##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 ****
 FORM 10-Q
 ****
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 for the quarterly period
ended May 27, 2006.
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
 For the transition period fromto.
 Commission File Number 0-10078
 HEI, Inc.
  Minnesota
    
    41-0944876(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)PO Box 5000, 1495 Steiger Lake Lane, Victoria, MN
    
    55386(Address of principal executive offices)
    
    (Zip Code)
 (952) 443-2500
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### 



TABLE OF CONTENTS
 Table of Contents
    
    HEI, Inc.
 Part I  Financial Information (unaudited)Item 1. Financial StatementsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of
Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures
About Market RiskItem 4. Controls and ProceduresPart II  Other InformationItem 6. ExhibitsSignatureCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Consolidated Balance Sheets
 (In thousands, except per share and share data)
 May 27, 2006
    
    
    August 31, 2005(unaudited)
    
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    169
    
    
    $
    351Accounts receivable, net of allowance for doubtful accounts of $151
and $157, respectively
    
    
    8,047
    
    
    
    9,278Inventories
    
    
    7,822
    
    
    
    8,044Security Deposit
    
    
    
    
    
    
    1,350Other current assets
    
    
    813
    
    
    
    1,136Total current assets
    
    
    16,851
    
    
    
    20,159Property and equipment:Land
    
    
    216
    
    
    
    216Building and improvements
    
    
    4,350
    
    
    
    4,323Fixtures and equipment
    
    
    24,906
    
    
    
    23,214Accumulated depreciation
    
    
    (21,385
    )
    
    
    (20,864
    )Net property and equipment
    
    
    8,087
    
    
    
    6,889Developed technology, less accumulated amortization of $408 and $352,
respectively
    
    
    6
    
    
    
    62Security deposits
    
    
    414
    
    
    
    230Other long-term assets
    
    
    641
    
    
    
    337Total assets
    
    $
    25,999
    
    
    $
    27,677Liabilities and Shareholders EquityCurrent liabilities:Line of credit
    
    $
    2,420
    
    
    $
    2,563Current maturities of long-term debt
    
    
    1,052
    
    
    
    484Accounts payable
    
    
    4,493
    
    
    
    4,019Accrued liabilities
    
    
    2,783
    
    
    
    4,129Total current liabilities
    
    
    10,748
    
    
    
    11,195Other long-term liabilities, less current maturities
    
    
    972
    
    
    
    873Long-term debt, less current maturities
    
    
    3,003
    
    
    
    1,813Total other long-term liabilities, less current maturities
    
    
    3,975
    
    
    
    2,686Total liabilities
    
    
    14,723
    
    
    
    13,881Shareholders equity:Undesignated stock; 5,000,000 and 1,833,000 shares authorized;
none issued
    
    
    
    
    
    
    Convertible preferred stock, $.05 par; 167,000 shares
authorized; 32,000 shares issued and outstanding; liquidation
preference at $26 per share (total liquidation preference $832)
    
    
    2
    
    
    
    2Common stock, $.05 par; 11,000,000 shares authorized; 9,505,000
and 9,379,000 shares issued and outstanding
    
    
    475
    
    
    
    469Paid-in capital
    
    
    27,465
    
    
    
    26,701Accumulated deficit
    
    
    (16,598
    )
    
    
    (13,169
    )Notes receivable-related parties-former officers and directors
    
    
    (68
    )
    
    
    (207
    )Total shareholders equity
    
    
    11,276
    
    
    
    13,796Total liabilities and shareholders equity
    
    $
    25,999
    
    
    $
    27,677
  3




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HEI, Inc.
 
 Consolidated Statements of Operations (Unaudited)
 (In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedMay 27, 2006
    
    
    May 28, 2005
    
    
    May 27, 2006
    
    
    May 28, 2005Net sales
    
    $
    13,219
    
    
    $
    13,755
    
    
    $
    38,724
    
    
    $
    41,563Cost of sales
    
    
    10,781
    
    
    
    11,185
    
    
    
    31,816
    
    
    
    33,170Gross profit
    
    
    2,438
    
    
    
    2,570
    
    
    
    6,908
    
    
    
    8,393Operating expenses:Selling, general and administrative
    
    
    2,247
    
    
    
    1,995
    
    
    
    6,759
    
    
    
