8-K/A

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K/A

AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):            March 6, 2000

HEI, INC.

(Exact Name of Registrant as Specified in Its Charter)

Minnesota
(State or Other Jurisdiction of Incorporation)

0-10078 (Commission File Number)	41-0944876 (I.R.S. Employer Identification No.)
1495 Steiger Lake Lane, Victoria, Minnesota (Address of Principal Executive Offices)	55386 (Zip Code)

952-443-2500
(Registrant's Telephone Number, Including Area Code)

N/A
(Former Name or Former Address, if Changed Since Last Report)

Item 2. Acquisition or Disposition of Assets.

    The undersigned registrant, HEI, Inc. ("HEI"), hereby amends Item 7 of its Current Report on Form 8-K, dated March 6, 2000 (initially filed with the Commission on March 21, 2000), to include the financial statements and exhibits identified in Item 7 below. The initially-filed Form 8-K described HEI's acquisition of Cross Technology, Inc. ("Cross"), in accordance with an Agreement and Plan of Reorganization, dated as of February 25, 2000, between HEI, Cross and the shareholders of Cross.

Item 7. Financial Statements and Exhibits.

(a)

FINANCIAL STATEMENTS OF BUSINESS ACQUIRED

    The following financial statements of Cross and the report of KPMG LLP, HEI's certified independent public accountants, are included in this report:

•

Independent Auditors' Report



•

Balance Sheets of Cross as of August 31, 1999 and 1998.



•

Statements of Operations of Cross for the years ended August 31, 1999 and 1998.



•

Statements of Shareholders' Equity of Cross for the years ended August 31, 1999 and 1998.



•

Statements of Cash Flows of Cross for the years ended August 31, 1999 and 1998.



•

Notes to Financial Statements.



(b)

PRO FORMA FINANCIAL INFORMATION

    The following pro forma financial information is included in this report:

•

Pro Forma Consolidated Statements of Operations for the years ended August 31, 1999 and 1998.

    The additional financial information required pursuant to Item 7 of Form 8-K is incorporated herein by reference to Item 1 of HEI's Form 10-QSB for the quarter ended March 4, 2000 (SEC File No. 000-10078).

(c)

EXHIBITS

    99.3 HEI's Form 10-QSB for the quarter ended March 4, 2000.

INDEX TO EXHIBITS

Exhibit No.	Description
99.3	HEI'a Form 10-QSB for the quarter ended March 4, 2000.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned thereunto duly authorized.

Dated: May 19, 2000

HEI, INC.
By:	/s/ ANTHONY J. FANT Anthony J. Fant Chairman and Chief Executive Officer

CROSS TECHNOLOGY, INC.
Financial Statements
August 31, 1999 and 1998

CROSS TECHNOLOGY, INC.

Table of Contents

	Page
Independent Auditors' Report	1
Balance Sheets	2
Statements of Operations	3
Statements of Shareholders' Equity	4
Statements of Cash Flows	5
Notes to Financial Statements	6

Independent Auditors' Report

The Board of Directors
Cross Technology, Inc.:

     We have audited the accompanying balance sheets of Cross Technology, Inc. (the Company) as of August 31, 1999 and 1998, and the related statements of operations, shareholders' equity, and cash flows for the periods then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cross Technology, Inc. as of August 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

/s/ KPMG LLP

April 30, 2000
Minneapolis, Minnesota

CROSS TECHNOLOGY, INC.

Balance Sheets

August 31, 1999 and 1998

	1999			1998
Assets
Current assets:
Cash and cash equivalents	$	826,207		186,299
Accounts receivable		519,874		593,721
Inventories		384,640		176,417
Deferred tax asset		95,826		100,605
Other assets		59,175		44,641
Total current assets		1,885,722		1,101,683
Property and equipment		1,566,220		1,189,828
Less accumulated depreciation		(666,190	)	(586,463	)
		900,030		603,365
Total assets	$	2,785,752		1,705,048
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt	$	42,236		—
Accounts payable		281,200		182,350
Salaries and related costs		376,595		414,844
Accrued expenses		151,761		160,560
Income tax payable		208,762		32,892
Total current liabilities		1,060,554		790,646
Long-term debt, less current portion		197,329		—
Deferred tax liability		117,549		120,335
Total liabilities		1,375,432		910,981
Shareholders' equity:
Common stock of $.01 par value per share authorized 120,000; 120,000 issued and outstanding, respectively		1,200		1,200
Additional paid-in capital		405,066		405,066
Retained earnings		1,004,054		387,801
Total shareholders' equity		1,410,320		794,067
Commitments and contingencies (note 7)
Total liabilities and shareholders' equity	$	2,785,752		1,705,048

See accompanying notes to financial statements.

