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Previous: MEDIQ INC, 8-K, 2001-01-16 |
Next: BIOMET INC, SC 13G/A, 2001-01-16 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 2, 2000.
/ / 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 Registrant in Its Charter)
| Minnesota | 41-0944876 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN |
55386 |
|
| (Address of principal executive offices) | (Zip Code) |
(952) 443-2500
Issuer's telephone number, including area code
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 9, 2001, 4,784,196 shares of common stock, par value $.05.
This Form 10-Q consists of 11 pages.
| Part I — | Financial Information | |||
Item 1. |
Financial Statements |
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Consolidated Balance Sheets |
3 |
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Consolidated Statements of Operations |
4 |
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Consolidated Statements of Cash Flows |
5 |
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Notes to Consolidated Financial Statements |
6-7 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
8-10 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
11 |
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Part II — |
Other Information |
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Item 6. |
Exhibits and Reports on Form 8-K |
12 |
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Signatures |
13 |
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2
Item 1. Financial Statements
HEI, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
| |
December 2, 2000 |
August 31, 2000 |
||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 260 | $ | 484 | ||||
| Restricted cash | 87 | 86 | ||||||
| 347 | 570 | |||||||
Accounts receivable, net |
7,492 |
8,582 |
||||||
| Inventories | 6,058 | 5,869 | ||||||
| Other current assets | 686 | 807 | ||||||
| Total current assets | 14,583 | 15,828 | ||||||
| Property and equipment: | ||||||||
| Land | 216 | 216 | ||||||
| Building and improvements | 4,194 | 4,170 | ||||||
| Fixtures and equipment | 17,903 | 17,265 | ||||||
| Accumulated depreciation | (11,167 | ) | (10,457 | ) | ||||
| Net property and equipment | 11,146 | 11,194 | ||||||
| Long-term investments | 1,350 | 1,358 | ||||||
| Other long-term assets | 548 | 556 | ||||||
| Total assets | $ | 27,627 | $ | 28,936 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Revolving line of credit | $ | 1,891 | $ | 2,943 | ||||
| Current maturities of long-term debt | 1,079 | 1,107 | ||||||
| Accounts payable | 4,217 | 4,326 | ||||||
| Accrued employee related costs | 948 | 947 | ||||||
| Accrued liabilities | 294 | 603 | ||||||
| Total current liabilities | 8,429 | 9,926 | ||||||
| Long-term liabilities, less current maturities | 3,800 | 3,894 | ||||||
| Shareholders' equity: | ||||||||
| Undesignated stock; 5,000,000 shares authorized; none issued | — | — | ||||||
| Common stock, $.05 par; 10,000,000 shares authorized; 4,782,196 and 4,776,696 shares issued and outstanding | 239 | 239 | ||||||
| Paid-in capital | 8,806 | 8,606 | ||||||
| Retained earnings | 6,353 | 6,271 | ||||||
| Total shareholders' equity | 15,398 | 15,116 | ||||||
| Total liabilities and shareholders' equity | $ | 27,627 | $ | 28,936 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
HEI, Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
| |
Three Months Ended |
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|---|---|---|---|---|---|---|---|---|
| |
Dec. 2, 2000 |
Dec. 4, 1999 |
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| Net sales | $ | 13,724 | $ | 8,094 | ||||
| Cost of sales | 11,170 | 6,795 | ||||||
| Gross profit | 2,554 | 1,299 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 1,546 | 1,313 | ||||||
| Research, development and engineering | 520 | 433 | ||||||
| Operating income (loss) | 488 | (447 | ) | |||||
| Other expense, net | (363 | ) | (28 | ) | ||||
| Income (loss) before income taxes | 125 | (475 | ) | |||||
Income tax expense (benefit) |
43 |
(156 |
) |
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| Net income (loss) | $ | 82 | $ | (319 | ) | |||
| Net income (loss) per common share | ||||||||
| Basic | $ | 0.02 | $ | (0.07 | ) | |||
| Diluted | $ | 0.02 | $ | (0.07 | ) | |||
| Weighted average common shares outstanding | ||||||||
| Basic | 4,779 | 4,702 | ||||||
| Diluted | 5,079 | 4,702 | ||||||
See accompanying notes to unaudited consolidated financial statements.