    6,381Research, development and
engineering
    
    
    1,062
    
    
    
    690
    
    
    
    3,140
    
    
    
    2,462Gain on claim settlement
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    (300
    )Costs related to investigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (871
    )
    
    
    185
    
    
    
    (2,991
    )
    
    
    (150
    )Other income (expenses):Interest expense and other
    
    
    (206
    )
    
    
    (148
    )
    
    
    (429
    )
    
    
    (498
    )Litigation recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481Other income (expense), net
    
    
    (34
    )
    
    
    236
    
    
    
    (9
    )
    
    
    318Income (loss) before
income taxes
    
    
    (1,111
    )
    
    
    273
    
    
    
    (3,429
    )
    
    
    151Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (1,111
    )
    
    $
    273
    
    
    $
    (3,429
    )
    
    $
    151Deemed dividend on Preferred Stock
    
    $
    
    
    
    $
    1,072
    
    
    $
    
    
    
    $
    1,072Net loss attributable
to common stock holders
    
    $
    (1,111
    )
    
    $
    (799
    )
    
    $
    (3,429
    )
    
    $
    (921
    )Earnings (loss) per common share:Basic & Diluted:Net Income (loss)
    
    $
    (0.12
    )
    
    $
    0.03
    
    
    $
    (0.36
    )
    
    $
    0.02Deemed dividend on Preferred Stock
    
    $
    
    
    
    $
    (0.13
    )
    
    $
    
    
    
    $
    (0.13
    )Net loss attributable to
common stock holders
    
    $
    (0.12
    )
    
    $
    (0.10
    )
    
    $
    (0.36
    )
    
    $
    (0.11
    )Weighted average common shares
outstanding:Basic
    
    
    9,491
    
    
    
    8,381
    
    
    
    9,457
    
    
    
    8,365Diluted
    
    
    9,491
    
    
    
    8,381
    
    
    
    9,457
    
    
    
    8,365
  4




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HEI, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Nine Months EndedMay 27, 2006
    
    
    May 28, 2005Cash flow from operating activities:Net income (loss)
    
    $
    (3,429
    )
    
    $
    151Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation and amortization
    
    
    1,848
    
    
    
    1,893Loss on disposal of property and equipment
    
    
    33
    
    
    
    40Stock based compensation expense
    
    
    387
    
    
    
    Changes in operating assets and liabilities:Restricted cash related to deferred litigation
    
    
    
    
    
    
    481Accounts receivable
    
    
    1,231
    
    
    
    (1,560
    )Inventories
    
    
    222
    
    
    
    (1,528
    )Other current assets
    
    
    323
    
    
    
    261Other assets
    
    
    
    
    
    
    (14
    )Accounts payable
    
    
    474
    
    
    
    309Accrued liabilities and other long-term liabilities
    
    
    (1,247
    )
    
    
    (283
    )Net cash flow used in operating activities
    
    
    (158
    )
    
    
    (250
    )Additions to property and equipment
    
    
    (923
    )
    
    
    (1,519
    )Proceeds from sale of assets
    
    
    83
    
    
    
    Additions to patents
    
    
    (7
    )
    
    
    (80
    )Security Deposit
    
    
    1,166
    
    
    
    Net cash flow provided by (used in) investing activities
    
    
    319
    
    
    
    (1,599
    )Cash flow from financing activities:Proceeds from issuance of stock, net
    
    
    47
    
    
    
    3,280Note repayment
    
    
    139
    
    
    
    227Repayment of long-term debt
    
    
    (386
    )
    
    
    (40
    )Net repayments on line of credit
    
    
    (143
    )
    
    
    (1,310
    )Net cash flow provided by (used in) financing activities
    
    
    (343
    )
    
    
    2,157Net increase (decrease) in cash and cash equivalents
    
    
    (182
    )
    
    
    308Cash and cash equivalents, beginning of period
    
    
    351
    
    
    
    200Cash and cash equivalents, end of period
    
    $
    169
    
    
    $
    508Supplemental disclosures of cash flow information:Interest paid
    
    $
    435
    
    
    $
    498Deemed dividend on preferred stock
    
    $
    
    
    
