-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J5X/no5oCnYgFjPWWBcglm1tx1X72dlX4CoXO4nU+IxjtebPzfst+Mq6NTi4i0t+ ctkyvDLHcQzcNNYBAs6jBw== 0001047469-98-042453.txt : 19981201 0001047469-98-042453.hdr.sgml : 19981201 ACCESSION NUMBER: 0001047469-98-042453 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEI INC CENTRAL INDEX KEY: 0000351298 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 410944876 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-10078 FILM NUMBER: 98760654 BUSINESS ADDRESS: STREET 1: 1495 STEIGER LAKE LN STREET 2: P O BOX 5000 CITY: VICTORIA STATE: MN ZIP: 55386 BUSINESS PHONE: 6124432500 MAIL ADDRESS: STREET 1: P O BOX 5000 STREET 2: 1495 STEIGER LAKE LANE CITY: VICTORIA STATE: MN ZIP: 55386 10KSB 1 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 **** FORM 10-KSB **** [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for fiscal year ended August 31, 1998. [ ] Transition report under 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. (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 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (612) 443-2500 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.05 PER SHARE (Title of Class) Indicate by check mark 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 . Indicate if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB. [ ] HEI, Inc. revenues for the fiscal year ended August 31, 1998 were $20,805,000. The aggregate market value as of November 23, 1998 (based on the closing price as reported by The Nasdaq National Market) of the voting stock held by non-affiliates was approximately $21,000,000. As of November 23, 1998, 4,095,195 Common Shares (par value $.05) were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended August 31, 1998 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held January 20, 1999 are incorporated by reference into Part III. HEI, Inc. is referred to herein as the Company, unless the context indicates otherwise. PART I Item 1. DESCRIPTION OF BUSINESS (a) Business Development HEI, Inc., a Minnesota corporation, was incorporated as Hybrid Electronics Inc. in 1968 and changed its name to HEI, Inc. in 1969. (b) Business of the Company Principal Products and Services - HEI, Inc. is a designer and manufacturer of ultraminiature microelectronic devices and high technology products incorporating these devices. HEI's custom-built microelectronics are employed in the hearing, medical, telecommunications and industrial markets. The optical switch product line and light pen product line, which represented minor parts of the Company's sales, were sold in August 1997 and August 1996, respectively. Distribution Methods - HEI sells through its Company-employed sales force based at corporate headquarters. Sources and Availability of Raw Materials - There are many sources of raw material supplies available nationally and internationally for Company operations. The manufacture of Company products involves assembly of components purchased from a wide variety of vendors. The Company's business is not dependent on any single supplier. Dependence on Single or Few Customers - Following is the approximate percentage of the Company's sales to major customers which accounted for more than 10% of total sales in fiscal years 1998, 1997 and 1996.
Customer 1998 1997 1996 -------- ---- ---- ---- Customer A 59% 27% 38% Customer B 14% Customer C 55% 16% Customer D 10%
Competition - In each of its product lines, the Company has significant competition, including users who may produce their own alternative devices. The Company obtains new business by identifying customer needs and engineering its products to meet those needs. It competes on the basis of engineering expertise, quality, service and price to obtain new and repeat orders. Research and Development - The estimated amount spent on Company-sponsored research and development activities was approximately $852,000 and $843,000 for the years ended August 31, 1998 and 1997, respectively. Employees - At August 31, 1998, the Company employed approximately 130 persons of which one was part-time. 2 Item 2. DESCRIPTION OF PROPERTY The Company owns a 48,000 square foot facility for administration and production in Victoria, Minnesota, which was completed in August 1981. The facility was expanded during fiscal 1996 from the original 25,000 square feet with an addition of 23,000 square feet to increase production capacity. Item 3. LEGAL PROCEEDINGS As of November 23, 1998 there are no legal proceedings pending against the Company or its properties. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS On August 4, 1998, a special meeting of shareholders was held. Matters voted on, total number of votes cast and votes for were as follows: 1. Removal of incumbent Directors.
In Favor of Removal Against/Abstain Total ------------------- --------------- --------- William R. Franta 2,149,306 1,381,578 3,530,884 Robert L. Brueck 2,149,206 1,381,678 3,530,884 Frederick M. Zimmerman 2,149,206 1,381,678 3,530,884
2. Election of Directors.
In Favor Withheld Total --------- -------- --------- David W. Ortlieb 2,080,133 17,464 2,097,597 Anthony J. Fant 2,080,026 17,571 2,097,597 Edwin W. Finch, III 2,079,776 17,821 2,097,597 Steve E. Tondera, Jr. 2,079,776 17,821 2,097,597 Robert L. Brueck 1,363,051 70,236 1,433,287 William R. Franta 1,363,051 70,236 1,433,287 Frederick M. Zimmerman 1,362,451 70,836 1,433,287
3. Approval of an amendment to the Company's Bylaws to opt out of the Minnesota Control Share Acquisition Statute (2,203,392 for, 1,302,899 against, 24,593 abstain and 3,530,884 total). 3 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information called for by Item 5 is incorporated by reference from the Annual Report on page 20. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS The information called for by Item 6 is incorporated by reference from the Annual Report on pages 4-8. The Company has a limited market risk in terms of the variability of the interest rate on its Industrial Development Revenue Bonds. The bonds bear interest at a rate which varies weekly, based on comparative tax exempt issues, and is limited to a maximum of 10%. ITEM 7. FINANCIAL STATEMENTS The information called for by Item 7 is incorporated by reference from the Annual Report on pages 9-18 as follows:
Page in Annual Report: ------------- Balance Sheets as of August 31, 1998 and 1997 9 Statements of Operations for the Years Ended August 31, 1998, 1997 and 1996 10 Statements of Changes in Shareholders' Equity for the Years Ended August 31, 1998, 1997 and 1996 11 Statements of Cash Flows for the Years Ended August 31, 1998, 1997 and 1996 12 Notes to Financial Statements 13-17 Report of KPMG Peat Marwick LLP 18
The Report of PricewaterhouseCoopers LLP is filed herewith as an exhibit. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information called for by Item 8 is incorporated by reference from the Proxy Statement on page 21. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT The information regarding directors called for by Item 9 is contained in the Proxy Statement under the caption "Item No. 1 Election of Directors" and is incorporated herein by reference. The following is a list of HEI, Inc. executive officers, their ages, positions and offices as of November 23, 1998.
NAME AGE POSITION - ---- --- --------- Anthony J. Fant 38 Chief Executive Officer Donald R. Reynolds 40 President Jerald H. Mortenson 64 Vice President of Finance and Administration, Chief Financial Officer and Treasurer Dale A. Nordquist 44 Vice President of Sales and Marketing 4 BUSINESS EXPERIENCE ANTHONY J. FANT became Chief Executive Officer of the Company in November 1998. Mr. Fant has been a director, President and Chief Executive Officer of Fant Broadcasting Company (including, for these purposes, various affiliated companies engaged primarily in television and radio broadcasting) since 1986. From 1986 to 1996, Fant Broadcasting Company acquired, built or managed a number of television and radio stations. From 1993 to 1996, a total of eight television and radio properties were purchased in seven states. Each of the eight properties have been sold for aggregate proceeds in excess of $53 million. Mr. Fant currently owns a number of businesses in diverse industries. DONALD R. REYNOLDS joined the Company in March 1998 as Executive Vice President and was appointed President in April 1998. Before joining the Company, he was employed with BF Goodrich Aerospace in senior executive positions in product engineering, marketing and business unit management, and most recently as Business Unit Director for a business unit having approximately $30 million in revenues. This business unit designed and manufactured high technology products (sensors, electronics, software) for the aerospace industry. JERALD H. MORTENSON joined the Company in March 1990. Before joining the Company he was employed for ten years with CTS Fabri-tek, first as Chief Financial Officer and the last five years as Group President. DALE A. NORDQUIST joined the Company in July 1981 as Western Regional Manager. He has served as Vice President of Sales and Marketing since December 1986. ITEM 10. EXECUTIVE COMPENSATION The information called for by Item 10 is contained in the Proxy Statement under the captions "Executive Compensation" and "Item No. 1 Election of Directors" and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 11 is contained in the Proxy Statement under the caption "Shares and Principal Shareholders" and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 12 is contained in the Proxy Statement and is incorporated herein by reference under the caption "Executive Officers and Executive Compensation - Change in Control Agreements". ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index on Page 7 (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended August 31, 1998. 5 SIGNATURES - ---------- In accordance with Section 13 or 15(c) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized HEI, Inc. BY: /s/ Anthony J. Fant ---------------------------------------- Anthony J. Fant, Chief Executive Officer Date: November 25, 1998 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Anthony J. Fant November 25, 1998 - ---------------------------------------------- ----------------- Anthony J. Fant, Chairman Date /s/ Jerald H. Mortenson November 25, 1998 - ---------------------------------------------- ----------------- Jerald H. Mortenson, Vice President of Finance Date and Administration, Chief Financial Officer and Treasurer /s/ Craig E. Roble November 25, 1998 - ---------------------------------------------- ----------------- Craig E. Roble, Company Controller Date /s/ Eugene W. Courtney November 25, 1998 - ---------------------------------------------- ----------------- Eugene W. Courtney, Director Date /s/ Edwin W. Finch, III November 25, 1998 - ---------------------------------------------- ----------------- Edwin W. Finch, Director Date /s/ David W. Ortlieb November 25, 1998 - ---------------------------------------------- ----------------- David W. Ortlieb, Director Date /s/ Steve E. Tondera, Jr. November 25,1998 - ---------------------------------------------- ----------------- Steve E. Tondera, Jr., Director Date /s/ Mack V. Traynor, III November 25,1998 - ---------------------------------------------- ----------------- Mack V. Traynor, III, Director Date
6 EXHIBIT INDEX -------------
Page Number or Incorporated by Exhibit Number Description Reference - -------------- ----------- --------------- 3.1 Restated Articles of Incorporation, as amended. Note 1 3.2+ Bylaws, as amended. 4.1a+ Credit Agreement with Norwest Bank Minnesota, N.A. dated May 14, 1998. 4.1b+ Current Note with Norwest Bank Minnesota, N.A. dated May 14, 1998. 4.2a Reimbursement Agreement by and between HEI, Inc. and Norwest Bank Note 2 Minnesota, N.A. dated April 1, 1996. 4.2b Mortgage Security Agreement Fixture Financing Statement and Assignment Note 2 of Leases and Rents by HEI, Inc. as Mortgagor to Norwest Bank Minnesota, N.A. as Mortgagee dated April 1, 1996. 4.2c Security Agreement by HEI, Inc. in favor of Norwest Bank Minnesota, Note 2 N.A. dated April 1, 1996. 10.1 Form of Indemnification Agreement between HEI and officers and Note 3 directors. *10.2 HEI 1989 Omnibus Stock Compensation Plan adopted April 3, 1989, as Note 4 amended to date. *10.3 1991 Stock Option Plan for Non-employee Directors, as amended to date. Note 5 *10.4+ 1998 Stock Option Plan adopted November 18, 1998. *10.5+ 1998 Stock Option Plan for Non-employee Directors adopted November 18, 1998. *10.6 Form of Agreement regarding Employment/Compensation upon change in Note 5 control with Messrs. Mortenson, Nordquist and Reynolds. *10.7+ Agreement regarding Employment/Compensation upon change in control with Mr. Courtney, dated November 20, 1998. 13+ Annual Report to Shareholders for the year ended August 31, 1998. 15 Report of PricewaterhouseCoopers LLP. 23 Consent of KPMG Peat Marwick LLP. 24 Consent of PricewaterhouseCoopers LLP. 27 Financial Data Schedule.
7 Notes to Exhibits above: [1] Filed as an exhibit to Annual Report on Form 10-K for the year ended August 31, 1990, and incorporated herein by reference. [2] Filed as an exhibit to Form 10-QSB for the quarter ended June 1, 1996, and incorporated herein by reference. [3] Filed as an exhibit to Registration Statement on Form S-2 (SEC no. 33-37285) filed October 15, 1990, and incorporated herein by reference. [4] Filed as an exhibit to Annual Report on Form 10-KSB for the year ended August 31, 1996 and incorporated herein by reference. [5] Filed as an exhibit to Annual Report on Form 10-KSB for the year ended August 31, 1997 and incorporated herein by reference. * Denotes management contract or compensation plan or arrangement. + Filed herewith. 8 EX-3.2 2 EX-3.2 Exhibit 3.2 BYLAWS OF HEI, INC. ARTICLE I OFFICES - CORPORATE SEAL Section 1.01. Registered Office. The registered office of the corporation in Minnesota shall be that set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or resolution of the directors filed with the Secretary of State of Minnesota changing the registered office. Section 1.02. Other Offices. The corporation may have such other offices, within or without the State of Minnesota, as the directors shall, from time to time, determine. Section 1.03. Corporate Seal. The corporation may, in the discretion of the Board of Directors, have a corporate seal. Any such seal shall have inscribed thereon the name of the corporation and the word "Minnesota" and the words "Corporate Seal." ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01. Place and Time of Meetings. Except as provided otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any place, within or without the State of Minnesota, as may from time to time be designated by the directors and, in the absence of such designation, shall be held at the registered office of the corporation in the State of Minnesota. The directors shall designate the time of day for each meeting. Section 2.02. Regular Meetings. (a) A regular meeting of the shareholders shall be held on such date as the Board of Directors shall by resolution establish. (b) At the regular meeting, the shareholders, voting as provided in the Articles of Incorporation and these Bylaws, shall designate the number of directors to constitute the Board of Directors (subject to the authority of the Board of Directors thereafter to increase or decrease the number of directors as permitted by law), shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting, and shall transact such other business as may properly come before them. Section 2.03 Special Meetings. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the Chief Executive Officer, Chief Financial Officer, any two directors, or by a shareholder or shareholders holding 10% or more of the shares entitled to vote (except that a special meeting for the purpose of considering any action to directly or indirectly effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by shareholders holding not less than 25% of all shares of the corporation entitled to vote), who shall demand such special meeting by written notice given to the Chief Executive Officer or the Chief Financial Officer of the corporation specifying the purposes of such meeting. Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, those present may adjourn to such day as they shall, by majority vote, agree upon. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present at the beginning of the meeting, the shareholders may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 2.05. Voting. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the Articles of Incorporation or statute provide otherwise, shall have one vote for each share having voting power registered in such shareholder's name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the Articles of Incorporation, or these Bylaws. Section 2.06. Closing of Books. The Board of Directors may fix a time, not exceeding 60 days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting. Section 2.07. Notice of Meetings. Notice of each shareholders' meeting shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, setting out the time and place of the meeting, except where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, except that notice of a meeting at which an agreement of merger or exchange is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least fourteen days prior thereto. Every notice of any special meeting called pursuant to Section 2.03 hereof shall state the purpose or purposes for 2 which the meeting has been called, and the business transacted at all special meetings shall be confined to the purpose stated in the notice. Section 2.08. Waiver of Notice. Notice of any regular or special meeting may be waived by any shareholder either before, at or after such meeting orally or in a writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the item may not lawfully be considered at the meeting and does not participate in the consideration of the item at that meeting. Section 2.09. Written Action. Any action which might be taken at a meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action. Section 2.10. Advance Notice Requirements. Only persons who are nominated in accordance with the procedures set forth in this Section 2.10 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.10. Nominations by shareholders shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 50 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the first day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (x) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) such person's name and (ii) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (y) as to the shareholder giving the notice, (i) the name and address, as they appear on the corporation's books, of such shareholder and (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to a nominee. Notwithstanding anything in these Bylaws to the contrary, no person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.10. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed in this Section 2.10 and, if the Chairman should so determine, the Chairman shall so declare to the meeting and the defective nomination shall be disregarded. 3 At any regular or special meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation who complies with the notice procedures set forth in this Section 2.10. For business to be properly brought before any regular or special meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 50 days prior to the meeting, provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the first day on which either such notice of the date of the regular or special meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the regular or special meeting (w) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (x) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, (y) the class and number of shares of the corporation which are beneficially owned by the shareholder and (z) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any regular or special meeting except in accordance with the procedures set forth in this Section 2.10 and, as an additional limitation, the business transacted at any special meeting shall be limited to the purposes stated in the notice of the special meeting. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.10 and, if the Chairman should so determine, the Chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS Section 3.01. General Powers. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, except as otherwise permitted by statute. Section 3.02. Number, Qualification and Term of Office. Until the first meeting of shareholders, the number of directors shall be the number named in the Articles of Incorporation or, if no such number is named therein, the number elected by the incorporator. Thereafter, the number of directors shall be established by resolution of the shareholders (subject to the authority of the Board of Directors to increase or decrease the number of directors as permitted by law). In the absence of such shareholder resolution, the number of directors shall be the number last fixed by the shareholders, the Board of Directors, the incorporator or the Articles of Incorporation. Directors need not be shareholders. Each of the directors shall hold office until the regular meeting of shareholders next held after such director's election and until such director's successor shall have been elected and shall qualify, or until the earlier death, resignation, 4 removal, or disqualification of such director; provided, however, that no director shall be elected to a term in excess of five years. Section 3.03. Board Meetings. Meetings of the Board of Directors may be held from time to time at such time and place within or without the State of Minnesota as may be designated in the notice of such meeting. Section 3.04. Calling Meetings; Notice. Meetings of the Board of Directors may be called by the Chairman of the Board by giving at least twenty-four hours' notice, or by any other director by giving at least five days' notice, of the date, time and place thereof to each director by mail, telephone, telegram or in person. Section 3.05. Waiver of Notice. Notice of any meeting of the Board of Directors may be waived by any director either before, at, or after such meeting orally or in a writing signed by such director. A director, by his attendance at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting. Section 3.06. Quorum. A majority of the directors holding office immediately prior to a meeting of the Board of Directors shall constitute a quorum for the transaction of business at such meeting. Section 3.07. Absent Directors. A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 3.08. Conference Communications. Any or all directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this Section 3.08 shall be deemed present in person at the meeting, and the place of the meeting shall be the place of origination of the conference communication. Section 3.09. Vacancies; Newly Created Directorship. Vacancies in the Board of Directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining directors of the Board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the Board of Directors as permitted by Section 3.02 may be filled by a two-thirds vote of the directors serving at the time of such increase; and 5 each director elected pursuant to this Section 3.09 shall be a director until such director's successor is elected by the shareholders at their next regular or special meeting. Section 3.10. Removal. Any or all of the directors may be removed from office at any time, with or without cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of directors, except as otherwise provided by Minnesota Statutes Section 302A.223, as amended, when the shareholders have the right to cumulate their votes. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. In the event that the entire Board or any one or more directors be so removed, new directors shall be elected at the same meeting. Section 3.11. Committees. A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be directors appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Directors, except as provided by Minnesota Statutes Section 302A.243. A majority of the members of the committee present at a meeting is a quorum for the transaction of business. Section 3.12. Written Action. Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by all of the directors or committee members, unless the Articles provided otherwise and the action need not be approved by the shareholders. Section 3.13. Compensation. Directors who are not salaried officers of this corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the Board of Directors. The Board of Directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. ARTICLE IV OFFICERS Section 4.01. Number. The officers of the corporation shall consist of a Chairman of the Board (if one is elected by the Board), a Chief Executive Officer, a Chief Financial Officer, a Secretary (if one is elected by the Board) and such other officers and agents as may, from time to time, be elected or appointed by the Board of Directors. Any number of offices may be held by the same person. 6 Section 4.02. Election, Term of Office and Qualifications. The Board of Directors shall elect or appoint by resolution approved by the affirmative vote of a majority of the directors present, from within or without their number, the Chief Executive Officer, Chief Financial Officer, and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities, and terms in office provided for in these Bylaws or a resolution of the Board of Directors not inconsistent therewith. Officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. Removal and Vacancies. Any officer may be removed from his office by the Board of Directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. Section 4.04. Chairman of the Board. The Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. Section 4.05. Chief Executive Officer. The Chief Executive Officer shall have general active management of the business of the corporation. In the absence of the Chairman of the Board, he/she shall preside at all meetings of the shareholders and directors. He/she shall see that all orders and resolutions of the Board of Directors are carried into effect. He/she shall execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the Articles or Bylaws or by the Board of Directors to some other officer or agent of the corporation. He/she shall maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders, and in general, shall perform all duties usually incident to the office of the Chief Executive Officer. He/she shall have such other duties as may, from time to time, be prescribed by the Board of Directors. Section 4.06. Vice President. Each Vice President, if one or more are elected, shall have such powers and perform such duties as may be specified in the Bylaws or prescribed by the Board of Directors or by the Chief Executive Officer. In the event of the absence or disability of the Chief Executive Officer, Vice Presidents shall succeed to this power and duties in the order designated by the Board of Directors. Section 4.07. Secretary. The Secretary, if one is elected, shall give proper notice of meetings of shareholders and directors. He/she shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the Chief Executive Officer. Section 4.08. Chief Financial Officer. The Chief Financial Officer shall keep accurate financial records for the corporation. He/she shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as the Board of Directors shall, from time to time, designate. He/she shall have power to endorse, for deposit, all 7 notes, checks and drafts received by the corporation. He/she shall disburse the funds of the corporation, as ordered by the Board of Directors, making proper vouchers therefor. He/she shall render to the Chief Executive Officer and the directors, whenever requested, an account of all his/her transactions as Chief Financial Officer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the Chief Executive Officer. Section 4.09. Compensation. The officers of this corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors. ARTICLE V SHARES AND THEIR TRANSFER Section 5.01. Certificates for Shares. All shares of the corporation shall be certificated shares. Every owner of shares of the corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the Board of Directors, certifying the number of shares of the corporation owned by such shareholder. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed, in the name of the corporation, by the Chief Executive Officer, and by the Secretary or an Assistant Secretary or by such officers as the Board of Directors may designate. If the certificate is signed by a transfer agent or registrar, such signature of the corporate officers may be by facsimile if authorized by the Board of Directors. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 5.04. Section 5.02. Issuance of Shares. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the Articles of Incorporation in such amounts as may be determined by the Board of Directors and as may be permitted by law. No shares shall be allocated except in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement, of services rendered or to be rendered to the corporation under a written agreement, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of such allotment of shares, the Board of Directors making such allotment shall state, by resolution, their determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are allotted. Section 5.03. Transfer of Shares. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. Section 5.04. Loss of Certificates. Except as otherwise provided by Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for shares to be lost, stolen or destroyed 8 shall make an affidavit of that fact in such form as the Board of Directors shall require and shall, if the Board of Directors so requires, give the corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the corporation against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. ARTICLE VI DIVIDENDS; RECORD DATE Section 6.01. Dividends. Subject to the provisions of the Articles of Incorporation, of these Bylaws, and of law, the Board of Directors may declare dividends whenever, and in such amounts as, is deemed advisable. Section 6.02. Record Date. Subject to any provision of the Articles of Incorporation, the Board of Directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any dividend to the shareholders entitled to receive payment of the dividend and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend notwithstanding any transfer of shares on the books of the corporation after the record date. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. ARTICLE VII BOOKS AND RECORDS; FISCAL YEAR Section 7.01. Share Register. The Board of Directors of the corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the Board: (1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and (2) a record of the dates on which certificates or transaction statements representing shares were issued. Section 7.02. Other Books and Records. The Board of Directors shall cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by Minnesota Statutes Section 302A.461, originals or copies of: (1) records of all proceedings of shareholders for the last three years; (2) records of all proceedings of the board for the last three years; (3) its Articles of Incorporation and all amendments currently in effect; 9 (4) its Bylaws and all amendments currently in effect; (5) financial statements required by Minnesota Statutes Section 302A.463 and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; (8) any shareholder voting or control agreements of which the corporation is aware; and (9) such other records and books of account as shall be necessary and appropriate to the conduct of the corporation's business. Section 7.03. Fiscal Year. The fiscal year of the corporation shall be determined by the Board of Directors. ARTICLE VIII LOANS, GUARANTEES, SURETYSHIP Section 8.01. The corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present and: (1) is in the usual and regular course of business of the corporation; (2) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest; an organization with which the corporation has a business relationship; or an organization with which the corporation has the power to make donations; (3) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board, to benefit the corporation; or (4) has been approved by the affirmative vote of the holders of two-thirds of the outstanding shares. The loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in such manner as a majority of the directors approve, including, without limitation, a pledge of or other security interest in shares of the corporation. Nothing in this Section shall be deemed to deny, limit, or restrict the powers of 10 guaranty or warranty of the corporation at common law or under a statute of the State of Minnesota. ARTICLE IX INDEMNIFICATION OF CERTAIN PERSONS Section 9.01. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved, as a non-party witness or otherwise, in any action, suit or proceeding, whether civil, criminal, administrative or investigative, including a proceeding by or in the right of the corporation (hereinafter a "proceeding"), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the corporation or, while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, where the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Minnesota Business Corporation Act, as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), by common law or by administrative or judicial interpretation, against all expense, liability and loss (including attorneys' fees, expert witness fees, bonds prospective or retroactive, insurance premiums or costs, out-of-pocket expenses related to a proceeding, judgments, fines, including without limitation, excise taxes or penalties assessed against such person with respect to any employee benefit plan, or amounts paid or to be paid in settlement, including any interest payable thereon) reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in Section 9.02 hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that payment of such expenses in advance of the final disposition of a proceeding shall be made only upon (i) delivery to the corporation of a written affirmation, by the person seeking such payment in advance, of a good faith belief that the criteria for indemnification set forth in the Minnesota Business Corporation Act have been satisfied, (ii) a determination that the facts then known to those making the determination would not preclude indemnification under the Minnesota Business Corporation Act or these Bylaws, and (iii) delivery to the corporation of an undertaking, by or on behalf of such person, to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified under this Section or otherwise. Such written undertaking to repay shall be a general obligation of the person making it, shall not be secured, and shall be accepted without reference to financial ability to make the repayment. The corporation may, by action of its Board 11 of Directors, provide indemnification to other classes of employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. Section 9.02. Right of Claimant to Bring Suit. If a claim under Section 9.01 of this Article is not paid in full by the corporation within sixty days after a written claim has been received by the corporation the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, whether or not the claimant is successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its normal disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Minnesota Business Corporation Act for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, Committee for the Board of Directors, special legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because claimant met the applicable standard of conduct set forth in the Minnesota Business Corporation Act, nor an act or determination by the corporation (including its Board of Directors, Committee of the Board of Directors, special legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 9.03. Non-Exclusivity of Rights. The right to indemnification and payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, common law or administrative or judicial interpretation, provisions of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. Section 9.04. Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Minnesota Business Corporation Act. Section 9.05. Indemnification Agreements. The corporation shall enter into agreements with its directors further providing the terms and conditions of their indemnification. Section 9.06. Amendments Limited. Any amendment to this Article IX shall only apply prospectively and shall in no way affect the corporation's obligations to indemnify and make advances pursuant to the Minnesota Business Corporation Act, this Article IX, or any contract of the corporation for actions or events which occurred before such amendment. 12 ARTICLE X AMENDMENTS Section 10.01. These Bylaws may be amended or altered by a vote of the majority of the whole Board of Directors at any meeting, provided that notice of such proposed amendment shall have been given in the notice given to the Directors of such meeting. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such Bylaws by a majority vote of the shareholders present or represented at any regular or special meeting of shareholders called for such purpose, and the Board of Directors shall not make or alter any Bylaws fixing a quorum for meetings of shareholders, prescribing procedures for removing Directors or filling vacancies in the Board of Directors, or fixing the number of directors or their classifications, qualifications, or terms of office, except that the Board of Directors may adopt or amend any Bylaw to increase its number. ARTICLE XI SECURITIES OF OTHER CORPORATIONS Section 11.01. Voting Securities Held by the Corporation. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf of the corporation (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation possesses. The Board of Directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the Chief Executive Officer or any other person. Section 11.02 Purchase and Sale of Securities. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon any other person or persons. 13 ARTICLE XII CONTROL SHARE ACT Section 12.01. The provisions of Section 302A.671 of the Minnesota Business Corporation Act shall not apply to control share acquisitions of shares of this corporation. 14 EX-4.1A 3 EX-4.1A Exhibit 4.1a CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of the 14 day of May, 1998, and is by and between HEI, INC., a Minnesota corporation with offices located in Victoria, Minnesota (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association with offices located in Wayzata, Minnesota (the "Bank"). RECITALS: WHEREAS, the Borrower desires to renew its revolving credit line in the principal amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) (the "Credit") for working capital purposes; and, WHEREAS, the Bank is willing to make the Credit available to the Borrower subject to the provisions of this Credit Agreement, which shall replace any prior Credit Agreements between the Borrower and the Bank. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein, the parties agree as follows: SECTION 1 Definitions 1.1 In addition to those terms defined in the above recitals, as used herein: "Acceptable Accounts Receivable" shall mean Borrower's accounts receivable which are: (i) less than ninety (90) days in age; (ii) not part of an account, ten percent (10.0%) or more of which is ninety (90) days past due; (iii) not subject to offset or dispute; (iv) not due from the U.S. Government, foreign entities (unless supported by letters of credit or from those entities listed on Exhibit A hereto), Subsidiaries or affiliates of the Borrower; and (v) not representing booked but unfilled orders. "Agreement" shall mean this Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter in accordance with the terms hereof. "Business Day" shall mean a day on which banks are generally open for business in Wayzata, Minnesota. "Base Rate" shall mean the "base" or "prime" rate of interest as announced by Norwest Bank Minnesota, National Association, at its principal office located in Minneapolis, Minnesota, as in effect from time to time. "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness and shall not include trade accounts payable or money borrowed from the Bank. "Borrowing Base" shall mean 80% of Acceptable Accounts Receivable, except that Acceptable Accounts Receivable from those entities listed on Exhibit A shall be included at a 65% rate. "Borrowing Base Certificate" shall mean a schedule of Borrower's accounts receivable and Acceptable Accounts Receivable, which certificate is prepared and furnished to Bank pursuant to Sections 2.1 and 3.2(C), and which is executed by an authorized officer of Borrower. "Cash Flow" shall mean, for the fiscal year of the Borrower, the aggregate amount of the following items properly shown on its year-end income statement, determined in accordance with generally accepted accounting principles consistently applied: (i) net income after taxes; (ii) amortization expense; (iii) depreciation and depletion expense; (iv) deferred tax expense; and (v) similar types of noncash charges against income which the Bank determines, in its reasonable discretion, to be appropriate "add-backs." "Closing Date" shall mean the date on which documents are signed. "Collateral Documents" mean all those certain documents specified in Sections 4.1 through 4.5. "Credit" shall mean the conditional revolving credit line established hereby, which shall not in any event exceed the aggregate principal amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) outstanding at any one time. "Current Maturities of Long-Term Debt" shall mean that portion of the Borrower's "Long-Term Debt" that matures or that is scheduled to be paid during the current fiscal year of the Borrower. For the purposes of this definition, "Long-Term Debt" shall mean the following: (i) the aggregate amount of the Borrower's liabilities properly shown as non-current liabilities on its balance sheet, determined in accordance with generally accepted accounting principles consistently applied, as of the last day of its preceding fiscal year; and (ii) any new liabilities of the Borrower incurred during its current fiscal year that, in accordance with generally accepted accounting principles consistently applied, should be shown as non-current liabilities on its balance sheet at fiscal year-end. "Current Note" shall mean the promissory Current Note of the Borrower substantially in the form of attached Exhibit B, evidencing borrowings under Section 2.1 hereof. "Events of Default" shall mean any and all events of default described in Section 8 hereof. "Indebtedness" shall mean, as to the Borrower, or any Subsidiary, all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several. 2 "Interest Period" shall mean, relative to any LIBOR Rate election, the period which shall begin on (and include) the date on which such election is effective or continued and, unless the maturity of the Current Note is accelerated, shall end on (but exclude) a day which is 30, 60 or 90 days thereafter, provided, however, that: A. If such Interest Period would otherwise end on a day which is not a Banking Day, such Interest Period shall end on the next following banking day; or B. The Borrower may not select, and there shall not be applicable, any Interest Period that would end later than the Maturity Date. "LIBOR Rate" shall mean the average rate per annum (rounded up to the nearest one-sixteenth of one percent) of which U.S. Dollar deposits are offered to Norwest in the London Interbank Market with a term equal to the applicable Interest Period, in an amount equal to the outstanding principal balance of the Current Note. "Maturity Date" shall mean January 31, 1999. "Permitted Liens" shall mean: A. Liens in favor of the Bank or in favor of U.S. Bank Trust, National Association, (f/k/a First Trust National Association), as Trustee. B. Existing liens disclosed to the Bank in writing prior to the date of this Agreement; C. Liens for taxes not delinquent or which Borrower is contesting in good faith; and D. Purchase money liens. E. Other liens, or aggregate sum of liens, securing obligations not to exceed $500,000.00 in any fiscal year. "Security Agreement" shall mean the security agreement pursuant to which, among other things, Borrower grants Bank a security interest in the accounts receivable of the Borrower. "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the outstanding voting securities shall, at the time of determination, be owned directly, or indirectly through one or more intermediaries, by the Borrower. "Tangible Net Worth" shall mean the sum of the contributed capital, surplus and undivided profits of the Borrower, less any amounts attributable to treasury stock, good will, patents, copyrights, mailing lists, catalogues, trademarks, bond discount and underwriting expenses, organization expenses, leasehold improvements and loans to officers or employees and other like intangibles (not including prepaid expenses classified as current assets or 3 intangible assets offset by equal related liabilities), all as determined in accordance with generally accepted accounting principles. 1.2 Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5.6. SECTION 2 The Loan 2.1 Credit. Subject to the other provisions of this Agreement, the Bank agrees to lend to the Borrower from time to time from the effective date hereof until the Maturity Date sums not to exceed the lesser of the Borrowing Base or THREE MILLION AND NO/100 DOLLARS ($3,000,000) in aggregate principal amount at any one time outstanding. Each borrowing under this Section 2.1 will be requested in writing or in person by an authorized officer of the Borrower, or telephonically by any person reasonably believed by the Bank to be an authorized officer of the Borrower. Each borrowing under this Section 2.1 will be evidenced by a notation on the Bank's records, which shall be conclusive evidence of such borrowing, and by the Current Note. The officer making the request must present the Bank with its most current Borrowing Base Certificate. Within the limits of the Credit and subject to the terms and conditions hereof, the Borrower may borrow, prepay pursuant to Section 2.6 hereof and reborn pursuant to this Section 2.1. 