<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 December 4, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from ______ to ______.
Commission File Number 0-10078
HEI, INC.
---------------------------
(Exact 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
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612) 443-2500
-----------------
None
----
Former name, former address and former
fiscal year, if changed since last report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of January 18, 2000, 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 10 pages.
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2
<TABLE>
<CAPTION>
Table of Contents HEI, Inc.
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<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited). . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 7-9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . ... . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS
HEI, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
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DECEMBER 4, 1999 August 31, 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $840 $1,217
Short-term investments 896 3,744
Restricted cash 273 295
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2,009 5,256
Accounts receivable, net 3,948 2,862
Inventories 2,386 1,861
Income taxes receivable 87 109
Other current assets 769 753
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Total current assets 9,199 10,841
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Property and equipment:
Land 216 216
Building and improvements 4,000 3,953
Fixtures and equipment 14,236 12,409
Accumulated depreciation (8,408) (8,238)
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Net property and equipment 10,044 8,340
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Restricted cash 21 83
Investment in MSC 1,444 1,468
Other long-term assets 201 221
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Total assets $20,909 $20,953
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $1,025 $0
Current maturities of long-term debt 700 700
Accounts payable 1,187 1,348
Accrued employee related costs 809 906
Accrued liabilities 312 379
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Total current liabilities 4,033 3,333
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Long-term liabilities, less current maturities 3,155 3,218
Deferred tax liability 15 246
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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 205 205
Paid-in capital 7,529 7,529
Retained earnings 5,972 6,422
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Total shareholders' equity 13,706 14,156
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Total liabilities and shareholders' equity $20,909 $20,953
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</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
4
HEI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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Three Months Ended
DEC. 4, 1999 Nov. 28, 1998
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<S> <C> <C>
Net sales $6,782 $6,135
Cost of sales 5,958 4,835
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Gross profit 824 1,300
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Operating expenses:
Selling, general and administrative 1,045 754
Research, development and engineering 433 276
Severance costs - 490
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Operating loss (654) (220)
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Other income (expense), net (28) 62
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Loss before income taxes (682) (158)
Income tax benefit (232) (56)
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Net loss ($450) ($102)
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Net loss per common share
Basic ($0.11) ($0.02)
Diluted ($0.11) ($0.02)
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Weighted average common shares outstanding
Basic 4,102 4,095
Diluted 4,102 4,095
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</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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5
HEI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(IN THOUSANDS)
<TABLE>
<CAPTION>
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Three Months Ended
DECEMBER 4, 1999 November 28, 1998
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<S> <C> <C>
Cash flow provided by (used for) operating activities:
Net loss ($450) ($102)
Equity in loss from MSC investment 24 -
Depreciation 432 341
Amortization 20 15
Accounts receivable allowance - -
Deferred income tax expense (benefit) (265) 12
Changes in current operating items:
Accounts receivable (1,086) 619
Inventories (525) (347)
Income taxes 22 (68)
Other current assets 18 281
Accounts payable (161) (590)
Accrued employee related costs and accrued liabilities (164) (153)
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Net cash flow provided by (used for) operating activities (2,135) 8
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Cash flow provided by investing activities:
Purchases of investments - (670)
Maturities of investments 2,848 2,112
Additions to property and equipment (2,136) (166)
Proceeds on sales of product lines - 18
Decrease (increase) in restricted cash 84 (493)
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Net cash flow provided by investing activities 796 801
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Cash flow provided by financing activities:
Repayment of long-term debt (63) -
Borrowings on revolving line of credit 1,025 -
Issuance of long-term debt - 271
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Net cash flow provided by financing activities 962 271
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Net increase (decrease) in cash and cash equivalents (377) 1,080
Cash and cash equivalents, beginning of period 1,217 297
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Cash and cash equivalents, end of period $840 $1,377
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
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Interest paid $38 $43
Income taxes paid 11 -
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</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) HEI, INC.
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(1) Basis of Financial Statement Presentation
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The unaudited consolidated 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.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.
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, 1999. Interim results of operations for the
three month period ended December 4, 1999 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) December 4, 1999 August 31, 1999
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<S> <C> <C>
Purchased parts $1,834 $989
Work in process 387 755
Finished goods 165 117
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$2,386 $1,861
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</TABLE>
(3) Net Loss Per Weighted Average Common Share
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Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Diluted loss 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.
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7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS HEI, INC.
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FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow used for operating activities was $2,135,000 for
the three months ended December 4, 1999. This included a net loss of
$450,000, non-cash depreciation and amortization of $452,000, equity in loss
from MSC investment of $24,000, increase in deferred income taxes of $265,000
and a net increase of $1,896,000 in current operating items for the first
three months of fiscal 2000. The current operating item increase included
increased accounts receivable of $1,086,000 due to increased sales in the
three month period ended December 4, 1999 as compared to the three month
period ended August 31, 1999. The current operating item increase also
included an increase in inventories of $525,000 mainly due an expected
increase in shipments.
Accounts receivable average days outstanding were 45 days as of December 4,
1999 compared to 41 days for the same period a year. Inventory turns were 8.4
for the first three months of fiscal 2000 compared to 9.7 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 1999 and 1998, the Company repaid $700,000 and
$650,000 of the construction and equipment bonds and in April 2000, 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
December 4, 1999 and August 31, 1999 was 4.15% 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.
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 year as the
obligation is paid.
