<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
****
FORM 10-QSB
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[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended November 28, 1998.
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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.
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(Exact name of Small Business Issuer in Its Charter)
Minnesota 41-0944876
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(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
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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 .
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of January 7, 1999, 4,095,195
shares of common stock, par value $.05.
Transitional Small Business Disclosure Format (Check one): Yes No X.
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This Form 10-QSB consists of 10 pages.
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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
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 7-9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 9
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS
HEI, INC.
BALANCE SHEETS (UNAUDITED)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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NOVEMBER 28, 1998 August 31, 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $1,377 $297
Short-term investments 6,539 7,984
Restricted cash 222 -
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8,138 8,281
Accounts receivable, net 2,815 3,434
Inventories 1,885 1,538
Income taxes receivable 1,244 1,176
Other current assets 899 1,176
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Total current assets 14,981 15,605
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Property and equipment:
Land 216 216
Building and improvements 3,915 3,897
Fixtures and equipment 9,148 9,018
Accumulated depreciation (7,182) (6,859)
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Net property and equipment 6,097 6,272
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Restricted cash 271 -
Long-term investments 189 186
Deferred financing costs 95 110
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Total assets $21,633 $22,173
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $700 $700
Accounts payable 1,244 1,834
Accrued employee related costs 720 612
Accrued liabilities 334 595
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Total current liabilities 2,998 3,741
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Long-term liabilities, less current portion 4,106 3,835
Deferred tax liability 290 256
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Shareholders' equity
Undesignated stock; 5,000,000 shares authorized;
none issued
Common stock, $.05 par; 10,000,000 shares authorized;
4,095,195 shares issued and outstanding 205 205
Paid-in capital 7,491 7,491
Retained earnings 6,543 6,645
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Total shareholders' equity 14,239 14,341
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Total liabilities and shareholders' equity $21,633 $22,173
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
4
HEI, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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Three Months Ended
NOV. 28, 1998 Nov. 29, 1997
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<S> <C> <C>
Net sales $6,135 $4,080
Cost of sales 4,835 3,543
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Gross profit 1,300 537
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Operating expenses:
Selling, general and administrative 754 635
Research, development and engineering 276 168
Severance costs 490 -
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Operating loss (220) (266)
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Other income, principally interest income 62 107
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Loss before income taxes (158) (159)
Income tax benefit (56) (55)
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Net loss ($102) ($104)
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Net loss per common share
Basic ($0.02) ($0.03)
Diluted ($0.02) ($0.03)
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Weighted average common shares outstanding
Basic 4,095 4,085
Diluted 4,095 4,085
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
5
HEI, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
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(IN THOUSANDS)
<TABLE>
<CAPTION>
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Three Months Ended
NOVEMBER 28, 1998 November 29, 1997
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<S> <C> <C>
Cash flow provided by operating activities:
Net loss ($102) ($104)
Depreciation 341 343
Amortization 15 16
Accounts receivable and inventory allowances 64 59
Deferred income tax expense (benefit) 12 (85)
Changes in current operating items:
Accounts receivable 619 1,054
Inventories (411) 209
Income taxes (68) -
Other current assets 281 40
Accounts payable (590) (134)
Accrued employee related costs and accrued liabilities (153) (172)
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Net cash flow provided by operating activities 8 1,226
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Cash flow provided by (used for) investing activities:
Purchases of investments (670) (3,458)
Maturities of investments 2,112 2,825
Additions to property and equipment (166) (219)
Proceeds on sales of product lines 18 64
Increase in restricted cash (493) (5)
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Net cash flow provided by (used for) investing activities 801 (793)
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Cash flow provided by (used for) financing activities:
Issuance of long-term debt 271 -
Repurchase of common shares - (186)
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Net cash flow provided by (used for) financing activities 271 (186)
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Net increase in cash and cash equivalents 1,080 247
Cash and cash equivalents, beginning of period 297 3,458
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Cash and cash equivalents, end of period $1,377 $3,705
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
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Interest paid $43 $54
Income taxes paid - -
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</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) HEI, INC.