2

CROSS TECHNOLOGY, INC.

Statements of Operations

Years ended August 31, 1999 and 1998

	1999		1998
Net sales	$	4,765,795	3,960,877
Cost of sales		2,644,489	2,512,513
Gross profit		2,121,306	1,448,364
Selling, general, and administrative expense		1,139,026	1,117,688
Operating income		982,280	330,676
Interest expense		9,318	4,200
Income before income taxes		972,962	326,476
Income tax expense		356,709	117,394
Net income	$	616,253	209,082
Earnings per share—basic and diluted	$	5.14	1.74
Weighted average common shares outstanding—basic and diluted		120,000	120,000

See accompanying notes to financial statements.

3

CROSS TECHNOLOGY, INC.

Statements of Shareholders' Equity

Years ended August 31, 1999 and 1998

	Common Stock
				Additional paid-in capital	Retained earnings	Total shareholders' equity
	Shares	Amounts
Balance, August 31, 1997	120,000	$	1,200	405,066	178,719	584,985
Net income	—		—	—	209,082	209,082
Balance, August 31, 1998	120,000		1,200	405,066	387,801	794,067
Net income	—		—	—	616,253	616,253
Balance, August 31, 1999	120,000	$	1,200	405,066	1,004,054	1,410,320

See accompanying notes to financial statements.

4

CROSS TECHNOLOGY, INC.

Statements of Cash Flows

Years ended August 31, 1999 and 1998

	1999			1998
Cash flows from operating activities:
Net income	$	616,253		209,082
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		79,727		112,113
Deferred taxes		1,993		19,730
Change in operating assets and liabilities:
Accounts receivable		73,847		(43,771	)
Inventory		(208,223	)	27,279
Other assets		(14,534	)	(44,641	)
Accounts payable		98,850		26,026
Accrued expenses		(47,048	)	(129,174	)
Income tax payable		175,870		32,892
Net cash provided by operating activities		776,735		209,536
Cash flows from investing activities:
Purchases of property and equipment		(376,392	)	(47,470	)
Net cash used in investing activities		(376,392	)	(47,470	)
Cash flows from financing activities:
Proceeds from issuance of note payable		250,000		—
Payments on note payable		(10,435	)	(250,000	)
Net cash provided (used) by financing activities		239,565		(250,000	)
Net increase (decrease) in cash		639,908		(87,934	)
Cash, beginning of year		186,299		274,233
Cash, end of year	$	826,207		186,299
Supplemental disclosure of noncash financing and investing activities:
Cash paid for interest	$	5,118		—
Cash paid for income taxes		178,846		64,772

See accompanying notes to financial statements.

5

CROSS TECHNOLOGY, INC.

Notes to Financial Statements

August 31, 1999 and 1998

(1)

Description of Business and Summary of Significant Accounting Policies

(a)

Nature of the Business

Cross Technology, Inc. (the Company) manufactures and markets wireless Smart Cards and other ultra-miniature radio frequency (RF) applications.

(b)

Cash Equivalents




The Company considers highly liquid debt instruments with an initial maturity of three months or less to be cash equivalents.

(c)

Inventories




Inventories are stated at the lower of cost or market and primarily consist of purchased parts. The first-in, first-out cost method is used to value inventories.

(d)

Property and Equipment




Property and equipment are stated at cost. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the property and equipment. The approximate useful lives of years and fixtures and equipment are 3-10 years.

Maintenance and repairs are charged to expense as incurred. Major improvements and tooling costs are capitalized and depreciated over their estimated useful lives. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are removed from the related accounts, and any resulting gain or loss charged or credited to operations.

(e)

Long-Lived Assets




Long-lived assets and certain identifiable intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

(f)

Pension Plan




The Company has a cash balance pension plan which covers all qualified employees. Pension plan costs are accrued based on actuarial estimates with the pension cost funded annually.