    $
    1,072Capital lease obligations related to property and equipment
    
    $
    2,144
    
    
    $
    250Issuance of common stock to landlord recognized as
long-term asset
    
    $
    336
    
    
    $
    
  5




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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
        Revenue Recognition.
  Use of Estimates.
 6




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7




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Three Months Ended
    
    
    Nine Months EndedMay 28, 2005
    
    
    May 28, 2005Net loss attributable to
common stockholders as
reported
    
    $
    (799
    )
    
    $
    (921
    )Add: Stock-based employee
compensation included in
reported net income, net of
related tax effects
    
    
    
    
    
    
    Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards
    
    
    (259
    )
    
    
    (1,074
    )Net loss pro forma
    
    $
    (1,058
    )
    
    $
    (1,995
    )Basic and diluted net loss
per share attributable to
common stockholders as
reported
    
    $
    (0.10
    )
    
    $
    (0.11
    )Stock-based compensation
expense
    
    
    (0.03
    )
    
    
    (0.13
    )Basic and diluted net loss per
share pro forma
    
    $
    (0.13
    )
    
    $
    (0.24
    )
  8




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May 27,
    
    
    August 31,2006
    
    
    2005Inventories:Purchased parts
    
    $
    5,735
    
    
    $
    5,881Work in process
    
    
    520
    
    
    
    590Finished goods
    
    
    1,567
    
    
    
    1,573$
    7,822
    
    
    $
    8,044Accrued Liabilities:Employee related costs
    
    $
    1,338
    
    
    $
    1786Deferred revenue
    
    
    
    
    
    
    440Real estate taxes
    
    
    42
    
    
    
    130Customer deposits
    
    
    191
    
    
    
    589Current maturities of long-term liabilities
    
    
    125
    
    
    
    247Warranty reserve
    
    
    62
    
    
    
    132Other accrued liabilities
    
    
    1,025
    
    
    
    805$
    2,783
    
    
    $
    4,129Other long-term liabilities:Remaining lease obligation, less
estimated sublease proceeds
    
    $
    559
    
    
    $
    552Unfavorable operating lease, net
    
    
    538
    
    
    
    568Total
    
    $
    1,097
    
    
    $
    1,120Less current maturities
    
    
    125
    
    
    
    247Total other long-term liabilities
    
    $
    972
    
    
    $
    873
   9




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Warranty
    
    WarrantyBeginning Balance
    
    Provisions
    
    Claims
    
    Ending BalanceFor the Three Months
EndedMay 27, 2006
    
    $
    36
    
    
    $
    (22
    )
    
    $
    2
    
    
    $
    12May 28, 2005
    
    $
    160
    
    
    $
    90
    
    
    $
    27
    
    
    $
    223For the Nine Months
EndedMay 27, 2006
    
    $
    132
    
    
    $
    (82
    )
    
    $
    38
    
    
    $
    12May 28, 2005
    
    $
    139
    
    
    $
    174
    
    
    $
    90
    
    
    $
    223
   May 27
    
    
    August 31,2006
    
    
    2005Commerce Bank mortgage payable in monthly
installments of principal and interest of $9 based on a
twenty-year amortization with a final payment of
approximately $1,050 due in November 2009;
collateralized by our Victoria facility
    
    $
    1,129
    
    
    $
    1,145Commerce Financial Group, Inc. equipment loan payable in
fixed monthly principal and interest installments of $28
through September 2007; collateralized by our Victoria
facility and equipment located at our Tempe facility
    
    
    460
    
    
    
    673Capital lease obligation; payable in installments of $1
through February 2009; collateralized with equipment
    
    
    20
    
    
    
    25Commercial loans payable in fixed monthly principal
installments of $1 through May 2009;collateralized with
certain machinery and equipment
    
    
    19
    
    
    
    22Capital lease obligations; payable in fixed monthly
installments of $16 through July 2008;collateralized
with certain machinery and equipment
    
    
    326
    
    
    
    423Capital lease obligations; payable in fixed monthly
installments of $4 through September 2008;
collateralized with certain machinery and equipment
    
    
    96
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $1 through November 2008; collateralized
with certain machinery and equipment
    
    
    19
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $3 through January 2009;collateralized
with certain machinery and equipment
    
    
    74
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $1 through February 2009; collateralized
with certain machinery and equipment
    
    
    24
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $2 through March 2009; collateralized
with certain machinery and equipment
    