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(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements have been prepared by the Company, under the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements contain all normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of such
financial statements.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These unaudited financial statements should be read in
conjunction with the financial statements and notes included in the Company's
Annual Report to Shareholders on Form 10-KSB for the year ended August 31, 1998.
Interim results of operations for the three month period ended November 28, 1998
may not necessarily be indicative of the results to be expected for the full
year.
The Company is currently in the process of determining the impact of Statement
of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for
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) November 28, 1998 August 31, 1998
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<S> <C> <C>
Purchased parts $1,517 $1,590
Work in process 900 681
Finished goods 342 76
Allowance for excess or obsolete stock (874) (809)
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$1,885 $1,538
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</TABLE>
(3) NET LOSS PER WEIGHTED AVERAGE COMMON SHARE
Basic earnings per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed by dividing net 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. In periods where
losses have occurred, options are considered anti-dilutive and thus have not
been included in the diluted loss per share calculations. All prior period loss
per share amounts have been recalculated in accordance with SFAS No. 128.
<PAGE>
7
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 $8,000 for
the three months ended November 28, 1998. This included a net loss of
$102,000, non-cash depreciation and amortization of $356,000, and a net
reduction of $322,000 in current operating items for the first three months
of fiscal 1999. The current operating item reduction included decreased
accounts receivable of $619,000 due to the timing of remittances in the three
month period ended November 28, 1998 as compared to the three month period
ended August 31, 1998. The current operating item reduction also included a
decrease in accounts payable of $590,000 mainly due to payments for
proxy/change of control costs.
Accounts receivable average days outstanding were 41 days as of November 28,
1998 compared to 31 days for the same period a year ago primarily due to higher
shipments as a percentage of total shipments toward the end of the first quarter
of the current year as compared to the first quarter of last fiscal year.
Inventory turns were 9.7 for the first three months of fiscal 1999 and for the
same period a year ago.
In April 1996, the Company received proceeds of $5,625,000 from the issuance of
Industrial Development Revenue Bonds. Of these funds, approximately $1,500,000
was used for the 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 no later than April 1, 2005. In
April 1998 and 1997, the Company repaid $650,000 and $440,000 of the
construction and equipment bonds and in April 1999, another $700,000 is expected
to be repaid. The Company has a 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 November 28, 1998 and August 31, 1998
was 3.60% and 3.70%, respectively. The bonds are collateralized by two
irrevocable letters of credit and essentially all of the Company's property and
equipment. The letter of credit reimbursement agreement 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 recognition
of severance costs in the first quarter of fiscal 1999, the Company incurred a
loss and was in default of certain of these covenants. The Company's covenant
defaults were waived. Restricted cash on the balance sheet represents an
investment pledged as payment on a severance agreement and is held in a separate
account and will be released to the Company's regular accounts over the next two
years for as the obligation is paid.
The Company has a $3,000,000 revolving line of credit which expires in January
1999. As of November 28, 1998, there were no borrowings under the amended
revolving line of credit. Any borrowings under this agreement would be
collateralized by the Company's accounts receivable. The agreement requires
compliance with certain financial covenants and restricts obtaining other
borrowings. Due to the recognition of severance costs in the first quarter of
fiscal 1999, the Company incurred a loss and was in default of certain of these
covenants. The Company's covenant defaults were waived. Interest on the
revolving line of credit is based, at the Company's option, on the lender's
prime rate of interest or 2% above the lender's LIBOR rate.
<PAGE>
8
Capital equipment expenditures for the three months ended November 28, 1998 were
$166,000, primarily for production equipment.
During fiscal 1999, the Company intends to expend approximately $1.8 million for
capital equipment to increase manufacturing capacity to meet anticipated
requirements for continued revenue growth. It is expected that these
expenditures will be funded primarily from internally generated funds.
REVIEW OF OPERATIONS
NET SALES
FISCAL 1999 VS. 1998: HEI, Inc.'s net sales for the three months ended November
28, 1998 increased 50%, compared to the same period a year ago reflecting an
increase in sales to the medical and telecommunications markets.