(g)

Revenue Recognition




Revenue is recognized at the time of shipment.

(h)

Income Taxes




Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is the tax payable (receivable) for the periods and the change during the period in deferred income tax assets and liabilities.

6

(i)

Use of Estimates




The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

(2)

Major Customers

Three customers comprised approximately 25%, 21%, and 15%, respectively, of fiscal 1999 net sales and approximately 32%, 23%, and 18%, respectively, of fiscal 1998 net sales. The amounts due from these customers at August 31, 1999 and 1998 totaled $198,239 and $443,717, respectively.

(3)

Cash Balance Pension Plan

The Company has a defined benefit cash balance pension plan which is available to qualified employees of the Company. Plan benefits are based upon the employees' years of service and compensation.

	1999		1998
Change in benefit obligation:
Benefit obligation at beginning of year	$	446,033	246,796
Service cost		203,107	184,051
Interest cost		33,452	18,469
Benefits paid		—	(3,283	)
Benefit obligation at end of year	$	682,592	446,033

7

	1999			1998
Change in plan assets:
Fair value of plan assets at beginning of year	$	326,335		142,898
Actual return on plan assets		78,598		21,396
Employer contribution		184,466		165,324
Benefits paid		—		(3,283	)
Fair value of plan assets at end of year	$	589,399		326,335
Funded status:	$
Unrecognized actuarial gain		(58,443	)	(11,238	)
Unrecognized prior service cost		66,405		73,046
Additional liability		(7,962	)	(61,808	)
Net amount recognized	$	—		—
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability	$	93,193		119,698
Weighted-average assumptions as of August 31:
Discount rate		7.5	%	7.5	%
Expected return on plan assets		7.5	%	7.5	%
Rate of compensation increase		—		—
Components of net periodic benefit cost:
Service cost	$	203,107		184,051
Interest cost		33,452		18,469
Expected return on plan assets		(31,393	)	(15,843	)
Amortization of prior service cost		6,641		6,641
Total benefit cost	$	211,807		193,318

8

(4)

Note payable

On May 24, 1999, the Company entered into a loan agreement with a financial institution in the amount of $250,000. Outstanding principal and interest is payable in monthly installments of $5,103, at a fixed interest rate of 8.190 percent. The note matures on May 20, 2004 and is secured by certain equipment of the Company.

(5)

Income Taxes

Income tax expense for the years ended August 31, 1999 and August 31, 1998 is summarized as follows:

	Current		Deferred	Total
1999:
Federal	$	323,876	1,819	325,695
State		30,840	174	31,014
	$	354,716	1,993	356,709
1998:
Federal	$	88,894	18,015	106,909
State		8,770	1,715	10,485
	$	97,664	19,730	117,394

Tax expense on income before income taxes differs from the amounts derived by applying the federal statutory rate for the following reasons:

	1999				1998
	Amount		Percentage of pretax income		Amount			Percentage of pretax income
Computed 'expected' federal tax expense	$	330,807	34.0	%	$	111,102		34.0	%
State income tax, net of federal income tax benefit		20,469	2.1	%		6,920		2.1	%
Other		5,433	0.6	%		(628	)	(0.1	)%
Total income tax expense	$	356,709	36.7	%	$	117,394		36.0	%

9

Deferred income tax assets and liabilities result from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities at August 31, 1999 and 1998 relate to the following asset and liability accounts:

	1999		1998
Deferred tax assets related to:
Inventory	$	30,847	28,870
Accrued vacation		10,874	11,619
Officer bonus payable		54,105	60,116
Total deferred tax assets		95,826	100,605
Valuation allowance		—	—
Net deferred tax assets		95,826	100,605
Deferred tax liabilities related to depreciation		117,549	120,335
Total deferred tax liabilities		117,549	120,335
Net deferred tax liabilities	$	21,723	19,730

Management has determined, based on prior earnings history and anticipated earnings, that no valuation allowance is necessary.

(6)

Related Party Transactions

The Company purchased life insurance policies for the principal shareholders of the Company. The Company pays the premiums for the life insurance policies and is the named beneficiary for each of the respective life insurance policies. The Company capitalizes premiums paid not to exceed the cash surrender value which is included with other assets.