2.2 Interest Rate: Upon two business days prior notice (before the end of the applicable Interest Period for a prior LIBOR Rate election) Borrower may elect or convert all or a portion of its outstanding balance under the Credit to one of the following interest rates: A. Base Rate Option. Interest on the unpaid principal of the Current Note shall be calculated at an annual rate equal to the Base Rate in effect from time, to time, which rate shall change as and when the Base Rate changes, on the basis of the actual number of days elapsed in a year of 360 days, and shall change as and when the Base Rate changes. B. LIBOR Rate Option. Subject to the terms and conditions of this Agreement, the Borrower may elect that the principal balance outstanding under the Current Note in increments of $100,000.00 bear interest at an annual rate equal to two hundred (200) basis points (2.0%) in excess of the LIBOR Rate as determined as of approximately 11:00 A. M., London time, two business days before the beginning of the Interest Period selected by the Borrower. If two business days prior to the end of an Interest Period, Borrower does not elect a new interest rate option, then the Base Rate Option shall apply. 4 2.3 Interest Payment. Interest on the Current Note shall be payable monthly, commencing April 30, 1998, and continuing on the same day of each succeeding month until the Current Note is paid; provided, however, if a LIBOR Rate Option has been selected, then interest shall be due and payable at the end of each Interest Period. 2.4 Principal Repayment. The principal of the Current Note shall be repayable on the Maturity Date. 2.5 Prepayment. The Borrower may at any time prepay the Current Note in whole or from time to time in part without premium or penalty. 2.6 Mandatory Prepayment. The Borrower shall be required to make prepayments of amounts due under the Current Note at any time the aggregate amount of borrowing outstanding is found to exceed the Borrowing Base. Such required prepayments shall be in an amount equal to the difference between borrowings outstanding and the Borrowing Base. 2.7 Sums Payable. All sums payable to the Bank hereunder shall be paid directly to the Bank in immediately available funds. The Bank shall send the Borrower statements of all amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within ninety days of its receipt of any statement which it deems to be incorrect. Alternatively, at its sole discretion, the Bank may charge against any deposit account of the Borrower all or any part of any amount due hereunder. SECTION 3 Conditions Precedent 3.1 The Borrower shall deliver the following to the Bank on or before the Closing Date: A. The Current Note, duly executed by Borrower. 3.2 The Bank shall not be obligated to lend hereunder on the occasion for any borrowing unless: A. The representations and warranties contained in Section 5 hereof are true and accurate on and as of such date; B. No Event of Default, and no event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, has occurred and is continuing or will exist upon the disbursement of such loan; and, C. The Borrower shall have delivered to the Bank a Borrowing Base Certificate as provided in Section 2.1 hereof, and a certification by an appropriate officer of the Borrower as to the matters set forth in Sections 3.2(A) and 3.2(B) hereof. SECTION 4 Security 5 4.1 Security Interest. To secure the Current Note and the performance of its additional obligations as set forth hereunder, the Borrower has executed and delivered to the Bank before the Closing Date the Security Agreement and financing statements, in form and substance satisfactory to the Bank, granting to the Bank a first security interest in accounts receivable, now owned or hereafter acquired. 4.2 Deposit Accounts. As additional security for the prompt satisfaction of all obligations of Borrower under the Current Note and Security Agreement, the Borrower hereby assigns, transfers and sets over to the Bank all of its right, title and interest in and to, and grants the Bank a lien on and a security interest in, all amounts that may be owing from time to time by the Bank to the Borrower in any capacity, including, but without limitation, any balance or share belonging to the Borrower, of any deposit or other account with the Bank, which lien and security interest shall be independent of any right of set-off which the Bank may have. 4.3 Collateral. The property in which a security interest is granted pursuant to the provisions of Sections 4.1 and 4.2 is herein collectively called the "Collateral". The Collateral, together with all of the Borrower's other property of any kind held by the Bank, shall stand as one general, continuing collateral security for all Indebtedness to the Bank and may be retained by the Bank until all Indebtedness owed to the Bank has been paid in full. 4.4 Additional Documents. At any time requested by the Bank, the Borrower shall execute and deliver or cause to be executed and delivered to the Bank such additional documents as the Bank may consider to be necessary or desirable to evidence or perfect the security interests referred to in Section 4.1 hereof. 4.5 Liens. The foregoing liens shall be first and prior liens except for Permitted Liens. SECTION 5 Representations and Warranties To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows: 5.1 Corporate Status. The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Minnesota. 5.2 Authority. The execution, delivery and performance of this Agreement, the Current Note and Security Agreement by the Borrower are within its corporate powers, have been duly authorized, and are not in contravention of law, or the terms of Borrower's Articles of Incorporation or by-laws or of any undertaking to which the Borrower is a party or by which it is bound. 5.3 Consent. No consent, approval or authorization of or declaration or filing with any governmental authority on the part of the Borrower is required in connection with the execution and delivery of this Agreement or the borrowings by the Borrower hereunder or on the part of the Borrower in connection with the consummation of any transaction contemplated hereby. 6 5.4 Liens. The property of the Borrower is not subject to any lien except Permitted Liens. 5.5 Litigation. No litigation or governmental proceeding is pending or, to the knowledge of the officers of the Borrower, threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business, except as previously disclosed to the Bank. 5.6 Financial Statements. All financial statements delivered to Bank by or on behalf of Borrower, including any schedules and notes pertaining thereto, have been prepared in accordance with generally accepted accounting principles consistently applied, and fully and fairly present the financial condition of the Borrower at the dates thereof and the results of operations for the periods covered thereby. There have been no material adverse changes in the consolidated financial condition or business of the Borrower from February 28, 1998 to the date hereof, except as previously disclosed to the Bank. 5.7 Licenses. The Borrower possesses adequate licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted. 5.8 ERISA. The Borrower does not have any unfunded liabilities in any pension plan, as such terms is defined in the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import ("ERISA"), together with the regulations thereunder. As used in this section, "unfunded liabilities" means with regard to any plan, the excess of the current value of the plan's benefits guaranteed under ERISA over the current value of the plan's assets allocable to such benefits. 5.9 Environmental. The Borrower has obtained all permits, licenses and other authorizations which are required under federal, state and/or local laws ("Environmental Laws") relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, hazardous or toxic materials or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Matters"). The Borrower is in compliance in all material respects with all terms and conditions of such required permits, licenses and authorizations and is also in compliance, in all material respects, with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any plan, order, decree, judgment or notice. The Borrower is not aware of, nor has the Borrower received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance or which may give rise to any liability under any Environmental Laws or the common law. The Borrower has not received any summons, citation, directive, letter or other communication, written or oral, from any agency or department of any state, federal or local government relating to any Environmental Matters or any alleged Environmental Matters. No investigation, administrative order, consent order and agreement, litigation or settlement with respect to any Environmental Matters or any alleged 7 Environmental Matters has been received by the Borrower or is proposed, threatened, anticipated or in existence with respect to the Borrower. 5.10 Validity. This Agreement is, and the Current Note when issued will be, valid and binding in accordance with their terms. 5.11 Good Standing. The Borrower is duly qualified to do business and is in good standing in any additional jurisdictions where, on advice of legal counsel, registration was deemed necessary. 5.12 Default. The Borrower is not in default of a material provision under any material agreement, instrument, decree or order to which it is a party or by which it or its property is bound or affected. SECTION 6 Affirmative Covenants The Borrower covenants and agrees that so long as any indebtedness remains outstanding to the Bank, unless the Bank shall otherwise consent in writing, it will: 6.1 Taxes. Pay, when due, all taxes assessed against it or its property except to the extent and so long as contested in good faith. 6.2 Corporate Existence. Maintain its corporate existence and comply with all laws and regulations applicable thereto. 6.3 Reports. Furnish to the Bank: A. Within 90 days after the end of each fiscal year of the Borrower a detailed report of audit of the Borrower for such fiscal year including the balance sheet of the Borrower as of the end of such fiscal year and the statements of profit and loss and surplus of the Borrower for the fiscal year then ended, prepared by independent certified public accountants satisfactory to the Bank. B. Within 30 days after the end of each quarter, or month if there are outstanding borrowings under the Credit, (i) the balance sheet of the Borrower as of the end of such quarter or month, (ii) the statement of profit and loss and surplus of the Borrower from the beginning of such fiscal year to the end of such quarter or month, (iii) an aged listing of Borrower's accounts receivable, and (iv) a Borrowing Base Certificate current through the end of the previous quarter or month, all in a form acceptable to Bank. All of the foregoing shall be unaudited, but certified as correct (subject to year end adjustments) by an appropriate officer of the Borrower. C. No later than 30 days prior to the beginning of each fiscal year, projected financial statements in form acceptable to the Bank. D. Annually, within 90 days after the end of each fiscal year, a listing of Borrower's existing equipment, in a form acceptable to the Bank. 8 E. Promptly upon knowledge thereof, notice to the Bank in writing of the occurrence of any event which has or might, after the lapse of time or the giving of notice and the lapse of time, become an Event of Default. F. Promptly, such other information as the Bank may reasonably request. 6.4 Maintenance of Property. Maintain its inventory, equipment, real estate and other properties in good condition and repair (normal wear and tear excepted), and pay and discharge or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same, and pay or cause to be paid all rental or mortgage payments due on such real estate. 6.5 Insurance. Cause its properties of an insurable nature to be adequately insured by reputable and solvent insurance companies against loss or damages customarily insured against by persons operating similar properties, and similarly situated, and carry such other insurance as usually carried by persons engaged in the same or similar businesses and similarly situated. 6.6 Records. Keep true, complete and accurate books, records and accounts in accordance with generally accepted accounting principles consistently applied. 6.7 Inspection. Permit any of Bank's duly authorized employees or agents the right, at any reasonable time and from time to time, to visit and inspect the properties of Borrower and to examine and take abstracts from its books and records. 6.8 Compliance. Continue to conduct the same general type of business as is now being carried on in compliance with all applicable statutes, laws, rules and regulations. 6.9 Collateral Audits. Permit the Bank, at its discretion, to conduct annual collateral audits, the cost for shall be paid by the Bank. 6.10 Primary Depository. Maintain its primary deposit accounts with the Bank. SECTION 7 Negative Covenants Without the Bank's written consent, so long as any indebtedness remains outstanding under the Credit or any other obligation to the Bank, the Borrower will not: 7.1 Liens. Permit any lien or aggregate sum of liens in excess of $500,000.00 including, without limitation, any pledge, assignment, mortgage, title retaining contract or other type of security interest to exist on its property, real or personal, except Permitted Liens. 7.2 Merger. Enter into any transaction of merger or consolidation, or transfer, sell, assign, lease or otherwise dispose of (other than sales in the ordinary course of business) all or a substantial part of its properties or assets, or any of its notes or accounts receivable, or any stock (other than directors qualifying shares) or any assets or properties necessary or desirable 9 for the proper conduct of its business, or change the nature of its business, or wind up, liquidate or dissolve, or agree to do any of the foregoing. 7.3 Borrowed Money. Create, incur, assume or suffer to exist, contingently or otherwise, indebtedness in excess of $500,000.00 for Borrowed Money, except indebtedness disclosed to the Bank in writing as existing at the time of execution of this Agreement. 7.4 Guarantee. Become or remain a guarantor or surety, or pledge its credit or become liable in any manner (except by endorsement for deposit in the ordinary course of business) on undertakings of another. 7.5 Acquisitions. Purchase or otherwise acquire all or substantially all of the assets of any person, firm, corporation or other entity. 7.6 Minimum Tangible Net Worth. Permit its Tangible Net Worth to be less than $17,372,000.00, less any amounts disbursed for stock-repurchase, for its fiscal year ending August 31, 1998. 7.7 Debt Ratio. Permit its long-term debt to Tangible Net Worth ratio to exceed 1.0 to 1.0 as of its fiscal year ending August 31, 1998. 7.8 Minimum Net Profit. Fail to produce a net profit after taxes quarterly and of at least $500,000.00 as of its fiscal year ending August 31, 1998. 7.9 Cash Flow Ratio. Maintain a ratio of Cash Flow to Current Maturities of Long Term Debt of at least 1.5 to 1.0 for its fiscal year ending August 31, 1998. 7.10 Management. Make any changes in management that would result in either Eugene W. Courtney or Jerald H. Mortenson, or both, having a materially reduced role in the management of the Borrower, except due to death or disability, unless the Bank shall consent in writing, which consent shall not be unreasonably withheld. 7.11 Accounting. Make a material change in its accounting procedures, whether for tax purposes or otherwise, including, but not limited to, making a Subchapter S election under the United States Internal Revenue Code. SECTION 8 Events of Default 8.1 Upon the occurrence of any of the following Events of Default: A. Payment. Default in any payment of interest or of principal on any obligations to the bank when due, and continuance thereof for 10 calendar days; B. Performance. Default in the observance or performance of any other agreement of the Borrower set forth herein or in the Security Agreement and continuance thereof for 30 days; 10 C. Borrowed Money. Default by the Borrower in the payment of any other indebtedness for Borrowed Money or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any indebtedness of the Borrower, the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof; D. Representations. Any representation or warranty made by the Borrower herein, or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or E. Litigation. The occurrence of any litigation or governmental proceeding which is pending or threatened against the Borrower, which could have a material adverse effect on the Borrower's financial condition or business, and which is not settled or dismissed within a reasonable period of time (a reasonable period of time not to exceed 30 days) after notice thereof to the Borrower or is not being contested by the Borrower based upon reasonable grounds; then, or at any time thereafter, unless such Event of Default is remedied, the Bank or the holder of the Current Note may, by notice in writing to the Borrower, terminate the Credit or declare the Current Note to be due and payable, or both, whereupon the Credit shall terminate forthwith or the Current Note shall immediately become due and payable, or both, as the case may be. 8.2 Upon the occurrence of any of the following Events of Default: Bankruptcy. The Borrower becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for the Borrower, or for the greater part of its properties without its consent and is not discharged within 60 days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against the Borrower and, if instituted against it, are consented to by it or remain undismissed for 60 days; then the Credit shall automatically terminate and the Current Note shall automatically become immediately due and payable, without notice. SECTION 9 Miscellaneous 9.1 Other Agreements. The provisions of this Agreement shall be in addition to those of any guaranty, pledge or security agreement, Current Note or other evidence of liability held by the Bank, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other notes, guaranties, pledges or security agreements in accordance with their respective terms. 9.2 Waiver. The Bank shall have the right at all times to enforce the provisions of this Agreement and the Collateral Documents in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Bank in refraining from so 11 doing at any time or times. The failure of the Bank at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. 9.3 Expenses. The Borrower will pay all expenses, including the reasonable fees and expenses of legal counsel for the Bank, incurred in connection with the enforcement of this Agreement and the Security Agreement, and the collection or attempted collection of the Current Note. 9.4 Notices. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: A. If to the Borrower: HEI, INC. 1495 Steiger Lake Lane Victoria, Minnesota 55386 Attention: Jerald H. Mortenson B. If to the Bank: Norwest Bank Minnesota, National Association 900 East Wayzata Boulevard Wayzata, Minnesota 55391 Attention: Judy Wenderoth 9.5 State Law. The substantive Laws of the State of Minnesota shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 9.6 Successors. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement, and the documents executed and delivered pursuant hereto, 12 constitute the entire agreement between the parties, and may be amended only in a writing signed by each party. 9.7 Validity. If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 9.8 Banking Day. Whenever any installment of the interest on the Current Note becomes due and payable on a day which is not a Banking Day, the maturity or due date shall be extended to the next succeeding Banking Day and, in the case of principal of the Current Note, interest shall be payable thereon at the rate per annum specified in the Current Note during such extension. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. HEI, INC. By: -------------------------------- Its: -------------------------------- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: -------------------------------- Its: -------------------------------- 13 EX-4.1B 4 EX-4.1B Exhibit 4.1b CURRENT NOTE $3,000,000.00 May 14, 1998 On January 31, 1999, for value received, HEI, Inc. (the "Borrower") promises to pay to the order of Norwest Bank Minnesota, National Association (the "Bank") at its office in Wayzata, Minnesota or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of Three Million and no/100 Dollars ($3,000,000.00), or so much thereof as is disbursed and remains outstanding thereunder on the due date hereof, as shown by the Bank's liability record, together with interest (calculated on the basis of actual days elapsed in a 360 day year) on the unpaid balance hereof from the date hereof until this Note is fully paid, at one of the following rates: (a) Base Rate Option: A variable rate of interest equal to the Base Rate in effect from time to time. The interest rate under this option shall change as and when the Base Rate changes. (b) LIBOR Rate Option: The "LIBOR Rate" plus two percent (2.0%). The "LIBOR Rate" means the rate per annum (rounded up, if necessary, to the nearest one-sixteenth of one percent) equal to the offered quotation to the Bank in the London interbank Eurodollar market for United States dollar deposits for delivery on the date specified by the Borrower, in the approximate amount of the loan and for the period specified by the Borrower (which period must be 30, 60, or 90 days), determined as of approximately 11:00 A.M., London time, two business days prior to the delivery date. If the Borrower selects this LIBOR Rate Option, it must notify the Bank at least two business days prior to the date on which it wishes to receive the loan proceeds. Unless the Borrower shall otherwise notify the Bank at least two business days prior to the end of an Interest Period, each advance bearing interest at the LIBOR Rate shall continue to bear interest at the Base Rate. The LIBOR Rate Option may only be selected for minimum principal amounts of $100,000 or multiples thereof. As used herein, "Base Rate" means the rate of interest established by the Bank from time to time as its "base" or "prime" rate. Interest shall by payable monthly, commencing May 31, 1998 and continuing on the same day of each succeeding month and also at maturity. The Borrower may at any time prepay the Current Note in whole or in part without premium or penalty; except that any prepayment of amounts based on the LIBOR Rate where such prepayment is made on a day other than the final day of an Interest Period shall require a prepayment penalty in an amount equal to the difference between the amount of interest that would have been payable for the remainder of the Interest Period at the rate then in effect and the yield on a hypothetical U.S. Treasury Security that could be purchased on the date of prepayment and maturing on the last day of the Interest Period. Unless prohibited by law, the undersigned agree(s) to pay all costs of collection, including reasonable attorneys' fees and legal expenses, incurred by the holder hereof in the event this Note is not duly paid. The holder hereof may at any time renew this Note or extend its maturity date for any period and release any security for, or any party to, this Note, all without notice to or consent of and without releasing any accommodation maker, endorser or guarantor from liability on this Note. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by the undersigned and each endorser and guarantor. This Note shall be governed by the substantive laws of the State named as part of the Bank's address above. This Note is issued pursuant to a Credit Agreement dated May ____, 1998, between the Borrower and the Bank and is subject to the terms and conditions thereof. HEI, Inc. By: --------------------------- Its: --------------------------- 2 EX-10.4 5 EX-10.4 Exhibit 10.4 HEI, INC. 1998 STOCK OPTION PLAN 1. Purpose. The purpose of this Plan is to attract and retain qualified officers, directors and other key employees of, and consultants to, HEI, Inc. (the "Company") and its Subsidiaries and to provide such persons with appropriate incentives. The Company has adopted the Plan effective as of November 18, 1998, subject to the approval of the Company's shareholders, and unless extended by amendment in accordance with the terms of the Plan, no Option Rights, Appreciation Rights, Restricted Shares or Deferred Shares will be granted hereunder after the tenth anniversary of such effective date. 2. Definitions. As used in this Plan, "Appreciation Right" means a right granted pursuant to Section 5 of this Plan, including a Free-standing Appreciation Right and a Tandem Appreciation Right. "Base Price" means the price to be used as the basis for determining the Spread upon the exercise of a Free-standing Appreciation Right. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Compensation Committee of the Board of Directors, as described in Section 13(a) of this Plan, or, in the absence of a Compensation Committee, the full Board. "Common Shares" means (i) shares of the voting common stock of the Company and (ii) any security into which Common Shares may be converted by reason of any transaction or event of the type referred to in Section 9 of this Plan. "Date of Grant" means the date specified by the Committee on which a grant of Option Rights or Appreciation Rights or a grant or sale of Restricted Shares or Deferred Shares shall become effective, which shall not be earlier than the date on which the Committee takes action with respect thereto. "Deferral Period" means the period of time during which Deferred Shares are subject to deferral limitations under Section 7 of this Plan. "Deferred Shares" means an award pursuant to Section 7 of this Plan of the right to receive Common Shares at the end of a specified Deferral Period. "Free-standing Appreciation Right" means an Appreciation Right granted pursuant to Section 5 of this Plan that is not granted in tandem with an Option Right or similar right. "Incentive Stock Option" means an Option Right that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. "Market Value per Share" means the fair market value of the Common Shares as determined by the Committee from time to time. "Nonqualified Option" means an Option Right that is not intended to qualify as an Incentive Stock Option. "Optionee" means the person so designated in an agreement evidencing an outstanding Option Right. "Option Price" means the purchase price payable upon the exercise of an Option Right. "Option Right" means the right to purchase Common Shares from the Company upon the exercise of a Nonqualified Option or an Incentive Stock Option granted pursuant to Section 4 of this Plan. "Participant" means a person who is selected by the Committee to receive benefits under this Plan and (i) is at that time an officer, director or other key employee of, or a consultant to, the Company or any Subsidiary or (ii) has agreed to commence serving in any such capacity. "Reload Option Rights" means additional Option Rights automatically granted to an Optionee upon the exercise of Option Rights pursuant to Section 4(f) of this Plan. "Restricted Shares" means Common Shares granted or sold pursuant to Section 6 of this Plan as to which neither the substantial risk of forfeiture nor the restriction on transfer referred to in Section 6 hereof has expired. "Rule 16b-3" means Rule 16b-3, as promulgated and amended from time to time by the Securities and Exchange Commission under the Securities Exchange Act of 1934, or any successor rule to the same effect. "Spread" means, in the case of a Free-standing Appreciation Right, the amount by which the Market Value per Share on the date when the Appreciation Right is exercised exceeds the Base Price specified therein or, in the case of a Tandem Appreciation Right, the amount by which the Market Value per Share on the date when the Appreciation Right is exercised exceeds the Option Price specified in the related Option Right. "Subsidiary" means a corporation, partnership, joint venture, unincorporated association or other entity in which the Company has a direct or indirect ownership or other equity interest; provided, however, that for 2 purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, "Subsidiary" means any corporation in which the Company owns or controls directly or indirectly more than 50% of the total combined voting power represented by all classes of stock issued by such corporation at the time of the grant. "Tandem Appreciation Right" means an Appreciation Right granted pursuant to Section 5 of this Plan that is granted in tandem with an Option Right or any similar right granted under any other plan of the Company. "10% Shareholder" means an individual who, at the time an Option Right is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock issued by the Company or by any parent or subsidiary corporation, within the meaning of Section 422(b)(6) of the Code or any successor provision thereto. 3. Shares Available under the Plan. (a) Subject to adjustment as provided in Section 9 of this Plan, the number of Common Shares which may be (i) issued or transferred upon the exercise of Option Rights or Appreciation Rights, or (ii) awarded as Restricted Shares and released from substantial risk of forfeiture thereof or Deferred Shares, shall not in the aggregate exceed 400,000 Common Shares, which may be Common Shares of original issuance or Common Shares held in treasury or a combination thereof. For the purposes of this Section 3(a): (i) Upon payment in cash of the benefit provided by any award granted under this Plan, any Common Shares that were covered by that award shall again be available for issuance or transfer hereunder; and (ii) Upon the full or partial payment of any Option Price by the transfer to the Company of Common Shares or upon satisfaction of tax withholding obligations in connection with any such exercise or any other payment made or benefit realized under this Plan by the transfer or relinquishment of Common Shares, there shall be deemed to have been issued or transferred under this Plan only the net number of Common Shares actually issued or transferred by the Company less the number of Common Shares so transferred or relinquished. (b) Notwithstanding anything in Section 3(a) hereof, or elsewhere in this Plan, to the contrary, the aggregate number of Common Shares actually issued or transferred by the Company upon the exercise of the Incentive Stock Options shall not exceed the total number of Common Shares first specified in Section 3(a) hereof. (c) Notwithstanding any other provision of this Plan to the contrary, no Participant shall be granted Option Rights and Appreciation Rights, in the aggregate, for more than 200,000 Common Shares during any calendar year, subject to adjustment as provided in Section 9 of this Plan. 3 (d) Notwithstanding any other provision of this Plan to the contrary, no Participant shall be granted Deferred Shares, in the aggregate, for more than 200,000 Common Shares during any calendar year, subject to adjustment as provided in Section 9 of this Plan. 4. Option Rights. The Committee may from time to time authorize grants to Participants of options to purchase Common Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Each grant shall specify the number of Common Shares to which it pertains. (b) Each grant shall specify an Option Price per Common Share, which may not be less than the Market Value per Share on the Date of Grant. In the case of any grant of Incentive Stock Options to a 10% Shareholder, such Option Price per Common Share may not be less than 110% of the Market Value per Share on the Date of Grant. (c) Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Company, (ii) nonforfeitable, unrestricted Common Shares, which are already owned by the Optionee, (iii) any other legal consideration that the Committee may deem appropriate, including without limitation any form of consideration authorized under Section 4(d) below, on such basis as the Committee may determine in accordance with this Plan and (iv) any combination of the foregoing. (d) Any grant of a Nonqualified Option may provide that payment of the Option Price may also be made in whole or in part in the form of Restricted Shares or other Common Shares that are subject to a risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Committee on or after the Date of Grant, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 4(d), the Common Shares received by the Optionee upon the exercise of the Nonqualified Option shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee; provided, however, that such risks of forfeiture and restrictions on transfer shall apply only to the same number of Common Shares received by the Optionee as applied to the forfeitable or restricted Common Shares surrendered by the Optionee. (e) Any grant may, if there is then a public market for the Common Shares, provide for deferred payment of the Option Price from the proceeds of sale through a broker of some or all of the Common Shares to which the exercise relates. (f) Any grant may provide for the automatic grant to the Optionee of Reload Option Rights upon the exercise of Option Rights, including Reload Option Rights, for Common Shares or any other noncash consideration authorized under Sections 4(c) and (d) above; provided, however, that the term of any Reload Option Right shall not extend beyond the term of the Option Right originally exercised. 4 (g) Successive grants may be made to the same Optionee regardless of whether any Option Rights previously granted to the Optionee remain unexercised. (h) Each grant shall specify the period or periods of continuous employment, or continuous engagement of the consulting services, of the Optionee by the Company or any Subsidiary that are necessary and/or the individual or aggregate performance criteria that must be satisfied before the Option Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Option Rights in the event of a change in control of the Company or other similar transaction or event. Notwithstanding the foregoing, in the case of any grant of Incentive Stock Options, the aggregate Market Value per Share on the Date of Grant of the Common Shares subject to such Incentive Stock Options (and all other incentive stock options granted by the Company or any parent or subsidiary corporation) that are exercisable for the first time by the Optionee during any calendar year shall not exceed $100,000. (i) Option Rights granted pursuant to this Section 4 may be Nonqualified Options or Incentive Stock Options or combinations thereof. (j) Any grant of an Option Right may provide for the payment to the Optionee of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis, or the Committee may provide that any dividend equivalents shall be credited against the Option Price. (k) No Option Right granted pursuant to this Section 4 may be exercised more than 10 years from the Date of Grant. In the case of any Incentive Stock Option granted to a 10% Shareholder, such Incentive Stock Option may not be exercised more than five years from the Date of Grant. (l) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Company by any designated officer thereof and delivered to and accepted by the Optionee and shall contain such terms and provisions as the Committee may determine consistent with this Plan. 5. Appreciation Rights. The Committee may also authorize grants to Participants of Appreciation Rights. An Appreciation Right shall be a right of the Participant to receive from the Company an amount, which shall be determined by the Committee and shall be expressed as a percentage (not exceeding 100%) of the Spread at the time of the exercise of an Appreciation Right. Any grant of Appreciation Rights under this Plan shall be upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Any grant may specify that the amount payable upon the exercise of an Appreciation Right may be paid by the Company in cash, Common Shares or any combination thereof and may (i) either grant to the Participant or reserve to the Committee the right to elect among those alternatives or (ii) preclude the right of the Participant to receive and the Company to issue Common Shares or other equity securities in lieu of cash. 5 (b) Any grant may specify that the amount payable upon the exercise of an Appreciation Right shall not exceed a maximum specified by the Committee on the Date of Grant. (c) Each grant shall specify (i) the period or periods of continuous employment, or continuous engagement of the consulting services, of the Optionee by the Company or any Subsidiary that are necessary and/or the individual or aggregate performance criteria that must be satisfied before the Appreciation Rights or installments thereof shall become exercisable and (ii) permissible dates or periods on or during which Appreciation Rights shall be exercisable. (d) Any grant may specify that an Appreciation Right may be exercised only in the event of a change in control of the Company or other similar transaction or event. (e) Any grant may provide for the payment to the Participant of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis. (f) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Company by any designated officer thereof and delivered to and accepted by the Optionee and shall describe the subject Appreciation Rights, identify any related Option Rights, state that the Appreciation Rights are subject to all of the terms and conditions of this Plan and contain such other terms and provisions as the Committee may determine consistent with this Plan. (g) Regarding Tandem Appreciation Rights only: Each grant shall provide that a Tandem Appreciation Right may be exercised only (i) at a time when the related Option Right (or any similar right granted under any other plan of the Company) is also exercisable and the Spread is positive and (ii) by surrender of the related Option Right (or such other right) for cancellation. (h) Regarding Free-standing Appreciation Rights only: (i) Each grant shall specify in respect of each Free-standing Appreciation Right a Base Price per Common Share, which shall be equal to or greater than the Market Value per Share on the Date of Grant; (ii) Successive grants may be made to the same Participant regardless of whether any Free-standing Appreciation Rights previously granted to the Participant remain unexercised; and (iii) No Free-standing Appreciation Right granted under this Plan may be exercised more than 10 years from the Date of Grant. 6. Restricted Shares. The Committee may also authorize grants or sales to Participants of Restricted Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Each grant or sale shall constitute an immediate transfer of the ownership of Common Shares to the Participant in consideration of the performance of services, entitling such 6 Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. (b) Each grant or sale may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Market Value per Share on the Date of Grant. (c) Each grant or sale shall provide that the Restricted Shares covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Committee on the Date of Grant, and any grant or sale may provide for the earlier termination of such period in the event of a change in control of the Company or other similar transaction or event. (d) Each grant or sale shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee on the Date of Grant. Such restrictions may include without limitation rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee. (e) Any grant or sale may require that any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in additional Common Shares, which may be subject to the same restrictions as the underlying award or such other restrictions as the Committee may determine. (f) Each grant or sale shall be evidenced by an agreement, which shall be executed on behalf of the Company by any designated officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Committee may determine consistent with this Plan. Unless otherwise directed by the Committee, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to the Restricted Shares, shall be held in custody by the Company until all restrictions thereon lapse. 7. Deferred Shares. The Committee may also authorize grants or sales of Deferred Shares to Participants upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Each grant or sale shall constitute the agreement by the Company to issue or transfer Common Shares to the Participant in the future in consideration of the performance of services, subject to the fulfillment during the Deferral Period of such conditions as the Committee may specify. 7 (b) Each grant or sale may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Market Value per Share on the Date of Grant. (c) Each grant or sale shall provide that the Deferred Shares covered thereby shall be subject to a Deferral Period, which shall be fixed by the Committee on the Date of Grant, and any grant or sale may provide for the earlier termination of the Deferral Period in the event of a change in control of the Company or other similar transaction or event. (d) During the Deferral Period, the Participant shall not have any right to transfer any rights under the subject award, shall not have any rights of ownership in the Deferred Shares and shall not have any right to vote the Deferred Shares, but the Committee may on or after the Date of Grant authorize the payment of dividend equivalents on the Deferred Shares in cash or additional Common Shares on a current, deferred or contingent basis. (e) Each grant or sale shall be evidenced by an agreement, which shall be executed on behalf of the Company by any designated officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Committee may determine consistent with this Plan. 8. Transferability. (a) No Option Right or Appreciation Right granted under this Plan may be transferred by a Participant, except (i) by will or the laws of descent and distribution, (ii) to one or more members of the Participant's immediate family, or (iii) to a trust established for the benefit of the Participant and/or one or more members of the Participant's immediate family. Option Rights and Appreciation Rights granted under this Plan may not be exercised during a Participant's lifetime except by (i) the Participant, (ii) a transferee of the Participant described in the preceding sentence, or (iii) in the event of the legal incapacity of the Participant or any such transferee, by the guardian or legal representative of the Participant or such transferee (as applicable) acting in a fiduciary capacity on behalf thereof under state law and court supervision. (b) Any grant made under this Plan may provide that all or any part of the Common Shares that are to be issued or transferred by the Company upon the exercise of Option Rights or Appreciation Rights or upon the termination of the Deferral Period applicable to Deferred Shares, or are no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 6 of this Plan, shall be subject to further restrictions upon transfer. 9. Adjustments. (a) The Committee may make or provide for such adjustments in the number of Common Shares covered by outstanding Option Rights, Appreciation Rights and Deferred Shares granted hereunder, the Option Prices per Common Share or Base Prices per Common Share applicable to any such Option Rights and Appreciation Rights, and the kind of shares (including 8 shares of another issuer) covered thereby, as the Committee may in good faith determine to be equitably required in order to prevent dilution or expansion of the rights of Participants that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or similar change in the capital structure of the Company or (ii) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of warrants or other rights to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Committee may on or after the Date of Grant provide in the agreement evidencing any award under this Plan that the holder of the award may elect to receive an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Committee may provide that the holder will automatically be entitled to receive such an equivalent award. The Committee may also make or provide for such adjustments in the maximum numbers of Common Shares specified in Section 3 of this Plan as the Committee may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 9. (b) If another corporation is merged into the Company or the Company otherwise acquires another corporation, the Committee may elect to assume under this Plan any or all outstanding stock options or other awards granted by such corporation under any stock option or other plan adopted by it prior to such acquisition. Such assumptions shall be on such terms and conditions as the Committee may determine; provided, however, that the awards as so assumed do not contain any terms, conditions or rights that are inconsistent with the terms of this Plan. Unless otherwise determined by the Committee, such awards shall not be taken into account for purposes of the limitations contained in Section 3 of this Plan. 10. Fractional Shares. The Company shall not be required to issue any fractional Common Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement thereof in cash. 11. Withholding Taxes. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of any taxes required to be withheld. At the discretion of the Committee, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such payment or benefit or the surrender of outstanding Common Shares. The Company and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 9 12. Certain Terminations of Employment or Consulting Services, Hardship, and Approved Leaves of Absence. Notwithstanding any other provision of this Plan to the contrary, in the event of termination of employment or consulting services by reason of death, disability, normal retirement, early retirement with the consent of the Company, termination of employment or consulting services to enter public or military service with the consent of the Company or leave of absence approved by the Company, or in the event of hardship or other special circumstances, of a Participant who holds an Option Right or Appreciation Right that is not immediately and fully exercisable, any Restricted Shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, any Deferred Shares as to which the Deferral Period is not complete, or any Common Shares that are subject to any transfer restriction pursuant to Section 8(b) of this Plan, the Committee may take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including without limitation waiving or modifying any limitation or requirement with respect to any award under this Plan. 13. Administration of the Plan. (a) This Plan shall be administered by the Compensation Committee of the Board, which shall be composed of not less than two members of the Board, or, in the absence of a Compensation Committee, by the full Board. At any time that awards under the Plan are subject to Rule 16b-3, each member of the Compensation Committee shall be a "non-employee director" within the meaning of such Rule. In addition, at any time that the Company is subject to Section 162(m) of the Code, each member of the Compensation Committee shall be an "outside director" within the meaning of such Section. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. (b) The interpretation and construction by the Committee of any provision of this Plan or any agreement, notification or document evidencing the grant of Option Rights, Appreciation Rights, Restricted Shares or Deferred Shares, and any determination by the Committee pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Committee shall be liable for any such action taken or determination made in good faith. 14. Amendments and Other Matters. (a) This Plan may be amended from time to time by the Committee; provided, however, that except as expressly authorized by this Plan, no such amendment shall cause this Plan to cease to satisfy any applicable condition of Rule 16b-3 or cause any award under the Plan to cease to qualify for any applicable exception under Section 162(m) of the Code, without the further approval of the stockholders of the Company. (b) With the concurrence of the affected Participant, the Committee may cancel any agreement evidencing Option Rights or any other award granted under this Plan. In the event 10 of any such cancellation, the Committee may authorize the granting of new Option Rights or other awards hereunder, which may or may not cover the same number of Common Shares as had been covered by the cancelled Option Rights or other award, at such Option Price, in such manner and subject to such other terms, conditions and discretion as would have been permitted under this Plan had the cancelled Option Rights or other award not been granted. (c) The Committee may condition the grant of any award or combination of awards authorized under this Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensation otherwise payable by the Company or a Subsidiary to the Participant. (d) This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary and shall not interfere in any way with any right that the Company or any Subsidiary would otherwise have to terminate any Participant's employment or other service at any time. (e) To the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as an Incentive Stock Option from so qualifying, any such provision shall be null and void with respect to any such Option Right; provided, however, that any such provision shall remain in effect with respect to other Option Rights, and there shall be no further effect on any provision of this Plan. (f) Any award that may be made pursuant to an amendment to this Plan that shall have been adopted without the approval of the stockholders of the Company shall be null and void if it is subsequently determined that such approval was required under the terms of the Plan or applicable law. (g) Unless otherwise determined by the Committee, this Plan is intended to comply with Rule 16b-3 at all times that awards hereunder are subject to such Rule. 11 EX-10.5 6 EX 10.5 Exhibit 10.5 HEI, INC. 1998 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS 1. Purpose. The purpose of this Plan is to attract and retain qualified individuals to serve as nonemployee members of the Board of Directors of HEI, Inc. (the "Company") and to provide such persons with appropriate incentives. The Company has adopted the Plan effective as of November 18, 1998, subject to the approval of the Company's stockholders, and unless extended by amendment in accordance with the terms of the Plan, no Option Rights will be granted hereunder after the tenth anniversary of such effective date. Upon the approval of the adoption of the Plan by the Company's stockholders, the Plan will replace and supersede the Company's prior Stock Option Plan for Nonemployee Directors (the "1991 Plan"). 2. Definitions. As used in this Plan, "Board" means the Board of Directors of the Company. "Change in Control" means a change in control of the Company, which will be deemed to have occurred after the effective date of this Plan if: (i) any "person" as such term is used in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof except that such term shall not include (A) the Company or any of its subsidiaries, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Shares, or (E) any person or group as used in Rule 13d-1(b) under the Exchange Act, is or becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 50% or more of the combined voting power of the Company's then outstanding securities. (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than (A) a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this definition or (B) a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as defined above) is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Common Shares" means (i) shares of the voting common stock of the Company and (ii) any security into which Common Shares may be converted by reason of any transaction or event of the type referred to in Section 6 of this Plan. "Date of Grant" means the date specified by the Board on which a grant of Option Rights shall become effective, which shall not be earlier than the date on which the Board takes action with respect thereto. "Disability" means any physical or mental illness, injury or condition that would qualify a Participant for benefits under any long-term disability benefit plan maintained by the Company 2 or any Subsidiary and applicable to such Participant (or, if the Participant is not eligible for any such plan, to senior executive officers of the Company). "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Market Value per Share" means the fair market value of the Common Shares as determined by the Board from time to time. "Option Price" means the purchase price payable upon the exercise of an Option Right. "Option Right" means the right to purchase Common Shares from the Company upon the exercise of a nonqualified stock option granted pursuant to Section 4 of this Plan. "Participant" means an individual who, at the time of any automatic award of Option Rights pursuant to Section 4 below, is a member of the Board and both a "non-employee director" within the meaning of Rule 16b-3 and an "outside director" within the meaning of Section 162(m) of the Code. "Rule 16b-3" means Rule 16b-3, as promulgated and amended from time to time by the Securities and Exchange Commission under the Exchange Act, or any successor rule to the same effect. "Subsidiary" means a corporation, partnership, joint venture, unincorporated association or other entity in which the Company has a direct or indirect ownership or other equity interest. 3. Shares Available under the Plan. (a) Subject to adjustment as provided in Section 6 of this Plan, the number of Common Shares which may be issued or transferred upon the exercise of Option Rights shall not in the aggregate exceed 425,000 Common Shares (including any Common Shares remaining under the 1991Plan), which may be Common Shares of original issuance or Common Shares held in treasury or a combination thereof. For the purposes of this Section 3(a): (i) Upon payment in cash of the benefit provided by any award granted under this Plan, any Common Shares that were covered by that award shall again be available for issuance or transfer hereunder; and (ii) Upon the full or partial payment of any Option Price by the transfer to the Company of Common Shares or upon satisfaction of tax withholding obligations in connection with any such exercise or any other payment made or benefit realized under this Plan by the transfer or relinquishment of Common Shares, there shall be deemed to have been issued or transferred under this Plan only the net number of Common Shares actually issued or transferred by the Company less the number of Common Shares so transferred or relinquished. 3 4. Option Rights. Subject to adjustment as provided in Section 6 of this Plan, the Board shall automatically grant to each Participant Option Rights to purchase Common Shares upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) Effective as of November 18, 1998, each individual who was then a Participant shall be granted Option Rights to purchase 55,000 Common Shares. Thereafter, commencing with the annual meeting of the Company's stockholders in January 2000, each individual who is a Participant upon the adjournment of an annual meeting of the Company's stockholders shall be granted Option Rights to purchase 10,000 Common Shares, effective as of the date of such annual meeting. (b) Each grant shall specify an Option Price per Common Share, which shall equal the Market Value per Share on the Date of Grant. (c) Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Company, (ii) nonforfeitable, unrestricted Common Shares, which are already owned by the Participant, (iii) any other legal consideration that the Board may deem appropriate, on such basis as the Board may determine in accordance with this Plan and (iv) any combination of the foregoing. (d) Any grant may, if there is then a public market for the Common Shares, provide for deferred payment of the Option Price from the proceeds of sale through a broker of some or all of the Common Shares to which the exercise relates. (e) Successive grants may be made to the same Participant regardless of whether any Option Rights previously granted to the Participant remain unexercised. (f) Each grant shall specify that the Option Rights awarded thereby shall become exercisable in full upon the earliest to occur of (i) the ninth anniversary of the Date of Grant, (ii) the first date after the Date of Grant on which the Market Value per Share of the Common Shares (as adjusted as provided in Section 6 of this Plan) equals or exceeds $25.00, (iii) the date of the Participant's death or Disability, and (iv) the effective date of a Change in Control, provided, in each case, that the Participant remains in continuous service with the Company until such date. (g) Option Rights granted pursuant to this Section 4 shall be nonqualified stock options. (h) No Option Right granted pursuant to this Section 4 may be exercised more than 10 years from the Date of Grant. 4 (i) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Company by any designated officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board may determine consistent with this Plan. 5. Transferability. No Option Right granted under this Plan may be transferred by a Participant, except (i) by will or the laws of descent and distribution, (ii) to one or more members of the Participant's immediate family, or (iii) to a trust established for the benefit of the Participant and/or one or more members of the Participant's immediate family. Option Rights granted under this Plan may not be exercised during a Participant's lifetime except by (i) the Participant, (ii) a transferee of the Participant described in the preceding sentence, or (iii) in the event of the legal incapacity of the Participant or any such transferee, by the guardian or legal representative of the Participant or such transferee (as applicable) acting in a fiduciary capacity on behalf thereof under state law and court supervision. 6. Adjustments. (a) The Board may make or provide for such adjustments in the number of Common Shares covered by outstanding Option Rights granted hereunder, the Option Prices per Common Share applicable to any such Option Rights, and the kind of shares (including shares of another issuer) covered thereby, as the Board may in good faith determine to be equitably required in order to prevent dilution or expansion of the rights of Participants that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or similar change in the capital structure of the Company or (ii) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of warrants or other rights to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Board may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Board may on or after the Date of Grant provide in the agreement evidencing any award under this Plan that the holder of the award may elect to receive an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Board may provide that the holder will automatically be entitled to receive such an equivalent award. The Board may also make or provide for such adjustments in the maximum numbers of Common Shares specified in Section 3 of this Plan as the Board may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 6. (b) If another corporation is merged into the Company or the Company otherwise acquires another corporation, the Board may elect to assume under this Plan any or all outstanding stock options or other awards granted by such corporation under any stock option or other plan adopted by it prior to such acquisition. Such assumptions shall be on such terms and conditions as the Board may determine; provided, however, that the awards as so assumed do not contain any terms, conditions or rights that are inconsistent with the terms of this Plan. Unless 5 otherwise determined by the Board, such awards shall not be taken into account for purposes of the limitations contained in Section 3 of this Plan. 7. Fractional Shares. The Company shall not be required to issue any fractional Common Shares pursuant to this Plan. The Board may provide for the elimination of fractions or for the settlement thereof in cash. 8. Withholding Taxes. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of any taxes required to be withheld. At the discretion of the Board, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such payment or benefit or the surrender of outstanding Common Shares. The Company and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 9. Administration of the Plan. (a) This Plan shall be administered by the Board. A majority of the Board shall constitute a quorum, and the acts of the members of the Board who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Board in writing, shall be the acts of the Board. (b) The interpretation and construction by the Board of any provision of this Plan or any agreement, notification or document evidencing the grant of Option Rights, and any determination by the Board pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Board shall be liable for any such action taken or determination made in good faith. 10. Amendments and Other Matters. (a) This Plan may be amended from time to time by the Board; provided, however, that except as expressly authorized by this Plan, no such amendment shall cause this Plan to cease to satisfy any applicable condition of Rule 16b-3 without the further approval of the stockholders of the Company. (b) With the concurrence of the affected Participant, the Board may cancel any agreement evidencing Option Rights or any other award granted under this Plan. In the event of any such cancellation, the Board may authorize the granting of new Option Rights or other awards hereunder, which may or may not cover the same number of Common Shares as had been covered by the cancelled Option Rights or other award, at such Option Price, in such manner and subject to 6 such other terms, conditions and discretion as would have been permitted under this Plan had the cancelled Option Rights or other award not been granted. (c) This Plan shall not confer upon any Participant any right with respect to continuance of service with the Board, the Company or any Subsidiary and shall not interfere in any way with any right that the Company, its stockholders or any Subsidiary would otherwise have to terminate any Participant's service at any time. (e) Any award that may be made pursuant to an amendment to this Plan that shall have been adopted without the approval of the stockholders of the Company shall be null and void if it is subsequently determined that such approval was required under the terms of the Plan or applicable law. (f) Unless otherwise determined by the Board, this Plan is intended to comply with Rule 16b-3 at all times that awards hereunder are subject to such Rule. EX-10.7 7 EX-10.7 Exhibit 10.7 Reference is made to that certain Agreement regarding Employment/Compensation upon Change in Control, dated April 23, 1997 (the "Agreement") between HEI, Inc., a Minnesota corporation, and Eugene W. Courtney, an executive thereof. In consideration of $1.00 and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Agreement is hereby amended and restated in its entirety as follows: This Agreement is entered into as of November 20, 1998, by and between HEI, Inc., a Minnesota corporation ("HEI"), and Eugene W. Courtney, an individual. In consideration of the mutual promises and covenants contained herein, the parties hereto agree as follows: 1. HEI shall pay to Mr. Courtney the amount of $540,000 as follows: (i) $40,000 upon the execution of this amendment and restatement of this Agreement, and (ii) $500,000 over the 24 month period commencing January 1999 in equal monthly installments of $20,833.33 payable on the first business day of each month. The foregoing payments shall be in lieu of all other payments or benefits of any kind whatsoever for which HEI shall be obligated to pay to Mr. Courtney, and such payments shall be unconditionally due to Mr. Courtney irrespective of any claim of breach of this Agreement or otherwise. The remaining payments of such amounts as may be outstanding from time to time shall be unconditionally secured by a pledge of an equivalent principal balance of certificates of deposit, government securities, letters of credit or other comparable instruments, with such form of security to be reasonably acceptable to Mr. Courtney, all as provided in that Assignment/Pledge Agreement of even date herewith (the "Assignment/Pledge Agreement"). 2. For the three month period (the "First Three Month Period") commencing on the date hereof, Mr. Courtney shall devote 80% of his professional time to HEI as a consultant and advisor, and for the three month period immediately following the First Three Month Period, Mr. Courtney shall devote 40% of his professional time to such services; provided that during the six week period commencing on the date hereof, Mr. Courtney shall continue to appear at HEI's offices on business days consistent with his past practices. 3. Mr. Courtney shall be nominated to serve, and agrees to serve if elected, as a director of HEI for a one-year term commencing at the 1999 annual meeting of HEI shareholders. 4. HEI, Anthony J. Fant, and his affiliates ("HEI/Fant") hereby release and discharge, to the fullest extent permitted by law, Mr. Courtney from all known actions, suits, causes of action, rights, demands, and claims, fixed or contingent, that HEI/Fant now have, or in the past had, against Mr. Courtney based on, arising out of, or related to any matters arising up to the date hereof. Mr. Courtney hereby releases and discharges, to the fullest extent permitted by law, HEI/Fant from all known actions, suits, causes of action, rights, demands, and claims, fixed or 2 contingent, that Mr. Courtney now has, or in the past had, against HEI/Fant, or any of them, based on, arising out of, or related to any matters arising up to the date hereof. 5. This Agreement is the entire Agreement between the parties on its subject matter and shall be deemed to supersede any other agreements allegedly made between the parties regarding the subject matter and any other agreements relating to Mr. Courtney's employment or severance, other than the Assignment/Pledge Agreement and such agreements between HEI and Mr. Courtney regarding confidentiality and non-competition. The parties represent that no other such agreements or understandings exist. Additionally, this Agreement shall in no manner affect Mr. Courtney's rights to indemnification as a director, officer or employee of HEI. 6. This Agreement may not be changed, modified or amended except in writing signed by both parties. 7. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 8. This Agreement shall be binding upon, and inure to the benefit of, the Company, its successors and assigns, and Mr. Courtney, his heirs, legal representatives and assigns. 9. This Agreement is being delivered and is intended to be performed in the State of Minnesota and shall be construed and enforced in accordance with the laws of such state. 10. This Agreement may be executed in counterparts. 3 Dated: November 20, 1998 AGREED UPON AND ACKNOWLEDGED: /s/ Eugene W. Courtney ------------------------------------- Eugene W. Courtney, individually HEI, INC. By: /s/ Anthony J. Fant ------------------------------------- Name: Anthony J. Fant Title: Chairman /s/ Anthony J. Fant ------------------------------------- Anthony J. Fant, individually and for his affiliates 4 EX-13 8 EX-13 Exhibit 13 HEI, Inc. Five Year Summary of Selected Financial Information - --------------------------------------------------- (In thousands, except per share amounts)
- --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Years Ended August 31 1998 1997 1996 1995 1994 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Net sales $20,805 $30,962 $20,680 $23,423 $17,295 Cost of sales 16,592 24,524 14,957 17,263 12,497 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Gross profit 4,213 6,438 5,723 6,160 4,798 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Operating expenses: Selling, general and administrative 2,375 2,277 2,342 2,401 2,094 Research, development and engineering 852 843 849 754 679 Proxy/change of control costs 5,664 - - - - Gain on sale of product line, net - (215) (45) - - - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Operating income (loss) (4,678) 3,533 2,577 3,005 2,025 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Income (loss) before income taxes (4,098) 3,980 2,833 3,250 2,102 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Income taxes (benefit) (1,471) 1,430 720 1,210 777 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Net income (loss) $(2,627) $ 2,550 $ 2,113 $ 2,040 $ 1,325 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Net income (loss) per basic share $ (.64) $ .62 $ .54 $ .54 $ .36 Net income (loss) per diluted share $ (.64) $ .60 $ .52 $ .52 $ .34 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Weighted average common shares Outstanding Basic 4,085 4,135 3,942 3,748 3,665 Diluted 4,085 4,279 4,098 3,899 3,858 - --------------------------------------------------- ------------ ----------- ------------- ------------ --------------- Balance sheet: Working capital $11,864 $14,784 $10,088 $ 8,380 $ 5,927 Total assets 22,173 24,511 22,414 12,857 10,905 Long-term debt, less current maturities 3,835 4,537 5,271 - - Shareholders' equity 14,341 16,995 13,816 10,982 8,671 - --------------------------------------------------- ------------ ----------- ------------- ------------ ---------------