    
    51
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $21 through November 2009 with final
payment of $140; collateralized with certain machinery
and equipment;
    
    
    875
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $9 through March 2009 with final payment
of $47; collateralized with certain machinery and
equipment
    
    
    296
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $2 through May 2009 with final payment
of $8; collateralized with certain machinery and
equipment
    
    
    53
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $6 through February 2010 with final
payment $41; collateralized with certain machinery and
equipment
    
    
    257
    
    
    
    0Capital lease obligations; payable in fixed monthly
installments of $10 through July 2009 with final payment
of $57; collateralized with certain machinery and
equipment
    
    
    356
    
    
    
    0Commercial loans payable paid in full during Fiscal 2006
    
    
    0
    
    
    
    9Total
    
    
    4,055
    
    
    
    2,297Less current maturities
    
    
    1,052
    
    
    
    484Total long-term debt
    
    $
    3,003
    
    
    $
    1,813
 10




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12




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Three Months Ended
    
    
    Nine Months EndedMay 27, 2006
    
    
    May 28, 2005
    
    
    May 27, 2006
    
    
    May 28, 2005Basic:Net income (loss)
    
    $
    (1,111
    )
    
    $
    273
    
    
    $
    (3,429
    )
    
    $
    151Net loss attributable to
common stockholders
    
    $
    (1,111
    )
    
    $
    (799
    )
    
    $
    (3,429
    )
    
    $
    (921
    )Net income (loss) per share
    
    $
    (0.12
    )
    
    $
    0.03
    
    
    $
    (0.36
    )
    
    $
    0.02Net loss attributable to
common stockholders per
share
    
    $
    (0.12
    )
    
    $
    (0.10
    )
    
    $
    (0.36
    )
    
    $
    (0.11
    )Weighted average
number of common
shares outstanding
    
    
    9,491
    
    
    
    8,381
    
    
    
    9,457
    
    
    
    8,365Diluted:Net income (loss)
    
    $
    (1,111
    )
    
    $
    273
    
    
    $
    (3,429
    )
    
    $
    151Net loss attributable to
common stockholders
    
    $
    (1,111
    )
    
    $
    (799
    )
    
    $
    (3,429
    )
    
    $
    (921
    )Net income (loss) per share
    
    $
    (0.12
    )
    
    $
    0.03
    
    
    $
    (0.36
    )
    
    $
    0.02Net loss attributable to
common stockholders per
share
    
    $
    (0.12
    )
    
    $
    (0.10
    )
    
    $
    (0.36
    )
    
    $
    (0.11
    )Weighted average
number of common
shares outstanding
    
    
    9,491
    
    
    
    8,381
    
    
    
    9,457
    
    
    
    8,365Assumed conversion of
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assumed conversion
of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average
common and assumed
conversion shares
    
    
    9,491
    
    
    
    8,381
    
    
    
    9,457
    
    
    
    8,365
   1
  13




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Three Months Ended May 27
    
    
    Nine Months Ended May 272006
    
    
    2005
    
    
    2006
    
    
    2005% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofDollars
    
    
    Sales
    
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    SalesUnited States
    
    $
    9,333
    
    
    
    71%
    
    
    $
    9,344
    
    
    
    68%
    
    
    $
    27,667
    
    
    
    71%
    
    
    $
    28,939
    
    
    
    70%Canada / Mexico
    
    
    278
    
    
    
    2%
    
    
    
    799
    
    
    
    6%
    
    
    
    1,155
    
    
    
    3%
    
    
    
    3,249
    
    
    
    8%Europe
    
    
    1,166
    
    
    
    9%
    
    
    
    1,673
    
    
    
    12%
    
    
    
    4,102
    
    
    
    11%
    
    
    
    4,000
    
    
    
    10%Asia-Pacific
    
    
    2,431
    
    
    
    18%
    
    
    
    1,928
    
    
    
    14%
    
    
    
    5,773
    
    
    
    15%
    
    
    
    5,135
    
    
    
    12%South America
    
    
    11
    
    
    
    0%
    
    
    
    11
    
    
    
    0%
    
    
    
    27
    
    
    
    0%
    
    
    
    240
    
    
    
    0%Total
    
    $
    13,219
    
    
    
    
    