The Company has a $5,000,000 revolving line of credit which expires in April
2000. At December 4, 1999, the Company had borrowed $1,025,000 under this
revolving line of credit. This borrowing is collateralized by the Company's
accounts receivable. The agreement requires compliance with certain financial
covenants and restricts obtaining other borrowings. Interest on the revolving
line of credit is based, at the Company's option, on the lender's prime rate
of interest or 2% above the lender's LIBOR rate.
Capital equipment expenditures for the three months ended December 4, 1999
were $2,136,000, primarily for production equipment in for the Company's new
facilities in Tempe, Arizona and Mexico as well as investments in a new
Enterprise Resource Planning applications software system.
<PAGE>
8
During fiscal 2000, the Company intends to expend approximately $5.4 million
for manufacturing and facility improvements and capital equipment as well as
a new enterprise resource planning application software system to support its
internal operations. These additions will increase manufacturing capacity to
meet anticipated requirements including additional equipment for the
Company's new facilities in Mexico and Tempe, Arizona. It is expected that
these expenditures will be funded primarily from operations and external
financing.
REVIEW OF OPERATIONS
NET SALES
FISCAL 2000 VS. 1999: HEI, Inc.'s net sales for the three months ended December
4, 1999 increased 11%, compared to the same period a year ago reflecting an
increase in sales to the hearing aid and industrial 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 2000 VS. 1999: For the three months ended December 4, 1999, gross
profit decreased $476,000 from last year, and the gross profit margin
decreased to 12% from 21% last year. The decreased gross profit rate
primarily reflects the impact of manufacturing related startup costs for the
Company's Tempe facility and unabsorbed fixed manufacturing costs for the
Mexico facility which is not yet operating at full capacity.
OPERATING EXPENSES
FISCAL 2000 VS. 1999: Operating expenses for the three month period ended
December 4, 1999 increased from last year's comparable period. The increase
in sales, general and administrative expenses of $291,000 was due to
increased selling expenses and ramp up costs for the High Density
Interconnect operations in Tempe, Arizona which are expensed as incurred. The
increase in research, development and engineering expenses of $157,000 was
primarily due to increased development costs to support future business
opportunities. Operating expenses in total were 22% of net sales compared to
25% for the first quarter of last year. The decrease in the percentage to net
sales is primarily due to severance costs incurred during the first quarter
of fiscal year 1999.
INCOME TAX BENEFIT
FISCAL 2000 VS. 1999: The Company records income tax expense (benefit) for
interim periods based on the expected effective rate for the full year. The
expected effective income tax rate for fiscal 2000 is approximately 34%.
Income tax benefit for the first quarter of fiscal 2000 was $232,000 as
compared to income tax benefit of $56,000 for the same period a year ago.
<PAGE>
9
NET LOSS
FISCAL 2000 VS. 1999: The Company had a net loss of $450,000 for the first
quarter of fiscal 2000 compared to a net loss of $102,000 for the same period
a year ago. The net loss for the current quarter was primarily due to higher
manufacturing, selling, general and administrative and research, development
and engineering expenses. The net loss for the first quarter of fiscal 1999
was principally the result of severance costs.
IMPACT OF YEAR 2000: The Company has devoted significant resources to
minimize the risk of potential disruption from year 2000 issues related to
computers or other equipment with date-sensitive software and embedded chip
systems. If we, or our significant customers, suppliers or other third
parties fail to correct year 2000 issues during the year 2000 transition
period, our ability to operate our business could be adversely affected.
However, based on our assessment of operations through January 17, 2000, we
have not experienced any significant year 2000 issues.
The Company assessed, inventoried and classified year 2000 issues on
all of our information systems infrastructure and non-technical assets (e.g.,
plant production equipment). Information systems that were year 2000
deficient were modified, upgraded or replaced and tested for compliance. All
non-computer assets (including production equipment) were tested for year
2000 compliance. The costs of addressing internal system year 2000 issues
totaled approximately $140,000, all of which have been incurred, and which
were not material to our financial position, results of operations or cash
flows.
The Company has surveyed significant customers, suppliers and third
parties critical to our business operations to determine their year 2000
compliance. Cross-functional planning teams assessed the associated risks and
developed contingency plans. The Company also established backup procedures
similar to existing procedures developed for our disaster recovery plan. The
Company will continue to modify these plans through the year 2000 transition
period as additional information becomes available.
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 AND OTHER
FACTORS DISCUSSED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS; HEI UNDERTAKES NO OBLIGATION TO
UPDATE THESE STATEMENTS TO REFLECT ENSUING EVENTS OR CIRCUMSTANCES, OR
SUBSEQUENT ACTUAL RESULTS.
<PAGE>
10
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
There were no Forms 8-K Current Report filed with the Securities
and Exchange Commission for the quarter ended December 4, 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: 01/18/00 /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> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> DEC-04-1999
<CASH> 840
<SECURITIES> 0
<RECEIVABLES> 3,948
<ALLOWANCES> 0
<INVENTORY> 2,386
<CURRENT-ASSETS> 9,199
<PP&E> 18,452
<DEPRECIATION> 8,408
<TOTAL-ASSETS> 20,909
<CURRENT-LIABILITIES> 4,033
<BONDS> 3,135
0
0
<COMMON> 205
<OTHER-SE> 13,501
<TOTAL-LIABILITY-AND-EQUITY> 20,909
<SALES> 6,782
<TOTAL-REVENUES> 6,782
<CGS> 5,958
<TOTAL-COSTS> 5,958
<OTHER-EXPENSES> 1,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (682)
<INCOME-TAX> (232)
<INCOME-CONTINUING> (450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (450)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