To Our Shareholders Fiscal year 1998 was a year of fundamental transition for your Company. HEI successfully completed a transition to new leadership and direction. It also completed a transition from a business strategy that concentrated on building our financial and technology foundations to a focus on strategic markets, consistency of growth and expansion of capabilities. We eliminated our heavy dependence on revenues from the volatile disk drive market--approximately 55% of net sales in fiscal 1997 -- and built a revenue base founded on more diverse and stable long-term growth opportunities. We also absorbed a one-time charge of $5.7 million for the expenses associated with both parties' costs in the Company's recent proxy contest and the related change of control costs. 1998: Successful Transition HEI achieved 60% growth in revenues from targeted applications in the hearing, medical and communications markets during fiscal 1998. This growth demonstrates HEI's ability to successfully apply and expand our state-of-the-art ultraminiature microelectronic packaging capabilities in these areas. The Company reported net income from operations for the past fiscal year, excluding the one-time costs related to the proxy contest and change of control, of approximately $.25 per share diluted, almost all from non-disk drive business. In fiscal 1998, HEI added significant top management expertise with the hiring of Donald Reynolds as President and Stephen Petersen as Director of Manufacturing. Mr. Reynolds came to us with 17 years' experience in electronics engineering, marketing and senior management with BF Goodrich Aerospace. Mr. Peterson brings over 20 years' experience in high technology engineering and manufacturing, most recently with the Interconnect Division of Sheldahl, Inc. We are pleased by their addition to our management team and look forward to their ongoing contributions to our growth. Eugene Courtney resigned as Chief Executive Officer, but remains a director of HEI and will also serve the Company in an advisory role. 1999: Growth and Expansion In fiscal 1999, with the strengthening of our focus on hearing, medical and communications markets, we expect to further demonstrate HEI's growth potential in these markets which have been carefully selected for their current and future requirements for our core competencies. In addition, we have begun a process of expanding those competencies to add applications-specific design expertise and sales coverage. This effort will provide differentiation in our markets and better position HEI for future growth and profitability. We believe that the combination of leading edge packaging knowledge and expanded circuit design expertise will provide value-added services that more fully serve the needs of our prospects and customers. As we pursue the strategies set out in fiscal 1998, we intend to expand our technology base, adding and broadening HEI's capabilities through selective partnering and/or acquisitions, particularly in the areas of flexible and laminate substrates. This will enable us to provide optimum packaging alternatives and serve new applications areas. We will also investigate further expansion of our manufacturing capacity and capabilities, to provide additional lower cost assembly services, where such services naturally complement and add value to our leading edge capabilities in ultraminiature device manufacturing. We believe that fiscal 1999 will be a year of growth in revenues and expansion of capabilities and resources. Despite the uncertain economic conditions, we remain optimistic, hopeful that these factors will not override our growth prospects for fiscal 1999, particularly the latter half. We believe we have the dynamic leadership and strategic direction, the identified applications and customers, and the means and capability to create long-term growth and expansion. New Directions and Opportunities On August 4, 1998, HEI's shareholders elected a new Board of Directors to lead your Company into the 21st century. HEI's strength comes from its experienced staff, its leading edge technology and the outstanding customer base it serves. Management and the new board are committed to building on this foundation, setting aggressive objectives, and seeking new opportunities to broaden and expand HEI's prospects. HEI is well positioned to take advantage of exciting new opportunities in microelectronics design and manufacturing, particularly in our strategic markets of hearing and medical instrumentation and communications. We thank you for your loyalty and confidence in HEI, and assure you of our dedication to growth, diversity and increased shareholder value. We look forward to a bright future for the Company and all its stakeholders. Sincerely, Anthony J. Fant Eugene W. Courtney Donald R. Reynolds Chairman of the Board Director President Chief Executive Officer Forward-Looking Statements This Annual Report includes forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements contain information regarding technology, markets, growth and earnings expectations based on the Company's current assumptions involving a number of risks and uncertainties. There are certain important factors that can cause actual results to differ materially from the forward-looking statements, including, without limitation, adverse business or market conditions; the ability of the Company to secure and satisfy customers; the availability and cost of materials from HEI's suppliers; adverse competitive developments; change in or cancellation of customer requirements; the year 2000 issue; and other factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements; HEI undertakes no obligation to update these statements to reflect ensuing events or circumstances, or subsequent actual results. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION The Company's net cash flow used for operating activities for the year ended August 31, 1998, was $3,043,000. The significant components of this operating net cash flow were negative cash flow of $1,451,000 from operations before changes in current operating items, a $1,056,000 increase in accounts receivable, a $1,089,000 increase in income taxes receivable and a $512,000 increase in other current assets partially offset by a $1,106,000 increase in accounts payable. The increase in accounts receivable is attributable primarily to increased sales in the last month of the current fiscal year versus the same period of last fiscal year. The income tax receivable is a result of the carry back effect of the pre-tax loss on fiscal year 1998 results. The increase in other current assets is mainly due to deposits made on equipment that will be converted to operating lease agreements. The increase in accounts payable is primarily due to an accrual of invoiced proxy/change of control costs not paid until September 1998. Accounts receivable average days outstanding was 40 days for the year ended August 31, 1998 compared to 36 days for the same period a year ago. Inventory turns were 12.0 turns and 10.9 turns for the years ended August 31, 1998 and 1997, respectively. The Company decreased short-term investments, primarily commercial paper, to $7,984,000, down $1,191,000 from a year ago, primarily to pay proxy/change of control costs. The current ratio at the end of fiscal 1998 was 4.2:1 as compared to 6.7:1 at the end of fiscal 1997. The reduced current ratio is principally due to decreased cash and cash equivalents and short-term investments and increased accounts payable partially offset by increased accounts receivable and other current assets. In May 1998, the Company extended the due date of its $3,000,000 revolving line of credit to January 1999 (see Note 5 under Notes to Financial Statements). As of August 31, 1998, there were no borrowings under the line. During fiscal 1998, the Company purchased $1,025,000 of property and equipment to increase manufacturing capacity to meet anticipated requirements. These expenditures were funded primarily by internally generated funds and the remaining proceeds of the Industrial Development Revenue Bonds issued in April 1996. The Company also entered into operating leases for an additional $694,000 of equipment over a three year period. During fiscal 1999, the Company intends to expend approximately $2.0 million for manufacturing facility improvements and capital equipment. These additions will increase manufacturing capacity to meet anticipated requirements for continued revenue growth. It is expected that these expenditures will be funded primarily from operations. RESULTS OF OPERATIONS
SALES BY PRODUCT LINE - ------------------------------------------------------------------------------------------------------------ (In thousands) 1998 1997 1996 - ------------------------------------------ --------------------- --------------------- --------------------- Microelectronics $20,805 $30,962 $18,545 Light pens - - 2,135 - ------------------------------------------ --------------------- --------------------- --------------------- Total $20,805 $30,962 $20,680 - ------------------------------------------ --------------------- --------------------- ---------------------
Sales. 1998 vs. 1997: Sales in fiscal 1998 decreased $10,157,000, or 33%, as compared to fiscal 1997. This decrease reflects the phase out during the last quarter of fiscal 1997 of volume production of a device for use in high-density disk drives. In the previous fiscal year, this disk drive program accounted for 55% of total sales. However, sales to the Company's other market areas (hearing and medical instruments, telecommunications and industrial applications) collectively increased 60% in fiscal 1998 as compared to sales to such markets in fiscal 1997. In fiscal 1998, one large multinational customer accounted for 59% of total sales. The business with this customer has grown steadily over the last five years, and currently the Company is producing 21 different devices for this customer for shipment to multiple locations, both domestic and international.
PERCENTAGE OF SALES - ------------------------------------------------- ------------------- ------------------ ------------------- 1998 1997 1996 - ------------------------------------------------- ------------------- ------------------ ------------------- Sales 100% 100% 100% Gross profit 20% 21% 28% Selling, general and administrative 11% 7% 11% Research, development and engineering 4% 3% 4% Proxy/change of control costs 27% - - - ------------------------------------------------- ------------------- ------------------ -------------------
1997 vs. 1996: Sales in fiscal 1997 increased $10,282,000, or 50%, as compared to fiscal 1996. This increase was primarily due to shipments in the high-density disk drive business, primarily to one customer. Shipments to this customer constituted 55% of sales during fiscal year 1997. Because the Company's sales to the computer disk drive market were generally tied to the customers' projected sales and production of the related product, the Company's sales levels were 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 revenues. 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. In April 1997, the Company announced that it had received notice from its then largest current customer to begin phasing out production of a microelectronic assembly used in high-density disk drives. Phase out of this program commenced late in the third quarter of fiscal year 1997 and was completed by the end of the fourth quarter. Gross Profit. 1998 vs. 1997: The Company's gross profit as a percentage of sales was 20% in fiscal 1998, as compared to 21% in fiscal 1997. The reduction in gross profit and gross profit as a percentage of sales was primarily due to the decrease in sales and the impact of relatively fixed manufacturing support costs. 1997 vs. 1996: The Company's gross profit as a percentage of sales was 21% in fiscal 1997, as compared to 28% in fiscal 1996. The reduced gross profit rate was primarily the result of volume pricing to a customer resulting in lower gross margin rates for sales on a high-density disk drive program. Operating Expenses. 1998 vs. 1997: Fiscal 1998 selling, general and administrative and research, development and engineering expenses increased $107,000, or 3%, over the previous year. In addition to these costs, the Company incurred $5,664,000 of one-time expenses related to proxy contest and change of control costs which resulted from the efforts of Fant Industries Inc. in the second half of this year to gain control of the Board of Directors. These expenses included preparation of proxy materials and other information to shareholders and litigation expenses related to the takeover activity, cash-out payments made to all stock option holders which were required as a result of the change of control and reimbursement to Fant Industries Inc. for its expenses as agreed to by the shareholders. These one-time expenses of $5,664,000 were entirely a cash outlay with the final amounts paid out in the first quarter of fiscal 1999. 1997 vs. 1996: Selling, general and administrative expenses decreased $65,000, or 3%, in fiscal 1997 from the previous year primarily due to the sale of the light pen product line at the end of fiscal 1996 and the leveraging effects of a significantly higher sales level. Research, development and engineering expenses remained fairly constant in fiscal 1997 versus fiscal 1996. Gain on sale of product line of $215,000 in fiscal 1997 represents the gain on the sale of the optoelectronic switch assembly business in August 1997. The $45,000 net gain on sale of product line in fiscal 1996 represents the gain on the sale of the light pen product line, which was completed in August 1996, partially offset by costs to close down the light pen product line (see Note 4 of Notes to Financial Statements). Other, Principally Interest Income. 1998 vs. 1997: Other income increased $133,000, or 30%, in fiscal 1998 as compared to fiscal 1997 primarily due to cash received from previously reserved notes receivable. 1997 vs. 1996: Other income increased $191,000, or 75%, in fiscal 1997 as compared to fiscal 1996 primarily due to increased interest income from significantly higher short-term investment balances, partially offset by higher interest expense on the Industrial Development Revenue Bonds. Net Income (Loss). 1998 vs. 1997: The Company had a net loss of $2,627,000 in fiscal 1998 compared to net income of $2,550,000 in fiscal 1997. The loss in fiscal 1998 was a result of decreased revenues and proxy/change of control costs of $5,664,000. The fiscal 1998 loss also resulted in an income tax benefit of $1,471,000 and an effective rate of 36%. 1997 vs. 1996: The Company had net income of $2,550,000 in fiscal 1997 as compared to net income of $2,113,000 in fiscal 1996. Operating income of $3,533,000 increased $956,000 in fiscal 1997 as compared to fiscal 1996 reflecting the significant 1997 sales increase. The effective tax rate in fiscal 1997 was 36% as compared to 25% in fiscal 1996. The reduced rate in fiscal year 1996 was due to the elimination of a deferred tax asset valuation allowance. ISSUES AND UNCERTAINTIES This Annual Report contains forward-looking statements that are based on the Company's current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses and operating results include, without limitation, adverse business or market conditions, the ability of the Company to secure and satisfy customers, the availability and cost of materials from suppliers, adverse competitive developments, and change in or cancellation of customer requirements. The forward-looking statements included herein are based on current assumptions that the Company will continue to develop, market, manufacture and ship products on a timely basis, that competitive conditions within the Company's markets will not change materially or adversely, that the Company will continue to identify and satisfy customer needs for products and services, that the Company will be able to retain and hire key personnel, that its equipment, process, capabilities and resources will remain competitive and compatible with the current state of technology, that risks due to shifts in customer demand will be minimized, that the Company does not anticipate a significant financial impact relating to year 2000 issues, and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments that are based on incomplete information and are subject to many factors that can materially affect results. The Company operates in a volatile segment of high technology markets and applications that are subject to rapid change and technical obsolescence. Because of these and other factors affecting the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. The following factors also may materially affect results and therefore should be considered. Substantial Fluctuations in Future Operating Results: The Company has experienced substantial fluctuations in its annual and quarterly operating results, and such fluctuations are expected to continue in future periods. The Company's operating results are affected by a number of factors, many of which are beyond the Company's control. All products manufactured by the Company are custom designed and assembled for a specific customer's requirement in anticipation of the receipt of volume production orders from that customer, which may not always materialize to the degree anticipated, if at all. The Company typically incurs significant start-up costs in the production of a particular product, which costs are expensed as incurred and for which the Company attempts to seek reimbursement from the customer. Accordingly, the Company's level of experience in manufacturing a particular product and its efficiency in minimizing start-up costs will affect the Company's operating results during the periods in which production begins and ramp-up occurs. The efficiencies of the Company in managing inventories and fixed assets, shortages of components or labor, the degree of automation used in the assembly process, fluctuations in material costs and the mix of materials, labor, manufacturing, and overhead costs are also significant factors affecting annual and quarterly operating results. Other factors contributing to fluctuations in the Company's operating results include unforeseen design or manufacturing problems, price competition, functional competition (other means of accomplishing the same or similar packaging end result), the inability to pass on cost overruns, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, and the range of services provided. In addition, the amount and timing of orders placed by a customer may vary due to a number of factors, including inventory balancing, changes in manufacturing strategy, and variation in product demand attributable to, among other things, product life cycles, competitive factors, and general economic conditions. Any one of these factors, or a combination thereof, could adversely affect the Company's annual and quarterly results of operations. The Company's customers generally require short delivery cycles, and a substantial portion of the Company's backlog is typically scheduled for delivery within 90 days. Quarterly sales and operating results therefore depend in large part on the volume and timing of bookings received during or immediately prior to the quarter, which are difficult to forecast in advance of that time. The short lead-time for the Company's backlog also affects its ability to accurately plan production and inventory levels. In addition, a significant portion of the Company's operating expenses is relatively fixed in nature and planned expenditures are based in part on anticipated orders. Any inability to adjust spending quickly enough to compensate for any revenue shortfall may magnify the adverse impact of such revenue shortfall on the Company's results of operations. Dependence on Single Industry: During the past several years, the Company has had significant dependence on a single market. In fiscal 1998, 69% of the Company's revenues came from sales to hearing instrument manufacturers. In addition, the Company has made significant sales in the medical products industry. Each of these industries is characterized by intense competition, relatively short product life cycles, rapid technological change, significant fluctuations in product demand, and significant pressure on vendors to reduce or minimize cost. Although the Company is attempting to reduce its dependence on any single industry, the Company does not expect this historic dependence to change dramatically or quickly. Accordingly, the Company will likely be affected by trends in the industries it serves. Customer Concentration: The Company's customer base is highly concentrated. In fiscal 1998, 1997 and 1996, the Company's two largest customers accounted for 73%, 82% and 54%, respectively, of net sales. Although the Company is attempting to reduce its dependence on a limited number of customers, the Company expects that sales to a relatively small number of original equipment manufacturers ("OEMs") will continue to account for a substantial portion of net revenues for the foreseeable future, and the loss of, or a decline in orders from, one of the Company's key customers would have a material adverse effect on the Company's financial and operating results. Competition: The Company operates in a highly competitive industry and competes against several domestic and foreign providers of similar microelectronics design and/or manufacturing services. The Company also faces competition from the internal operations of its current and potential OEM customers, which the Company believes will continue to evaluate the merits of manufacturing components internally versus outsourcing, and from offshore contract manufacturers, which, because of their lower labor rates and other related factors, enjoy a comparative advantage over the Company with respect to high-volume production. The Company expects to encounter future competition from other electronics manufacturers that currently provide or may begin to provide contract design and manufacturing services. A number of the Company's competitors may have substantially greater manufacturing, financial, technical, marketing, and other resources than does the Company, and may offer a broader scope and presence of operations on a worldwide basis. Significant competitive factors in the microelectronics market include price, quality, responsiveness, testing capabilities, the ability to manufacture in very high volumes and proximity to the customers final assembly facilities. While the Company has competed favorably in the past with respect to these factors, this is a particularly fast changing market, and there can be no assurance that the Company will continue to do so in the future. The trends toward increasingly shorter product cycles and to off-shore production are expected to result in more intense competition as each new customer program is generally open to bidding by the Company and its competitors, increasingly including those with off-shore facilities and capabilities. Further, the Company is often only one of two or more suppliers on any particular customer requirement and is therefore subject to continuing competition on existing programs. In order to remain competitive in any of its markets, the Company must continually provide timely and technologically advanced design capabilities and manufacturing services, ensure the quality of its products, and compete favorably with respect to turnaround and price. If the Company were to fail to compete favorably with respect to the principal competitive factors in its markets served, the Company's business and operating results would be adversely affected. Component Supply and Sources: Substantially all of the Company's manufacturing services are provided on a turnkey basis in which the Company, in addition to providing design, assembly and testing services, is responsible for the procurement of the