    
    $
    13,755
    
    
    
    
    
    
    $
    38,724
    
    
    
    
    
    
    $
    41,563
   14




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Three Months Ended May 27, 2006
    
    Nine Months Ended May 27, 2006Advanced
    
    
    
    
    
    
    
    
    
    
    
    
    
    AdvancedMicroelectronics
    
    Medical
    
    
    
    
    
    
    
    
    
    Microelectronics
    
    MedicalCorporate
    
    Operations
    
    Operations
    
    Total
    
    Corporate
    
    Operations
    
    Operations
    
    TotalNet sales
    
    $
    0
    
    
    $
    9,049
    
    
    $
    4,170
    
    
    $
    13,219
    
    
    $
    0
    
    
    $
    25,332
    
    
    $
    13,392
    
    
    $
    38,724Gross profit
    
    
    0
    
    
    
    2,317
    
    
    
    121
    
    
    
    2,438
    
    
    
    0
    
    
    
    5,310
    
    
    
    1,598
    
    
    
    6,908Operating Expense
    
    
    2,204
    
    
    
    954
    
    
    
    151
    
    
    
    3,309
    
    
    
    6,670
    
    
    
    2,627
    
    
    
    602
    
    
    
    9,899Op income (loss)
    
    
    (2,204
    )
    
    
    1,363
    
    
    
    (30
    )
    
    
    (871
    )
    
    
    (6,670
    )
    
    
    2,683
    
    
    
    996
    
    
    
    (2,991
    )Total assets
    
    
    0
    
    
    
    19,952
    
    
    
    6,047
    
    
    
    25,999
    
    
    
    0
    
    
    
    19,952
    
    
    
    6,047
    
    
    
    25,999Depr. and
amortization
    
    
    0
    
    
    
    572
    
    
    
    70
    
    
    
    642
    
    
    
    0
    
    
    
    1,579
    
    
    
    269
    
    
    
    1,848Capital expenditures
    
    
    0
    
    
    
    102
    
    
    
    294
    
    
    
    396
    
    
    
    0
    
    
    
    598
    
    
    
    325
    
    
    
    923
 Three Months Ended May 28, 2005
    
    Nine Months Ended May 28, 2005Advanced
    
    
    
    
    
    
    
    
    
    
    
    
    
    AdvancedMicroelectronics
    
    Medical
    
    
    
    
    
    
    
    
    
    Microelectronics
    
    MedicalCorporate
    
    Operations
    
    Operations
    
    Total
    
    Corporate
    
    Operations
    
    Operations
    
    TotalNet sales
    
    $
    0
    
    
    $
    8,150
    
    
    $
    5,605
    
    
    $
    13,755
    
    
    $
    0
    
    
    $
    24,188
    
    
    $
    17,375
    
    
    $
    41,563Gross profit
    
    
    0
    
    
    
    1,356
    
    
    
    1,214
    
    
    
    2,570
    
    
    
    0
    
    
    
    4,130
    
    
    
    4,263
    
    
    
    8,393Operating Expense
    
    
    1,980
    
    
    
    292
    
    
    
    113
    
    
    
    2,385
    
    
    
    6,438
    
    
    
    1,431
    
    
    
    674
    
    
    
    8,543Op income (loss)
    
    
    (1,980
    )
    
    
    1,064
    
    
    
    1,101
    
    
    
    185
    
    
    
    (6,438
    )
    
    
    2,699
    
    
    
    3,589
    
    
    
    (150
    )Total assets
    
    
    0
    
    
    
    19,379
    
    
    
    8,070
    
    
    
    27,449
    
    
    
    0
    
    
    
    19,379
    
    
    
    8,070
    
    
    
    27,449Depr. and
amortization
    
    
    0
    
    
    
    484
    
    
    
    102
    
    
    
    586
    
    
    
    0
    
    
    
    1,590
    
    
    
    303
    
    
    
    1,893Capital expenditures
    
    
    0
    
    
    
    741
    
    
    
    10
    
    
    
    751
    
    
    
    0
    
    
    
    1,554
    
    
    
    45
    
    
    
