000 for the
three and nine month periods ended May 29, 1999, respectively, compared to net
income of $347,000 and $447,000 for the same periods a year ago. The decrease in
net income for the three month period ended May 29, 1999 as compared to the same
period last year was principally the result of decreased sales. The decrease in
net income for the nine month period ended May 29, 1999 as compared to the same
period last year was principally the result of increased costs and expenses
associated with new business initiatives, including the start up of the
Company's new manufacturing facility in Mexico.
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
during the fourth quarter of fiscal 1999. Expenditures to date for the Year 2000
project amounted to approximately $90,000 and the Company expects that
completion of the project will result in additional expenditures of
approximately $20,000. 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.
FORWARD-LOOKING STATEMENTS
INFORMATION IN THIS DOCUMENT WHICH IS NOT HISTORICAL INCLUDES FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE MADE BASED ON THE COMPANY'S
CURRENT ASSUMPTIONS REGARDING TECHNOLOGY, MARKETS, GROWTH AND EARNINGS
EXPECTATIONS, AND ALL OF SUCH FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES. THERE ARE CERTAIN IMPORTANT FACTORS THAT CAN CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
INCLUDING WITHOUT LIMITATION, ADVERSE BUSINESS OR MARKET CONDITIONS; THE ABILITY
OF THE COMPANY TO SECURE AND SATISFY CUSTOMERS, THE AVAILABILITY AND COST OF
MATERIALS FROM HEI'S SUPPLIERS, ADVERSE COMPETITIVE DEVELOPMENTS, 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>
11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27-Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
May 29, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized
HEI, INC.
(Registrant)
Date: 07/12/99 /s/ Jerald H. Mortenson
-------------------- ------------------------------------------
Jerald H. Mortenson
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(a duly authorized officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-29-1999
<CASH> 1,951
<SECURITIES> 0
<RECEIVABLES> 2,818
<ALLOWANCES> 0
<INVENTORY> 2,173
<CURRENT-ASSETS> 12,827
<PP&E> 14,843
<DEPRECIATION> 7,835
<TOTAL-ASSETS> 20,091
<CURRENT-LIABILITIES> 2,192
<BONDS> 3,135
0
0
<COMMON> 205
<OTHER-SE> 14,103
<TOTAL-LIABILITY-AND-EQUITY> 20,091
<SALES> 18,220
<TOTAL-REVENUES> 18,220
<CGS> 14,802
<TOTAL-COSTS> 14,802
<OTHER-EXPENSES> 3,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> (106)
<INCOME-TAX> (36)
<INCOME-CONTINUING> (70)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