components that are assembled by the Company for its customers. Although the Company attempts to minimize margin erosion as a result of component price increases, in certain circumstances it is required to bear some or all of the risk of such price fluctuations, which could adversely affect the Company's profits. To date, the Company has generally been able to negotiate contracts that allow it to shift much of the impact of price fluctuations to the customer; however, there can be no assurance that the Company will be able to do so in all cases. In addition, in order to assure an adequate supply of certain key components that have long procurement lead times, such as integrated circuits, the Company occasionally must order such components prior to receiving formal customer purchase orders for the assemblies that require such components. Failure to accurately anticipate the volume or timing of customer orders can result in component shortages or excess component inventory, which in either case could adversely affect the Company's financial and operating results. Some of the assemblies manufactured by the Company require one or more components that are ordered from, or which may be available from, only one source or a limited number of sources. Delivery problems relating to components purchased from any of the Company's key suppliers could have a material adverse impact on the financial performance of the Company. From time to time, the Company's suppliers allocate components among their customers in response to supply shortages. In some cases, supply shortages will substantially curtail production of all assemblies using a particular component. In addition, at various times there have been industry-wide shortages of electronic components. While the Company has not experienced sustained periods of shortages of components in the recent past, there can be no assurance that substantial component shortages will not occur in the future. Any such shortages could have a material adverse effect on the Company's operating results. Variability of Customer Requirements and Customer Financing: The level and timing of orders placed by customers vary due to the customers' attempts to balance their inventory, changes in customers' manufacturing strategies, and variations and demand for the customers' products. Due in part to these factors, most of the Company's customers do not commit to firm production schedules for more than several weeks in advance of requirements. The Company's inability to forecast the level of customers' orders with certainty makes it difficult to schedule production and optimize utilization of manufacturing capacity. In the past, the Company has been required to increase staffing and incur other expenses in order to meet the anticipated demands of its customers. From time to time, anticipated orders from some of the Company's customers have failed to materialize and delivery schedules have been deferred as a result of changes in a customer's business needs, both of which have adversely affected the Company's operating results. On other occasions, customers have required rapid increases in production that have placed an excessive burden on the Company's resources. There can be no assurance that the Company will not experience similar fluctuations in customer demand in the future. In addition, the Company may carry significant accounts receivable in connection with providing manufacturing services to its customers. Although the Company has not encountered significant problems in collecting on such accounts receivable on a timely basis, if one or more of the Company's principal customers were to become insolvent, or otherwise fail to pay for the services and materials provided by the Company, the Company's operating results and financial condition would be adversely affected. Rapid Technological Change: The Company's customers compete in markets that are characterized by rapid technological change and short product life cycles. In particular, the hearing, medical and telecommunications markets are prone to rapid product obsolescence by new technologies. The microelectronics industry could experience future competition from new or emerging technologies that render existing technology less competitive or obsolete. The inability of the Company to develop technologies or acquire capability to meet the evolving market requirements of its customers could have a material adverse effect on the Company's business, financial condition and results of operations, including the Company's ability to maintain its revenue base. Management of Growth: The Company has a recent history of growth, sometimes followed by significant decreases in revenues as customer demand for the Company's products decreases. The Company's future operating results will depend on management's ability to manage periods of both growth and downturn, to be able to hire, train and retain the appropriate number of qualified employees, and to forecast revenues and control expenses. Unexpected declines in revenues, without corresponding and timely reductions in expenses, could have a material adverse effect on the Company's business, results of operations, or financial condition. Hiring and Retention of Employees: The Company's continued growth and success depend to a significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. Competition for skilled business, product development, technical and other personnel is intense. There can be no assurance that the Company will be successful in recruiting new personnel and retaining existing personnel. None of the Company's employees are subject to a long-term employment agreement, although several key employees are subject to non-competition agreements. The loss of one or more key employees could have a material adverse effect on the growth of the Company. Possible Volatility of Stock Price: The market price of the Company's Common Stock has experienced significant fluctuations and may continue to fluctuate in the future. The market price of the Common Stock may be significantly affected by factors such as changes in requirements or demands for the Company's services, the announcement of new products or product enhancements by the Company or its competitors, technological innovations by the Company or its competitors, quarterly variations in the Company's or its competitors' results of operations, changes in prices of the Company's or its competitors' products and services, changes in revenue and revenue growth rates of the Company, changes in earnings estimates by market analysts, speculation in the press or analyst community, and general market conditions or market conditions specific to particular industries. The stock prices for many companies in the technology sector have experienced wide fluctuations that often have been unrelated to their operating performance. Such fluctuations may adversely affect the market price of the Company's Common Stock. Impact of Year 2000: The Company has considered the impact of Year 2000 on the computer systems and applications and developed a remediation plan. Conversion activities are in process and we expect conversion and testing to be completed by March 1999. Expenditures in 1998 for the Year 2000 project amounted to approximately $60,000 and the Company expects that completion of the project will result in additional expenditures of approximately $50,000. The Company is also assessing the Year 2000 readiness of key material and service providers. The Company believes that with modifications to existing systems and conversions to new systems, the Year 2000 issue will not pose significant operational problems. However, there can be no assurance that all Year 2000 issues will be identified and resolved in a timely manner, particularly those issues involving key material and service providers' and other business affiliates' computer systems outside of the Company's control. If the Company's remediation plan is not successful, or if these outside systems should fail, there could be a significant disruption of the Company's ability to transact business with its customers and suppliers. HEI, Inc. Balance Sheets - -------------- (Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------- As of August 31 1998 1997 - ---------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 297 $ 3,458 Short-term investments 7,984 9,175 - ---------------------------------------------------------------------------- 8,281 12,633 Accounts receivable, net 3,434 2,325 Inventories 1,538 1,575 Income taxes receivable 1,176 87 Other current assets 1,176 773 - ---------------------------------------------------------------------------- Total current assets 15,605 17,393 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Property and equipment Land 216 216 Building and improvements 3,897 3,790 Fixtures and equipment 9,018 8,158 Accumulated depreciation (6,859) (5,558) - ---------------------------------------------------------------------------- Net property and equipment 6,272 6,606 - ---------------------------------------------------------------------------- Restricted cash -- 389 Long-term investments 186 -- Deferred financing costs 110 123 - ---------------------------------------------------------------------------- Total assets $22,173 $24,511 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term debt $ 700 $ 648 Accounts payable 1,834 728 Accrued employee related costs 612 680 Accrued liabilities 595 553 - ---------------------------------------------------------------------------- Total current liabilities 3,741 2,609 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Long-term debt, less current maturities 3,835 4,537 Deferred tax liability 256 370 - ---------------------------------------------------------------------------- Shareholders' equity: Undesignated stock; 5,000,000 shares authorized, none issued Common stock, $.05 par: 10,000,000 shares authorized; 4,095,195 and 4,103,176 shares issued and outstanding, respectively 205 205 Paid-in capital 7,491 7,518 Retained earnings 6,645 9,272 - ---------------------------------------------------------------------------- Total shareholders' equity 14,341 16,995 - ---------------------------------------------------------------------------- Total liabilities and shareholders' equity $22,173 $24,511 - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. HEI, Inc. Statements of Operations - ------------------------ (in thousands, except per share amounts)
- ---------------------------------------------------------------------------- Years Ended August 31 1998 1997 1996 - ---------------------------------------------------------------------------- Net sales $20,805 $30,962 $20,680 Cost of sales 16,592 24,524 14,957 - ---------------------------------------------------------------------------- Gross profit 4,213 6,438 5,723 - ---------------------------------------------------------------------------- Operating expenses: Selling, general and administrative 2,375 2,277 2,342 Research, development and engineering 852 843 849 Proxy/change of control costs 5,664 -- -- Gain on sale of product line, net -- (215) (45) - ---------------------------------------------------------------------------- Operating income (loss) (4,678) 3,533 2,577 - ---------------------------------------------------------------------------- Other, principally interest income 580 447 256 - ---------------------------------------------------------------------------- Income (loss) before income taxes (4,098) 3,980 2,833 - ---------------------------------------------------------------------------- Income tax expense (benefit) (1,471) 1,430 720 - ---------------------------------------------------------------------------- Net income (loss) $(2,627) $ 2,550 $ 2,113 - ---------------------------------------------------------------------------- Net income (loss) per common share Basic $ (0.64) $ 0.62 $ 0.54 Diluted $ (0.64) $ 0.60 $ 0.52 - ---------------------------------------------------------------------------- Weighted average common shares outstanding Basic 4,085 4,135 3,942 Diluted 4,085 4,279 4,098 - ----------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. HEI, Inc. Statements of Changes in Shareholders' Equity - ---------------------- (Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------- Common Stock Common Stock Shares Amount Paid-in Retained Outstanding Outstanding Capital Earnings - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 1995........................ 3,791,597 $ 190 $6,183 $ 4,609 Net income.................................... -- -- -- 2,113 Issuance of common shares under employee stock purchase and option plans............................ 238,830 12 636 -- Tax benefit of nonqualified stock options..... -- -- 73 -- - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 1996........................ 4,030,427 202 6,892 6,722 Net income.................................... -- -- -- 2,550 Issuance of common shares under employee stock purchase and option plans............................ 177,049 8 799 -- Common shares repurchased and retired......... (104,300) (5) (595) -- Tax benefit of nonqualified stock options..... -- -- 422 -- - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 1997........................ 4,103,176 205 7,518 9,272 Net loss...................................... -- -- -- (2,627) Issuance of common shares under employee stock purchase and option plans............................ 26,819 1 159 -- Common shares repurchased and retired ........ (34,600) (1) (186) -- - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 1998 4,095,195 $ 205 $7,491 $ 6,645 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. HEI, Inc. Statements of Cash Flows - ------------------------ (In thousands)
- ----------------------------------------------------------------------------------------------------- Years Ended August 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Cash flow provided by operating activities: Net income (loss) $ (2,627) $ 2,550 $ 2,113 Depreciation 1,358 1,376 907 Amortization 60 70 31 Accounts receivable and inventory allowances (1) 59 (222) Deferred income tax expense (benefit) (242) 8 (198) Gain on sale of product line, net -- (215) (45) Other 1 35 51 Change in current operating items: Accounts receivable (1,056) 1,701 (1,539) Inventories (15) (60) 537 Income taxes (1,089) (656) 394 Other current assets (512) (133) (112) Accounts payable 1,106 256 88 Accrued employee related costs and accrued liabilities (26) (121) 311 - ----------------------------------------------------------------------------------------------------- Net cash flow provided by (used for) operating activities (3,043) 4,869 2,316 - ----------------------------------------------------------------------------------------------------- Cash flow used for investing activities: Purchases of investments (15,185) (10,892) (7,033) Maturities of investments 16,170 7,205 5,365 Additions to property and equipment (1,025) (1,605) (4,621) Proceeds on sales of product lines and equipment 237 494 -- Decrease (increase) in restricted cash 389 2,066 (2,455) - ----------------------------------------------------------------------------------------------------- Net cash flow provided by (used by) investing activities 606 (2,732) (8,744) - ----------------------------------------------------------------------------------------------------- Cash flow provided by financing activities: Proceeds from long-term debt -- -- 5,625 Repayment of long-term debt (650) (440) -- Increase in deferred financing costs (47) (54) (170) Issuance of common stock and other 159 807 648 Tax benefit of nonqualified stock options -- 422 73 Repurchase of common shares (186) (600) -- - ----------------------------------------------------------------------------------------------------- Net cash flow provided by (used for) financing activities (724) 135 6,175 - ----------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,161) 2,272 (252) Cash and cash equivalents, beginning of year 3,458 1,186 1,438 - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 297 $ 3,458 $ 1,186 - ----------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: - ----------------------------------------------------------------------------------------------------- Interest paid $ 201 $ 218 $ 80 Income taxes paid 100 1,656 515 - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Notes to Financial Statements NOTE 1 - -------------------------------------------------------------------------------- Summary of Significant Accounting Policies HEI, Inc. (the Company) specializes in the design and manufacture of ultraminiature microelectronic devices and high technology products incorporating those devices. Cash, Cash Equivalents and Short-Term Investments. The Company considers its investments in all highly liquid debt instruments with original maturities of three months or less at date of purchase to be cash equivalents. The carrying amount approximates fair value because of the short maturity of those instruments. Short-term investments consist mainly of high quality commercial paper with maturities of less than one year. The short-term investments are carried at amortized cost which approximates fair value and are classified as held to maturity in accordance with Statement of Financial Accounting Standards No. 115 (SFAS No. 115). 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 to value inventories. The allowance for excess or obsolete stock is determined based on the Company's continuing analysis of inventory levels in excess of current requirements or considered to be obsolete. The Company has established an allowance to record such inventories at estimated net realizable value. 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 building and improvements are 10-39 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. Long-Lived Assets. The Company evaluates the recoverability of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires long-lived assets and certain identifiable intangibles to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As of August 31, 1998, the Company did not consider any of its assets to be impaired. 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. Accounting for Stock-based Compensation. In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 "Accounting for Stock-based Compensation", a new standard of accounting and reporting for stock-based compensation plans. The Company adopted the disclosure provisions in fiscal 1997. The Company has continued to measure compensation cost, if any, for its stock option plans using the intrinsic value based method of accounting it has historically used and, therefore, the new standard has no effect on the Company's operating results. Revenue Recognition. Revenue is recognized at the time of shipment. Net Income (Loss) Per Weighted Average Common Share. In February 1997, SFAS No. 128, "Earnings per Share" (EPS) was issued by the FASB. This standard, which the Company adopted effective with its second quarter of fiscal 1998, requires dual presentation of basic and diluted EPS on the face of the statement of operations. Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding assuming the exercise of dilutive stock options. 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. All prior period earnings per share have been recalculated in accordance with SFAS No. 128. 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. NOTE 2 - -------------------------------------------------------------------------------- Proxy/Change of Control Costs The Company incurred $5,664,000 of one-time expenses related to proxy contest and change of control costs which resulted from the efforts of Fant Industries Inc. in the second half of this year to gain control of the Board of Directors. These expenses included preparation of proxy materials and other information to shareholders and litigation expenses related to the takeover activity, cash-out payments made to all stock option holders which were required as a result of the change of control and reimbursement to Fant Industries Inc. for its expenses as agreed to by the shareholders. These one-time expenses of $5,664,000 were entirely a cash outlay with the final amounts paid out in the first quarter of fiscal 1999. NOTE 3 - -------------------------------------------------------------------------------- Major Customers, Concentration of Credit Risk and Geographic Data Major customers, each of which accounted for more than 10% of the Company's net sales for the years ended August 31, were as follows:
- ------------------- ------------------ ----------------- ------------------ 1998 1997 1996 - ------------------- ------------------ ----------------- ------------------ Customer A 59% 27% 38% Customer B 14% - - Customer C - 55% 16% Customer D - - 10% - ------------------- ------------------ ----------------- ------------------
The Company generally sells its products to original equipment manufacturers in the United States and abroad in accordance with supply contracts specific to certain manufacturer product programs. The Company performs ongoing credit evaluations of its customers' financial conditions and, generally, does not require collateral from its customers. The Company's continued sales to these customers are often dependent upon the continuance of the customers' product programs. Customer C's product program was completed during the fourth quarter of fiscal 1997. The Company's ten largest customers accounted for approximately 96% of net sales in fiscal 1998, 95% in fiscal 1997, and 88% in fiscal 1996 and approximately 96% and 87% of accounts receivable at August 31, 1998 and 1997, respectively. The Company had net sales of $10,407,000, $6,647,000 and $5,924,000 to Singapore in fiscal 1998, 1997, and 1996, respectively, and $14,970,000 to Thailand in fiscal 1997. Net export sales were $11,819,000, $22,604,000 and $7,278,000 in fiscal 1998, 1997 and 1996, respectively. The majority of the international sales were to multinational companies who instructed HEI to ship products to their own off-shore assembly facilities. NOTE 4 - -------------------------------------------------------------------------------- Other Financial Statement Data The following provides additional information concerning selected balance sheet accounts at August 31, 1998 and 1997:
- ------------------------------------------- ----------------------- ---------------------- (In thousands) 1998 1997 - ------------------------------------------- ----------------------- ---------------------- Accounts receivable, net: Trade accounts receivable $3,664 $2,608 Less allowance for doubtful accounts (230) (283) - ------------------------------------------- ----------------------- ---------------------- $3,434 $2,325 - ------------------------------------------- ----------------------- ---------------------- Inventories: Purchased parts $1,590 $1,557 Work in process 681 556 Finished goods 76 220 Less allowance for excess or obsolete stock (809) (758) - ------------------------------------------- ----------------------- ---------------------- $1,538 $1,575 - ------------------------------------------- ----------------------- ---------------------- Other current assets: Deferred tax assets $ 688 $ 560 Deposits on operating leases 456 - Receivable on sale of product line, net 12 114 Other current assets 20 99 - ------------------------------------------- ----------------------- ---------------------- $1,176 $ 773 - ------------------------------------------- ----------------------- ---------------------- Accrued liabilities: Real estate taxes $ 90 $ 136 Other 505 417 - ------------------------------------------- ----------------------- ---------------------- $ 595 $ 553 - ------------------------------------------- ----------------------- ----------------------