    1,599
     15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 Some of the Information included in this Quarterly Report on Form 10-Q contains forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 that involve substantial risks and uncertainties. You can identify these statements by
forward-looking words such as may, will, expect, anticipate, believe, intend,
estimate, continue, and similar words. You should read statements that contain these words
carefully for the following reasons: such statements discuss our future expectations, such
statements contain projections of future earnings or financial condition and such statements state
other forward-looking information. Although it is important to communicate our expectations, there
may be events in the future that we are not accurately able to predict or over which we have no
control. The risk factors included in Item 7 of our Annual Report on Form 10-K for the fiscal year
ended August 31, 2005 provide examples of such risks, uncertainties and events that may cause
actual results to differ materially from our expectations and the forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, as we undertake no
obligation to update these forward-looking statements to reflect ensuing events or circumstances,
or subsequent actual results.
 Overview
  16




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##### Table of Contents



Results of Operations
 Three Months Ended May 27, 2006 and May 28, 2005:
  Three Months Ended
    
    
    Nine month endedMay 27,
    
    
    
    
    
    
    May 28,
    
    
    
    
    
    
    May 27,
    
    
    
    
    
    
    May 28,2006
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    2005Net sales
    
    $
    13,219
    
    
    
    100
    %
    
    $
    13,755
    
    
    
    100
    %
    
    $
    38,724
    
    
    
    100
    %
    
    $
    41,563
    
    
    
    100
    %Cost of sales
    
    
    10,781
    
    
    
    82
    %
    
    
    11,185
    
    
    
    81
    %
    
    
    31,816
    
    
    
    82
    %
    
    
    33,170
    
    
    
    80
    %Gross profit
    
    
    2,438
    
    
    
    18
    %
    
    
    2,570
    
    
    
    19
    %
    
    
    6,908
    
    
    
    18
    %
    
    
    8,393
    
    
    
    20
    %Operating expenses
    
    
    3,309
    
    
    
    24
    %
    
    
    2,385
    
    
    
    18
    %
    
    
    9,899
    
    
    
    26
    %
    
    
    8,543
    
    
    
    21
    %Operating loss
    
    
    (871
    )
    
    
    (6
    )%
    
    
    185
    
    
    
    1
    %
    
    
    (2,991
    )
    
    
    (8
    )%
    
    
    (150
    )
    
    
    (1
    )%Other income (expense)
    
    
    (240
    )
    
    
    (2
    )%
    
    
    88
    
    
    
    1
    %
    
    
    (438
    )
    
    
    (1
    )%
    
    
    301
    
    
    
    1
    %Net income (loss)
    
    $
    (1,111
    )
    
    
    (8
    )%
    
    $
    273
    
    
    
    2
    %
    
    $
    (3,429
    )
    
    
    (9
    )%
    
    $
    151
    
    
    
    0
    %
 Three Months Ended
    
    
    Nine Months EndedMay 27, 2006
    
    
    May 28, 2005
    
    
    May 27, 2006
    
    
    May 28, 2005Medical/Hearing
    
    $
    10,778
    
    
    $
    11,234
    
    
    $
    30,240
    
    
    $
    33,477Communications
    
    
    1,435
    
    
    
    1,224
    
    
    
    5,216
    
    
    
    4,486Industrial
    
    
    1,006
    
    
    
    1,297
    
    
    
    3,268
    
    
    
    3,600Total Net Sales
    
    $
    13,219
    
    
    $
    13,755
    
    
    $
    38,724
    
    
    $
    41,563
 Net Sales
    17




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##### Table of Contents



Gross Profit
   Operating Expenses
 Selling, general and administrative expenses
  18




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##### Table of Contents



Research, development, and engineering expenses
  Gain on claim settlement
  Other Income (Expense), Net
   Income Taxes
  Deemed Dividend on Preferred Stock
  19




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FINANCIAL CONDITION AND LIQUIDITY
        20




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Revenue Recognition, sales returns and warranty
  21




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##### Table of Contents



Item 3. Qualitative and Quantitative Disclosures About Market Risk
 Market Risk
  Interest Rate Risk
   22




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##### Table of Contents



Item 4. Controls and Procedures
      23




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PART II  OTHER INFORMATION
 
 Item 6. Exhibits
 Exhibits31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  HEI, Inc.Date: July 11, 2006
    /s/ Timothy C. ClaytonTimothy C. ClaytonChief Financial Officer 
 Exhibit Index
 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 24