(7)

Commitments and Contingencies

(a)

Lease Agreements

The Company leases certain office space and an automobile under cancelable or transferable operating leases. Rental expense under these leases was $71,334 and $74,024, during the years ended August 31, 1999 and 1998, respectively.

(b)

Sales Representative Agreements




The Company has sales agreements in place with certain independent representatives in the United States and overseas. These agreements require that the Company pay the representatives commissions, on a monthly basis, which are based upon a specified percentage of sales.

(c)

Royalties




The Company is required to remit a royalty payment of $.07 for each Smart Card that is manufactured and sold, to an independent party. The expense recognized for the royalty agreement was approximately $103,000 and $83,000 in fiscal 1999 and 1998, respectively.

(8)

Subsequent Events

On March 6, 2000, the Company merged with HEI, Inc., a publicly-held company. Each share of the Company's common stock outstanding was canceled and exchanged for 5 shares of HEI common stock.

10

HEI, Inc.

Pro Forma Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

	12 Mos Ended Aug 31, 1999								12 Mos Ended Aug 31, 1998
	HEI			Cross			Cons		HEI			Cross			Cons
Net sales	$	24,323		$	4,766		$	29,089	$	20,805		$	3,961		$	24,766
Cost of sales		19,733			2,645			22,378		16,592			2,513			19,105
Gross profit		4,590			2,121			6,711		4,213			1,448			5,661
Operating expenses:
Selling general and administrative		3,475			1,139			4,614		2,375			1,117			3,492
Research and development		1,343			—			1,343		852			—			852
Severance costs		490			—			490		—			—			—
Proxy/change of control costs		—			—			—		5,664			—			5,664
Operating income (loss)		(718	)		982			264		(4,678	)		331			(4,347	)
Other income (expense), net		380			(9	)		371		580			(5	)		575
Income (loss) before taxes		(338	)		973			635		(4,098	)		326			(3,772	)
Income tax expense (benefit)		(115	)		357			242		(1,471	)		117			(1,354	)
Net income (loss)	$	(223	)	$	616		$	393	$	(2,627	)	$	209		$	(2,418	)
Net income (loss) per common share
Basic							$	0.08							$	(0.52	)
Diluted							$	0.08							$	(0.52	)
Weighted average common shares outstanding
Basic								4,698								4,685
Diluted								4,701								4,685

Notes to Pro Forma Consolidated Statements of Operations

    The unaudited pro forma financial information gives effect to the acquisition of Cross Technology, Inc. and the issuance of 600,000 shares of HEI common stock as if the transaction occurred as of September 1, 1997.

    The weighted average common shares outstanding calculation reflects the 600,000 shares of common stock issued in conjunction with the pooling as if they had been issued as of September 1, 1997.

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Item 2. Acquisition or Disposition of Assets.
Item 7. Financial Statements and Exhibits.

INDEX TO EXHIBITS
SIGNATURES
Table of Contents
Independent Auditors' Report
Notes to Pro Forma Consolidated Statements of Operations

EX-99.3

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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 March 4, 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 Small Business Issuer in Its Charter)

Minnesota (State or other jurisdiction of incorporation or organization)	41-0944876 (I.R.S. Employer Identification No.)
P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN (Address of principal executive offices)	55386 (Zip Code)

Issuer's telephone number, including area code: (952) 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 April 14, 2000, 4,745,546 shares of common stock, par value $.05.

    Transitional Small Business Disclosure Format (Check one): Yes / /  No /x/

    This Form 10-QSB consists of 12 pages.

Table of Contents

HEI, Inc.

Part I—Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated 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 4.	Submission of Matters to a Vote of Security Holders	11
Item 6.	Exhibits and Reports on Form 8-K	11
Signatures		12

2

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

HEI, Inc.