Sale of Product Lines. In August 1997 and 1996, the Company sold its optoelectronic switch assembly and light pen product lines, respectively. Through these transactions, the buyers acquired certain assets including manufacturing equipment and related inventory, product licenses and assumed all warranties. In connection with these sales, the Company received cash payments for the assets and an agreement for additional amounts to be paid monthly over the subsequent two years. At August 31, 1996, as a result of the sale of the light pen product line, costs associated with the close down of this product line were accrued and were included in the $45,000 net gain from the sale of product line. The Company anticipates no substantial effect of the sale of these product lines on future operating results. NOTE 5 - -------------------------------------------------------------------------------- Financing Arrangements 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 April 1, 2005. In April 1998 and 1997 the Company repaid $650,000 and $440,000 of the construction and equipment 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 August 31, 1998 was 3.70%. The bonds are collateralized by two irrevocable letters of credit and essentially all property and equipment. A commitment fee is paid annually to the bank at a rate of 1% of the letters of credit. 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 Company's one-time $5,664,000 proxy/change of control costs, the Company was in default of certain of these covenants. The Company received waivers for its covenant defaults. Restricted cash on the balance sheet represented cash advanced under the bonds which was held by the bond trustee in an interest bearing account and was released to the Company in fiscal 1998. Also in fiscal 1998, the Company extended the due date of its $3,000,000 revolving line of credit to January 1999. At August 31, 1998 and 1997, there were no borrowings under the line of credit. Any borrowings under this agreement would be collateralized by accounts receivable. The agreement contains certain restrictive covenants including limitations on other borrowings and maintenance of specified financial levels and ratios for net income, tangible net worth and debt to tangible net worth and cash flow. Due to the Company's one-time $5,664,000 proxy/change of control costs, the Company was in default of certain of these covenants. The Company received waivers for its covenant defaults. The agreement also includes a covenant which limits the sale of assets not in the ordinary course of business. In accordance with the agreement, the Company received waivers for the sale of each product line. Borrowings are limited to the lesser of $3,000,000 or the borrowing base, which is 80% of eligible accounts receivable. Interest on the borrowings is based, at the Company's option, on the lender's prime rate of interest or at 2% above the lender's LIBOR rate. Principal maturities of long-term debt at August 31, 1998 are as follows (in thousands):
Years ending August 31, 1999 $ 700 2000 700 2001 700 2002 700 2003 700 Thereafter 1,035 ------------------------------------- ----------------------------- $4,535 ------------------------------------- -----------------------------
NOTE 6 - -------------------------------------------------------------------------------- Income Taxes Income tax expense (benefit) for the years ended August 31 consisted of the following:
- --------------------------------- ----------------- ----------------- ----------------- (In thousands) 1998 1997 1996 - --------------------------------- ----------------- ----------------- ----------------- Current: Federal $(1,234) $1,279 $829 State 5 143 89 Deferred (242) 8 (198) - --------------------------------- ----------------- ----------------- ----------------- Income tax expense (benefit) $(1,471) $1,430 $720 - --------------------------------- ----------------- ----------------- -----------------
The components of the deferred tax assets and liabilities at August 31, 1998 and 1997 are as follows:
- --------------------------------------------- ----------------------- ----------------------- (In thousands) 1998 1997 - --------------------------------------------- ----------------------- ----------------------- Deferred tax assets: Receivables $ 105 $ 160 Inventories 324 282 Accrued liabilities 151 118 Net operating loss carry-forward 108 - - --------------------------------------------- ----------------------- ----------------------- - --------------------------------------------- ----------------------- ----------------------- $ 688 $ 560 - --------------------------------------------- ----------------------- ----------------------- Deferred tax liabilities: Property and equipment $(238) $(263) Deferred gain on sales of product lines (18) (107) - --------------------------------------------- ----------------------- ----------------------- $(256) $(370) - --------------------------------------------- ----------------------- -----------------------
In fiscal 1996, the Company eliminated the valuation allowance of $274,000 for the deferred tax asset related to the allowance established for excess or obsolete inventories due to the sale and disposal of light pen inventories during the fourth quarter of fiscal 1996 and the determination that the deferred tax asset related to the remaining inventory allowance will more likely than not be recoverable. A reconciliation of the statutory federal income tax rate for the years ended August 31 is as follows:
- ----------------------------------- ------------------ ------------------- ------------------ 1998 1997 1996 - ----------------------------------- ------------------ ------------------- ------------------ Federal statutory tax rate (34.0)% 34.0% 34.0% State income tax rate (net of federal tax effect) (3.0) 2.4 2.7 Reversal of valuation allowance - - (9.7) Other 1.1 (.5) (1.6) - ----------------------------------- ------------------ ------------------- ------------------ Effective tax rate (35.9)% 35.9% 25.4% - ----------------------------------- ------------------ ------------------- ------------------
NOTE 7 - -------------------------------------------------------------------------------- Stock Benefit Plans 1989 Plan. Under the Company's 1989 Omnibus Stock Compensation Plan (the "1989 Plan"), a maximum of 2,000,000 shares of common stock may be issued pursuant to qualified and nonqualified stock options, stock purchase rights and other stock-based awards. Stock options granted become exercisable in varying increments. Generally, the exercise price for options granted is equal to the average closing market price of the common stock for the five days preceding the date of grant. Under the 1989 Plan, substantially all regular full-time employees are given the opportunity to designate up to 10% of their annual compensation to be withheld, through payroll deductions, for the purchase of common stock at 85% of the lower of (i) the market price at the beginning of the plan year, or (ii) the market price at the end of the plan year. During fiscal 1998, 1997 and 1996, 11,619, 12,049 and 26,330 shares at prices of $5.79, $5.08 and $3.96, respectively, were purchased under the 1989 Plan. At August 31, 1998, 1997 and 1996, the number of shares available for grant were 428,062, 179,681 and 214,230, respectively. Directors' Plan. Under the directors' plan, 400,000 shares are authorized for issuance, with an annual grant of 10,000 shares to each non-employee director. These grants are effective on the first business day following the annual shareholders' meeting at an exercise price equal to the average closing market price of the common stock for the five days preceding the date of grant. The options become exercisable one year after the grant date and expire ten years after the grant date. Options to purchase 40,000 shares were granted each year to the four non-employee directors at $11.325 per share and $6.00 per share in 1997 and 1996, respectively. Options to purchase 30,000 shares were granted to the three non-employee directors at $4.925 in 1998. At August 31, 1998, no options for shares remain outstanding and 130,000 shares are available for grant. Change of Control. Under the terms and conditions of the Company's 1989 Plan and the directors' plan, a change of control in the Company's Board of Directors, under certain circumstances, requires a liquidation of all unexercised stock options. In fiscal 1998, all stock options were liquidated under this provision. The required payments relating to stock options outstanding due to the change of control liquidation made in fiscal 1998 were approximately $3,700,000 which are included in proxy/change of control costs in the statement of operations. Summary of Activity. The following is a summary of all activity involving options:
- ---------------------------------- ---------------- --------------------- Weighted Average Options Exercise Price Outstanding Per Share - ---------------------------------- ---------------- --------------------- Balance, August 31, 1995 692,000 $4.061 Granted 110,000 5.920 Exercised (212,500) 2.473 - ---------------------------------- ---------------- --------------------- Balance, August 31, 1996 589,500 4.980 - ---------------------------------- ---------------- --------------------- Granted 40,000 11.325 Exercised (165,000) 4.527 Cancelled (17,500) 4.713 - ---------------------------------- ---------------- --------------------- Balance, August 31, 1997 447,000 5.680 - ---------------------------------- ---------------- --------------------- Granted 575,000 5.160 Exercised (15,000) 5.308 Change of control liquidation (972,000) 5.397 Cancelled (35,000) 5.305 - ---------------------------------- ---------------- --------------------- Balance, August 31, 1998 0 $0.000 - ---------------------------------- ---------------- ---------------------
During fiscal 1998, terms of all outstanding stock options were modified to extend the expiration to ten years after date of grant. Accounting for Stock-based Compensation. Had the Company used the fair-value-based method of accounting for its stock option plans beginning in fiscal year 1996 and charged compensation cost against income over the vesting period, net income (loss) for fiscal years 1998, 1997 and 1996 would have been changed to the following pro forma amounts:
- --------------------------------------- ------------------- -------------------- --------------------- 1998 1997 1996 - --------------------------------------- ------------------- -------------------- --------------------- Net income (loss) $(2,636,000) $2,384,000 $2,023,000 Net income (loss) per share, diluted $ (.65) $ .56 $ .49 - --------------------------------------- ------------------- -------------------- ---------------------
The weighted average grant-date fair value of options granted during 1998, 1997 and 1996 was $1.22, $5.59 and $2.92, respectively. The weighted average grant-date fair value of options was determined separately for each grant under the Company's various plans by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key weighted average assumptions:
- ---------------------------------------------- -------------------- ------------------- -------------------- 1998 1997 1996 - ---------------------------------------------- -------------------- ------------------- -------------------- Risk-free interest rates 5.00% to 5.50% 6.00% to 6.35% 5.22% to 6.31%
- ---------------------------------------------- -------------------- ------------------- -------------------- 1998 1997 1996 - ---------------------------------------------- -------------------- ------------------- -------------------- Expected life .5 to 3 years .5 to 5 years .5 to 5 years Expected volatility 62% 62% 58% Expected dividends None None None - ---------------------------------------------- -------------------- ------------------- --------------------
NOTE 8 - -------------------------------------------------------------------------------- Employee Benefit Plans The Company has a 401(k) plan covering all eligible employees. Employees can make voluntary contributions to the plan of up to 20% of their compensation not to exceed the maximum specified by the Internal Revenue Code. The plan also provides for a discretionary contribution by the Company. During fiscal years 1998, 1997 and 1996, the Company contributed $93,000, $100,000 and $96,000, respectively, to the plan. NOTE 9 - -------------------------------------------------------------------------------- Commitments Future commitments under non-cancelable operating leases, primarily for manufacturing equipment, are approximately $216,000 in 1999, $198,000 in 2000 and $72,000 in 2001. Total expense under non-cancelable operating leases was approximately $153,000 in 1998, $66,000 in 1997 and $64,000 in 1996. NOTE 10 - -------------------------------------------------------------------------------- Net Income (Loss) Per Weighted Average Share Computation The components of net income (loss) per basic and diluted share are as follows:
- -------------------------------------------------------- ------------------ --------------- (In thousands, except per share amounts) 1998 1997 - -------------------------------------------------------- ------------------ --------------- Basic: Net income (loss) $(2,627) $2,550 Net income (loss) per share $ (.64) $ .62 Weighted average number of common shares outstanding 4,085 4,135 - -------------------------------------------------------- ------------------ --------------- Diluted: Net income (loss) $(2,627) $2,550 Net income (loss) per share $ (.64) $ .60 Weighted average number of common shares outstanding 4,085 4,135 Assumed conversion of stock options - 144 - -------------------------------------------------------- ------------------ --------------- Weighted average common and assumed conversion shares 4,085 4,279 - -------------------------------------------------------- ------------------ ---------------
Report of Independent Accountants To the Shareholders of HEI, Inc.: We have audited the accompanying balance sheet of HEI, Inc. as of August 31, 1998 and the related statement of operations, changes in shareholders' equity, and cash flows for the year 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 audit. The accompanying financial statements of HEI, Inc. as of and for the years ended August 31, 1997 and 1996 were audited by other auditors whose report, dated September 26, 1997, expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 1998 financial statements referred to above present fairly, in all material respects, the financial position of HEI, Inc. as of August 31, 1998 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota October 12, 1998 Statement of Financial Responsibility The accompanying financial statements, including the notes thereto, and other financial information presented in this Annual Report, were prepared by management, which is responsible for their integrity and objectivity. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based upon management's best estimates and judgments. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that the Company's assets are protected and that transactions are executed in accordance with established authorizations and are recorded properly. The reasonable assurance concept is based on recognition that the cost of a system of internal accounting controls should not exceed the benefit derived. The Audit Committee of the Board of Directors is responsible for recommending the independent accounting firm to be retained for the coming year. The Audit Committee meets periodically and privately with the independent accountants, as well as with management, to review accounting, auditing, and financial reporting matters. On September 25, 1998, the Company's Board of Directors took action to approve the engagement of KPMG Peat Marwick LLP (KPMG) as the Company's independent accountants following the September 3, 1998 resignation of PricewaterhouseCoopers LLP (PwC), the Company's independent accountants for the past five years. The report by PwC on the Company's financial statements for fiscal years ended August 31, 1997 and 1996 did not contain an adverse opinion or disclaimer of opinion nor were they qualified or modified as to uncertainty, scope, or accounting principles. During the Company's fiscal years ended August 31, 1997 and 1996, and the period from September 1, 1997 to September 3, 1998, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, that if not resolved to the satisfaction of PwC would have caused it to make a reference to such disagreement in its report nor any reportable events as defined in Item 304(a) (1) (v) of Regulation S-K. Prior to the engagement of KPMG, neither the Company nor anyone acting on its behalf consulted KPMG on any matter of accounting principles or the application of such principles to a particular transaction. The Company's independent accountants, KPMG, are engaged to audit the financial statements of the Company and to issue their report thereon. See the accompanying Report of Independent Accountants. Summary of Quarterly Operating Results (unaudited) (In thousands, except per share amounts)
- ----------------------------------- -------------- -------------- -------------- -------------- Fiscal Year 1998 First Second Third Fourth - ----------------------------------- -------------- -------------- -------------- -------------- Net sales $4,080 $4,632 $6,026 $6,067 Gross profit 537 992 1,414 1,270 Proxy/change of control costs - - 274 5,390 Operating income (loss) (266) 137 336 (4,885) Net income (loss) (104) 204 347 (3,074) - ----------------------------------- -------------- -------------- -------------- -------------- Net income (loss) per share Basic $ (.03) $ .05 $ .08 $ (.75) Diluted $ (.03) $ .05 $ .08 $ (.75) - ----------------------------------- -------------- -------------- -------------- -------------- Fiscal Year 1997 First Second Third Fourth - ----------------------------------- -------------- -------------- -------------- -------------- Net sales $6,258 $9,197 $9,067 $6,440 Gross profit 2,383 1,629 1,528 898 Operating income 1,563 809 744 417 Net income 1,010 591 539 410 - ----------------------------------- -------------- -------------- -------------- -------------- Net income per share Basic $ .25 $ .14 $ .13 $ .10 Diluted $ .24 $ .14 $ .13 $ .10 - ----------------------------------- -------------- -------------- -------------- --------------
NOTE: The summation of quarterly net income (loss) per share for 1998 and on a diluted basis for 1997 does not equate to the calculation for the year since the quarterly calculations are performed on a discrete basis. Corporate Information HEI INC Board of Directors Anthony J. Fant, Chairman Chief Executive Officer of the Company, President and Chief Executive Officer Fant Industries Inc. Eugene W. Courtney Business Consultant Edwin W. Finch, III President FHL Capital Corporation David W. Ortlieb Independent Management Consultant Steve E. Tondera, Jr. Senior Vice President and Chief Financial Officer Fant Industries Inc. Mack V. Traynor, III President and Chief Executive Officer NEO Networks Corporate Officers and Management Anthony J. Fant Chief Executive Officer Donald R. Reynolds President Jerald H. Mortenson Vice President of Finance and Administration, Chief Financial Officer and Treasurer Dale A. Nordquist Vice President of Sales and Marketing Stephen K. Petersen Director of Manufacturing Scott J. Kazle Director of Research and Development Wray A. Wentworth Director of Corporate Quality General Counsel Brown & Wood LLP New York, New York Independent Accountants KPMG Peat Marwick LLP Minneapolis, Minnesota Stock Transfer Agent and Registrar Norwest Bank Minnesota, N.A. Box 738 161 North Concord Exchange South St. Paul Minnesota 55075-0738 Corporate Headquarters HEI, Inc. P.O. Box 5000 1495 Steiger Lake Lane Victoria, Minnesota 55386-5000 (612) 443-2500 E-mail: headqtrs@heii.com Internet: www.heii.com Form 10-KSB A copy of the Company's Annual Report to the Securities and Exchange Commission on Form 10-KSB is available without charge by written or oral request to: Shareholder Relations HEI, Inc. P.O. Box 5000 Victoria, Minnesota 55386 Phone (612) 443-2500 Facsimile (612) 443-2668 Annual Meeting of Shareholders The Company's annual meeting of shareholders will be held on January 20, 1999 at 3:00 PM at The Planets (50th floor), IDS Center, 80 South Eighth Street, Minneapolis, Minnesota. Market Price and Related Matters The Company's common stock is currently traded on The Nasdaq National Market under the symbol HEII. Below are the high and low closing bid prices for each quarter of fiscal year 1998 and 1997, as reported by Nasdaq.
1998 High Low First Quarter $ 5-3/4 $4-11/32 Second Quarter 7-3/8 4-1/4 Third Quarter 7-1/4 6-1/8 Fourth Quarter 6-15/16 4-3/4 1997 High Low First Quarter $ 9-1/2 $ 6-3/8 Second Quarter 12 8 Third Quarter 9-1/4 4-1/4 Fourth Quarter 6 4-9/16
As of August 31, 1998, the Company had approximately 2,500 shareholders of which approximately 525 are shareholders of record. The Company has not declared cash dividends. EX-15 9 EX-15 Exhibit 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of HEI, Inc.: We have audited the balance sheet of HEI, Inc. as of August 31, 1997, and the related statements of operations, changes in shareholders' equity, and cash flows for the years ended August 31, 1997 and 1996. 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 audits 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 HEI, Inc. as of August 31, 1997, and the results of its operations and its cash flows for the years ended August 31, 1997 and 1996, in conformity with generally accepted accounting principles. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota September 26, 1997 EX-23 10 EX-23 Exhibit 23 The Board of Directors HEI, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-33322, 33-46928, 33-46929, and 333-49489) on Form S-8 of HEI, Inc. of our report dated October 12, 1998, relating to the balance sheet of HEI, Inc. as of August 31, 1998 and for the year ended August 31, 1998, and the related statements of operations, changes in stockholders' equity, and cash flows for the year ended August 31, 1998, which report appears in the August 31, 1998, annual report on Form 10-KSB of HEI, Inc. KPMG Peat Marwick LLP Minneapolis, Minnesota November 25, 1998 EX-24 11 EX-24 Exhibit 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of HEI, Inc. on Forms S-8 (File Nos. 33-33322, 33-46928, 33-46929 and 333-49489) of our report dated September 26, 1997, on our audits of the financial statements of HEI, Inc. as of August 31, 1997, and for the years ended August 31, 1997 and 1996, which report is incorporated by reference in its Annual Report on Form 10-KSB for the year ended August 31, 1998. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota November 25, 1998 EX-27 12 EX-27
5 1,000 12-MOS AUG-31-1998 SEP-01-1997 AUG-31-1998 297 0 3,434 0 1,538 15,605 13,131 6,859 22,173 3,741 3,835 0 0 205 14,136 22,173 20,805 20,805 16,592 16,592 8,113 0 198 (4,098) (1,471) (2,627) 0 0 0 (2,627) (0.64) (0.64)
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