4
HEI, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| |
Three Months Ended |
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|---|---|---|---|---|---|---|---|---|
| |
December 2, 2000 |
December 4, 1999 |
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| Cash flow from operating activities: | ||||||||
| Net income (loss) | $ | 82 | $ | (319 | ) | |||
| Equity in net loss of MSC | 8 | 24 | ||||||
| Depreciation and amortization | 732 | 480 | ||||||
| Accounts receivable allowance | (36 | ) | — | |||||
| Deferred income tax expense (benefit) | 119 | (265 | ) | |||||
| Non-cash expenses for CMED transaction | 161 | — | ||||||
| Other | 6 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,126 | (1,594 | ) | |||||
| Inventories | (189 | ) | (1,230 | ) | ||||
| Income taxes | (86 | ) | 74 | |||||
| Other current assets | 2 | 8 | ||||||
| Accounts payable | (109 | ) | 555 | |||||
| Accrued employee related costs and accrued liabilities | (222 | ) | (106 | ) | ||||
| Net cash flow provided by (used for) operating activities | 1,594 | (2,373 | ) | |||||
| Cash flow from investing activities: | ||||||||
| Maturities of investments | — | 2,848 | ||||||
| Additions to property and equipment | (682 | ) | (2,136 | ) | ||||
| Decrease (increase) in restricted cash | (1 | ) | 84 | |||||
| Net cash flow provided by (used for) investing activities | (683 | ) | 796 | |||||
| Cash flow from financing activities: | ||||||||
| Issuance of common stock | 39 | — | ||||||
| Repayment of long-term debt | (122 | ) | (73 | ) | ||||
| Borrowings on (repayments of) revolving line of credit | (1,052 | ) | 1,025 | |||||
| Net cash flow provided by (used for) financing activities | (1,135 | ) | 952 | |||||
| Net increase (decrease) in cash and cash equivalents | (224 | ) | (625 | ) | ||||
| Cash and cash equivalents, beginning of period | 484 | 2,043 | ||||||
| Cash and cash equivalents, end of period | $ | 260 | $ | 1,418 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | 146 | $ | 45 | ||||
| Income taxes paid | 14 | 35 | ||||||
See accompanying notes to unaudited consolidated financial statements.
5
HEI, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(1) Basis of Financial Statement Presentation
The unaudited interim 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 in accordance with accounting principles generally accepted in the United States of America.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America. 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, 2000. Interim results of operations for the three-month period ended December 2, 2000 may not necessarily be indicative of the results to be expected for the full year.
In December, 1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the first quarter of fiscal 2001. The adoption did not have an impact on the Company's financial position or results of operations.
During fiscal 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company adopted SFAS 133 in the first quarter of fiscal 2001. The adoption did not have an impact on the Company's financial position or results of operations.
The Company's quarterly periods end on the last Saturday of each quarter of its fiscal year ending August 31.
6
(2) Inventories
Inventories are stated at the lower of cost or market and include materials, labor and overhead costs. The weighted average cost method is used in valuing inventories. Inventories consist of the following:
| |
December 2, 2000 |
August 31, 2000 |
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|---|---|---|---|---|---|---|
| |
(In thousands) |
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| Purchased parts | $ | 4,851 | $ | 5,158 | ||
| Work in process | 591 | 418 | ||||
| Finished goods | 616 | 293 | ||||
| $ | 6,058 | $ | 5,869 | |||
(3) Net Income (Loss) Per Weighted Average Common Share
Basic income (loss) 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 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.
| |
Three Months Ended |
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|---|---|---|---|---|
| |
December 2, 2000 |
December 4, 1999 |
||
| |
(In thousands) |
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| Basic common shares | 4,779 | 4,702 | ||
| Dilutive effect of stock options | 300 | — | ||
| Diluted common shares | 5,079 | 4,702 | ||
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 $1,594,000 for the three months ended December 2, 2000. This primarily included net income of $82,000, non-cash depreciation and amortization of $732,000, deferred income tax expense of $119,000 and a net decrease of $522,000 in working capital investments during the first three months of fiscal 2000. The lower working capital investment primarily resulted from decreased accounts receivable of $1,126,000 partially offset by increased inventories of $189,000, decreased income taxes of $86,000, lower accounts payable of $109,000 and lower accrued employee related costs and accrued liabilities of $222,000.