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except per share amounts)

	March 4, 2000			August 31, 1999
Assets
Current assets:
Cash and cash equivalents	$	955		$	2,043
Short-term investments		—			3,744
Restricted cash		232			295
		1,187			6,082
Accounts receivable, net		6,315			3,382
Inventories		3,889			2,246
Income taxes receivable		—			109
Other current assets		900			908
Total current assets		12,291			12,727
Property and equipment:
Land		216			216
Building and improvements		4,108			4,030
Fixtures and equipment		16,686			13,898
Accumulated depreciation		(9,632	)		(8,904	)
Net property and equipment		11,378			9,240
Restricted cash		—			83
Investment in MSC		1,418			1,468
Other long-term assets		180			221
Total assets	$	25,267		$	23,739
Liabilities and Shareholders' Equity
Current liabilities:
Revolving line of credit	$	1,975		$	—
Current maturities of long-term debt		742			742
Accounts payable		3,183			1,629
Accrued employee related costs		996			1,283
Accrued liabilities		1,059			531
Income taxes payable		184			209
Total current liabilities		8,139			4,394
Long-term liabilites, less current maturities		3,311			3,415
Deferred tax liability		133			364
Shareholders' equity:
Undesignated stock; 5,000,000 shares authorized; none issued		—			—
Common stock, $.05 par; 10,000,000 shares authorized; 4,717,440 and 4,695,195 shares issued and outstanding		236			235
Paid-in capital		7,997			7,905
Retained earnings		5,451			7,426
Total shareholders' equity		13,684			15,566
Total liabilities and shareholders' equity	$	25,267		$	23,739

   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					Six Months Ended
	Mar. 4, 2000			Feb. 27, 1999		Mar. 4, 2000			Feb. 27, 1999
Net sales	$	9,392		$	8,301	$	17,486		$	15,738
Cost of sales		8,367			6,241		15,162			12,077
Gross profit		1,025			2,060		2,324			3,661
Operating expenses:
Selling, general and administrative		1,817			1,207		3,130			2,240
Research, development and engineering		445			313		878			589
Acquisition transaction costs		453			—		453			—
Severance costs		—			—		—			490
Operating income (loss)		(1,690	)		540		(2,137	)		342
Other income (expense), net		(82	)		82		(110	)		144
Income (loss) before income taxes		(1,772	)		622		(2,247	)		486
Income tax expense (benefit)		(116	)		224		(272	)		176
Net income (loss)	$	(1,656	)	$	398	$	(1,975	)	$	310
Net income (loss) per common share
Basic	$	(0.35	)	$	0.08	$	(0.42	)	$	0.07
Diluted	$	(0.35	)	$	0.08	$	(0.42	)	$	0.07
Weighted average common shares outstanding
Basic		4,706			4,695		4,704			4,695
Diluted		4,706			4,699		4,704			4,695

See accompanying notes to unaudited consolidated financial statements.

4

HEI, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Six Months Ended
	March 4, 2000			February 27, 1999
Cash flow provided by (used for) operating activities:
Net income (loss)	$	(1,975	)	$	310
Equity in loss from MSC investment		50			—
Depreciation and amortization		1,052			774
Accounts receivable allowance		25			—
Deferred income tax expense (benefit)		(265	)		2
Changes in current operating items:
Accounts receivable		(2,958	)		(199	)
Inventories		(1,643	)		(938	)
Income taxes		84			1,391
Other current assets		42			332
Accounts payable		1,554			(384	)
Accrued employee related costs and accrued liabilities		241			(375	)
Net cash flow provided by (used for) operating activities		(3,793	)		913
Cash flow provided by (used for) investing activities:
Purchases of investments		—			(6,440	)
Maturities of investments		3,744			7,109
Additions to property and equipment		(3,149	)		(520	)
Proceeds from sales of product lines		—			27
Decrease (increase) in restricted cash		146			(498	)
Net cash flow provided by (used for) investing activities		741			(322	)
Cash flow provided by financing activities:
Issuance of common stock and other		93			—
Issuance of long-term debt		—			271
Repayment of long-term debt		(104	)		(63	)
Borrowings on revolving line of credit		1,975			—
Net cash flow provided by financing activities		1,964			208
Net increase (decrease) in cash and cash equivalents		(1,088	)		799
Cash and cash equivalents, beginning of period		2,043			483
Cash and cash equivalents, end of period	$	955		$	1,282
Supplemental disclosures of cash flow information:
Interest paid	$	108		$	82
Income taxes paid		—			—

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 generally accepted accounting principles in the United States.

    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 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 and six month periods ended March 4, 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. SAB 101 will be effective for the Company in the first quarter of fiscal 2001. The adoption is not expected to have a material 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 plans to adopt the new standard beginning with the first quarter of fiscal year 2001, as required. The Company is in the process of evaluating SFAS 133 and its impact on the Company.