Because the Company's sales are generally tied to the customers' projected sales
and production of the related product, the Company's sales levels are subject to
fluctuations outside the Company's control. To the extent that sales to any one
customer represent a significant portion of the Company's sales, any change in
the level of sales to that customer can have a significant impact on the
Company's total sales. In addition, production for one customer may conclude
while production for a new customer has not yet begun or is not yet at full
volume. These factors may result in significant fluctuations in sales from
quarter to quarter.
GROSS PROFIT
FISCAL 1999 VS. 1998: For the three months ended November 28, 1998, gross profit
increased $763,000 from last year, and the gross profit margin increased to 21%
from 13% last year. The increased gross profit rate primarily reflects the
impact of higher sales on relatively fixed manufacturing costs.
OPERATING EXPENSES
FISCAL 1999 VS. 1998: Operating expenses for the three month period ended
November 28, 1998 increased from last year's comparable period. The increase in
sales, general and administrative expenses of $119,000 was due to higher legal
expenses, increased selling expenses and start up costs related to Mexican
operations which are expensed as incurred. The increase in research, development
and engineering expenses of $108,000 was primarily due to increased development
costs to support future business opportunities. In addition to these costs, 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
will be paid over the next two years. Operating expenses in total were 25% of
net sales compared to 20% for the first quarter of last year. The increase in
the percentage to net sales is primarily due to increased expenses and the
recognition of severance costs partially offset by increased revenues.
INCOME TAX BENEFIT
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 and fiscal 1998 is approximately 35%. Income tax
benefit for the first quarter of fiscal 1999 was $56,000 as compared to income
tax benefit of $55,000 for the same period a year ago.
<PAGE>
9
NET LOSS
FISCAL 1999 VS. 1998: The Company had a net loss of $102,000 for the first
quarter of fiscal 1999 compared to net loss of $104,000 for the same period a
year ago. The net loss for the current quarter was primarily due to the
recognition of severance costs. The net loss for the first quarter of fiscal
1998 was principally the result of decreased sales and lower gross profit
margins.
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.
FORWARD-LOOKING INFORMATION
INFORMATION IN THIS DOCUMENT WHICH IS NOT HISTORICAL INCLUDES FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE MADE BASED ON THE COMPANY'S
CURRENT ASSUMPTIONS REGARDING TECHNOLOGY, MARKETS, GROWTH AND EARNINGS
EXPECTATIONS, AND ALL OF SUCH FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES. THERE ARE CERTAIN IMPORTANT FACTORS THAT CAN CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
INCLUDING, WITHOUT LIMITATION, ADVERSE BUSINESS OR MARKET CONDITIONS, THE
ABILITY OF THE COMPANY TO SECURE AND SATISFY CUSTOMERS, THE AVAILABILITY AND
COST OF MATERIALS FROM HEI'S SUPPLIERS, ADVERSE COMPETITIVE DEVELOPMENTS, 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.
PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
Forms 8-K Current Report were filed with the Securities and Exchange
Commission on November 24, 1998, October 1, 1998 and September 11, 1998.
<PAGE>
10
SIGNATURES
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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.
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(Registrant)
Date: 01/12/99 /s/ Jerald H. Mortenson
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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> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-28-1998
<CASH> 1,377
<SECURITIES> 0
<RECEIVABLES> 2,815
<ALLOWANCES> 0
<INVENTORY> 1,885
<CURRENT-ASSETS> 14,981
<PP&E> 13,279
<DEPRECIATION> (7,182)
<TOTAL-ASSETS> 21,633
<CURRENT-LIABILITIES> 2,998
<BONDS> 3,835
0
0
<COMMON> 205
<OTHER-SE> 14,034
<TOTAL-LIABILITY-AND-EQUITY> 21,633
<SALES> 6,135
<TOTAL-REVENUES> 6,135
<CGS> 4,835
<TOTAL-COSTS> 4,835
<OTHER-EXPENSES> 1,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> (158)
<INCOME-TAX> (56)
<INCOME-CONTINUING> (102)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (102)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