Accounts receivable average days outstanding were 52 days as of December 2, 2000 compared to 47 days as of December 4, 1999 due to timing of customer remittances, primarily for our Mexico operations. Subsequent to the end of the quarter, a customer receivable of approximately $930,000 has become past due. The Company is in the process of structuring a payment plan with the customer. In addition, the customer has agreed to grant the Company a security interest in their assets subject to customer lender's approval. Management currently believes the receivable will be collected in full based on discussions with the customer and will continue to evaluate the need for an additional reserve for collection of this account in the quarter ended March 3, 2001 when the terms of the repayment plan have been fully developed.
The inventory increase is primarily due to increased finished goods in conjunction with future delivery requirements from our customers. Annualized inventory turns were 7.0 for the first quarter of fiscal 2001 compared to 7.3 turns for the same period a year ago.
In April 1996, the Company received proceeds of $5,625,000 from the issuance of Industrial Development Revenue Bonds. Of these proceeds, approximately $1,500,000 was used for the construction of the addition to the Company's manufacturing facility in Victoria, Minnesota and the remainder was used for equipment purchases. The bonds relating 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 relating to the purchased equipment require payments over seven years from the date of purchase of the equipment through no later than April 1, 2005. During each third quarter of fiscal years 2000 and 1999, the Company repaid $700,000 of the construction and equipment bonds and in April 2001, another $700,000 is expected to be repaid. 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 December 2, 2000 and August 31, 2000 was 4.60% and 4.70%, respectively. The bonds are collateralized by two irrevocable letters of credit and essentially all of the Company's property and equipment. A commitment fee is paid annually to the bank at a rate of 1.25% of the letters of credit.
The Company has a revolving commitment with a financial institution for total borrowings of the lesser of $5,000,000 or the borrowing base, as defined in the agreement, with interest, based on the Company's option, at the prime rate of interest or 2.5% above the LIBOR rate. At December 2, 2000 the interest rate on the revolving commitment was 9.5%. The balance outstanding was $1,891,000 and $2,943,000 at December 2, 2000 and August 31, 2000, respectively.
In August 2000, the Company arranged for financing of a capital expenditure loan. According to the terms of the loan, the Company will receive up to $5,000,000 reimbursement for capital equipment expenditures and will make equal monthly payments based on a term of 60 months from when the money is borrowed. The capital expenditure loan is due and payable in August, 2003 or later, contingent on the renewal of the bank agreement. These bank agreements discussed here and above
8
require the Company to maintain certain restrictive covenants. The Company was in compliance with these covenants at December 2, 2000.
The Company has $219,000 of debt outstanding which requires monthly payments until May 2004 of approximately $5,000 for principal and interest and carries an interest rate of 8.19%.
Restricted cash on the balance sheet represents an investment pledged as payment on a severance agreement and is held in a separate account and the remainder will be released to the Company's regular accounts in the second quarter as the obligation is paid.
During fiscal 2001, the Company intends and the Board of Directors has approved approximately $2.8 million of capital expenditures for manufacturing and facility improvements, of which $682,000 has been expended in the first quarter of fiscal 2001. These additions will increase manufacturing capacity to meet anticipated requirements including additional equipment for the Company's new facilities in Mexico and Tempe, Arizona. In addition, the Company is currently seeking approval from the Board of Directors for an additional $1.6 million of capital expenditures, which primarily relates to increased investment in RF wireless technology. It is expected that these expenditures will be funded primarily from operations and external financing.
REVIEW OF OPERATIONS
Net Sales
Fiscal 2001 vs. 2000: HEI, Inc.'s net sales for the three month period ended December 2, 2000 increased 70% compared to the same period a year ago, reflecting an increase in almost all markets and from Mexico and Cross operations.
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 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 2001 vs. 2000: For the three-month period ended December 2, 2000, gross profit increased $1,255,000 from the same period last year. The gross profit margin rate for the three months ended December 2, 2000 increased to 19% as compared to 16% for the comparable periods last year. This increase primarily reflects increased economies of scale from fixed manufacturing costs as a result of increased revenues.
Operating Expenses
Fiscal 2001 vs. 2000: Operating expenses for the three-month period ended December 2, 2000 increased from last year's comparable periods. The increase in selling, general and administrative expenses of $233,000 for the three-month period was due to increased selling costs to develop new business and support new operations and additional revenue. The increases in research, development and engineering expenses of $87,000 for the three month period were primarily due to increased development costs to support future business opportunities. Operating expenses in total were 15% of net sales for the three month period compared to 22% for the same period last year reflecting the impact of increased revenue. Total operating expenses are expected to continue to increase throughout fiscal 2001 as the Company continues to grow and through increased research and development, primarily related to the RF wireless technology.
9
Other Expense, Net
Other expense, net includes a $161,000 ($106,000 net of tax) non-cash charge related to costs associated with the abandoned Colorado MEDtech transaction. These expenses were assumed by Anthony J. Fant, the largest shareholder in both HEI and Colorado MEDtech. Accounting rules require HEI to record a charge for the Colorado MEDtech transaction even though these costs were paid by Mr. Fant.
Income Taxes
Fiscal 2001 vs. 2000: The Company records income tax expense for interim periods based on the expected effective rate for the full year. The estimated effective income tax rate for fiscal 2001 was 34% as compared to (33%) for fiscal 2000. The Company recorded income tax expense of $43,000 for the three month period ended December 2, 2000 compared to an income tax benefit of $156,000 for the same period a year ago. Management believes it is more likely than not that the Company will realize the aggregate deferred tax asset of $761,000 at December 2, 2000. Unanticipated negative changes in future operations of the Company could, however, adversely effect the realization of the Company's deferred tax asset.
Net Income
Fiscal 2001 vs. 2000: The Company had net income of $82,000 for the three month period ended December 2, 2000 compared to net loss of $319,000 for the same period a year ago. The increased net income for the current quarter was principally the result of higher revenues and gross profit which was partially offset by the non-cash charge associated with the abandoned Colorado MEDtech transaction.
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 ability to generate income to utilize existing deferred tax assets 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.
10
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to certain market risks with its $5,000,000 revolving line of credit, capital expenditure loans and, to a lesser extent, its Industrial Development Bonds (IDRBs). At December 2, 2000, the outstanding balance on the revolving line of credit, capital expenditure loans and IDRBs were $1,891,000, $1,744,000 and $3,135,000, respectively. The revolving line of credit agreement bears interest, at the Company's option, at the prime rate of interest or 2.5% above the LIBOR rate. One capital expenditure loan bears interest, at the Company's option, at .25% above the prime rate of interest or 2.75% above the LIBOR rate. At December 2, 2000 the interest rates on the revolving commitment and capital expenditure loans were 9.5%, 9.75% and 8.19%, respectively. The IDRBs bear interest at a rate which varies weekly, based on comparable tax exempt issues, and is limited to a maximum rate of 10%. At December 2, 2000 the interest rate on the IDRBs was 4.60%. Consequently, the Company is exposed to the risk of greater borrowing costs if interest rates increase.
11
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27-Financial Data Schedule
HEI filed one Form 8-K Current Report with the Securities and Exchange Commission during the first quarter of fiscal year 2001 on October 20, 2000.
12
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) | ||||
/s/ STEVE E. TONDERA, JR. Steve E. Tondera, Jr. Vice President of Finance, Chief Financial Officer and Treasurer (a duly authorized officer) |
Date: 01/16/01
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