    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:

	March 4, 2000		August 31, 1999
	(In thousands)
Purchased parts	$	3,039	$	1,201
Work in process		413		813
Finished goods		437		232
	$	3,889	$	2,246

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(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		Six Months Ended
	March 4, 2000	Feb. 27, 1999	March 4, 2000	Feb. 27, 1999
	(In thousands)
Basic common shares	4,706	4,695	4,704	4,695
Dilutive effect of stock options	—	4	—	—
Diluted common shares	4,706	4,699	4,704	4,695

(4)  Acquisition of Cross Technology, Inc.

    On March 3, 2000 HEI acquired Cross Technology, Inc. (Cross), a manufacturer and marketer of wireless Smart Cards and other ultra-miniature radio frequency (RF) applications. Under the terms of the agreement, 600,000 shares of HEI common stock were exchanged for all of the outstanding common stock of Cross. The transaction is being accounted for as a pooling of interests and all HEI's historical financial statements have been restated to include Cross financial results. Shown below are the detailed results of operations for each company:

	Three Months Ended
	March 4, 2000									February 27, 1999
	HEI			Cross			Consolidated			HEI		Cross		Consolidated
Revenue	$	7,345		$	2,047		$	9,392		$	7,053	$	1,248	$	8,301
Cost of sales		6,377			1,990			8,367			5,574		667		6,241
Gross profit		968			57			1,025			1,479		581		2,060
Operating expenses		2,440			275			2,715			1,239		281		1,520
Other and taxes		46			(80	)		(34	)		32		110		142
Net income (loss)	$	(1,518	)	$	(138	)	$	(1,656	)	$	208	$	190	$	398

	Six Months Ended
	March 4, 2000									February 27, 1999
	HEI			Cross			Consolidated			HEI			Cross		Consolidated
Revenue	$	14,127		$	3,359		$	17,486		$	13,188		$	2,550	$	15,738
Cost of sales		12,335			2,827			15,162			10,409			1,668		12,077
Gross profit		1,792			532			2,324			2,779			882		3,661
Operating expenses		3,918			543			4,461			2,759			560		3,319
Other and taxes		(158	)		(4	)		(162	)		(86	)		118		32
Net income (loss)	$	(1,968	)	$	(7	)	$	(1,975	)	$	106		$	204	$	310

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

FINANCIAL CONDITION—LIQUIDITY AND CAPITAL RESOURCES

    The Company's net cash flow used for operating activities was $3,793,000 for the six months ended March 4, 2000. This primarily included net loss of $1,975,000, non-cash depreciation and amortization of $1,052,000, a deferred income tax benefit of $265,000 and a net increase of $2,680,000 in working capital investments during the first six months of fiscal 2000. The higher working capital investment resulted from increased accounts receivable of $2,958,000, increased inventories of $1,643,000 partially offset by higher accounts payable of $1,554,000 and higher accrued employee related costs and accrued liabilities of $241,000.

    The inventory increase is primarily due to increased purchased parts in conjunction with meeting customer delivery requirements.

    Accounts receivable average days outstanding were 51 days as of March 4, 2000 compared to 43 days as of February 27, 1999 primarily due to timing of customer remittances. Annualized inventory turns were 8.5 for the second quarter of fiscal 2000 compared to 9.7 turns for the same period a year ago as a result of a build up of long lead time components required for future revenue.

    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. 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 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 March 4, 2000 and August 31, 1999 was 4.20% 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 a loss in the second quarter, the Company was in default of certain of these covenants but these defaults were waived.

    With the acquisition of Cross Technology, Inc. (Cross), the Company assumed Cross' remaining $219,000 debt. This debt, used for the purchase of equipment, 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 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 March 4, 2000, the Company had borrowed $1,975,000 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. Due to the recognition of a loss in the second quarter, the Company was in default of certain of these covenants but these 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. The Company intends to replace this with another revolving line of credit of at least an equal amount.

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    Capital equipment expenditures for the six months ended March 4, 2000 were $3,149,000, primarily for production equipment for the Company's new facilities in Tempe, Arizona and Mexico as well as investments in a new Enterprise Resource Planning (ERP) applications software system.

    During fiscal 2000, the Company intends to expend approximately $5.4 million for manufacturing and facility improvements and capital equipment as well as the 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 and six month periods ended March 4, 2000 increased 13% and 11%, respectively, compared to the same periods a year ago, reflecting an increase in sales in the hearing aid market 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 2000 vs. 1999:  For the three month and six month periods ended March 4, 2000, gross profit decreased $1,035,000 and $1,337,000, respectively, from the same periods last year. The gross profit margin for the three and six months ended March 4, 2000 decreased to 11% and 13%, respectively, as compared to 25% and 23% for the comparable periods last year. This decrease primarily reflects lower margin sales for the Company's Mexico division and Cross operations, start-up costs for the Tempe, Arizona high density interconnect facility and significantly higher material costs on portions of the sales during the start-up of new programs. These situations that resulted in lower gross margins are expected to improve in the third quarter.

Operating Expenses

    Fiscal 2000 vs. 1999:  Operating expenses for the three and six month periods ended March 4, 2000 increased from last year's comparable periods. The increase in selling, general and administrative expenses of $610,000 and $890,000 for the three and six month periods, respectively, was due to increased selling costs to develop new business and support new operations, costs associated with implementing a new ERP system and expensing incurred ramp up costs related to the high density interconnect division in Tempe, Arizona. The increases in research, development and engineering expenses of $132,000 and $289,000 for the three and six month periods, respectively, were primarily due to increased development costs to support future business opportunities. In addition, during the second quarter the Company expensed $453,000 of costs related to the acquisition of Cross. Operating expenses in total were 29% and 26% of net sales for the three and six month periods, respectively, compared to 18% and 21% for the same periods last year.

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Income Taxes

    Fiscal 2000 vs. 1999:  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 2000 is approximately 12% compared to the full year fiscal 1999 effective rate of 34%. The decrease in the effective rate is due to lower expected net income for the year ended August 31, 2000. The Company recorded an income tax benefit of $116,000 and $272,000 for the three and six month periods ended March 4, 2000, respectively, compared to income tax expense of $224,000 and $176,000 for the same periods a year ago. Management believes it is more likely than not that the Company will realize the aggregate deferred tax asset of $611,000 at March 4, 2000. Changes in future operations of the Company could adversely effect the realization of the Company's deferred tax asset.

Net Income

    Fiscal 2000 vs. 1999:  The Company had net loss of $1,656,000 and $1,975,000 for the three and six month periods ended March 4, 2000, respectively, compared to net income of $398,000 and $310,000 for the same periods a year ago. The net loss was principally the result of lower gross profit and higher expenses associated with the ramp up of the Mexico and Tempe, Arizona facilities and the Cross acquisition costs.

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.

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PART II—OTHER INFORMATION

Item 2.  Changes in Securities

c)

See Note 4 to the Financial Statements included herein for information responsive to Item 2(c), which Note 4 is incorporated by reference herein. The HEI Common Stock was issued to the three shareholders of Cross Technology, Inc., all of whom were accredited investors, pursuant to Rule 506 of Regulation D.

Item 4.  Submission of Matters to a Vote of Security Holders

a)

The Company held its Annual Meeting of Shareholders on January 20, 2000.



b)

The following matters were considered:



1.

Election of five Directors, each to serve a one-year term. The vote was as follows for each of the nominees.

Name	Affirmative	Authority Withheld
Edwin W. Finch, III	3,604,354	190,295
Steve E. Tondera, Jr.	3,603,174	191,475
David W. Ortlieb	3,602,774	191,875
Mack V. Traynor	3,602,374	192,275
Anthony J. Fant	3,596,554	198,095

2.

Increase in shares authorized for 1998 Stock Option Plan. Voting on the increase in shares authorized for 1998 Stock Option Plan was as follows: 3,509,792 shares in favor, 266,614 opposed, 18,243 abstentions, and 0 broker non-votes.

Item 6.  Exhibits and Reports on Form 8-K

a)

Exhibits




Exhibit 27-Financial Data Schedule

b)

Reports on Form 8-K




The Company filed a Form 8-K on March 21, 2000 in connection with its acquisition of Cross Technology, Inc.

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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:  04/18/00	/s/ JERALD H. MORTENSON Jerald H. Mortenson Vice President of Finance and Administration, Chief Financial Officer and Treasurer (a duly authorized officer)

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QuickLinks

Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

PART II—OTHER INFORMATION
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES