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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2003 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share New York Stock Exchange
Class A Common Stock, par value $.01 per share (Name of each exchange on which
(Title of each class) registered)
Securities registered pursuant to Section 12(g) of the Act:
Rights to Purchase Series B Junior Participating Preferred Stock
Rights to Purchase Series C Junior Participating Preferred Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity
held by nonaffiliates of the registrant was $125,000,000 based on the closing
price of Common Stock and Class A Common Stock as of April 30, 2003 (the last
business day of the registrant's most recently completed second fiscal quarter)
as reported by the New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of
common stock, as of December 31, 2003:
Common Stock, $.01 par value 9,691,095 shares
Class A Common Stock, $.01 par value 14,154,628 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2004
Annual Meeting of Shareholders are incorporated by reference into Part III. See
Item 15(a)(3) beginning on page 61 for a listing of exhibits.
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HEICO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
Page
No.
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PART I
Item 1. Business.................................................................................. 2
Item 2. Properties................................................................................ 11
Item 3. Legal Proceedings......................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................... 13
Item 6. Selected Financial Data................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 27
Item 8. Financial Statements and Supplementary Data............................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 59
Item 9A. Controls and Procedures................................................................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 60
Item 11. Executive Compensation.................................................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 60
Item 13. Certain Relationships and Related Transactions............................................ 60
Item 14. Principal Accounting Fees and Services.................................................... 60
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 61
SIGNATURES........................................................................................... 65
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements contained herein that are not clearly historical in
nature may be forward-looking and the words "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Any forward-looking statements contained herein, in press releases,
written statements or other documents filed with the Securities and Exchange
Commission or in communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and conference
calls, concerning our operations, economic performance and financial condition
are subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
. Lower demand for commercial air travel or airline fleet changes,
which could cause lower demand for our goods and services;
. Product specification costs and requirements, which could cause
our costs to complete contracts to increase;
. Governmental and regulatory demands, export policies and
restrictions, military program funding by U.S. and non-U.S.
Government agencies or competition on military programs, which
could reduce our sales;
. HEICO's ability to introduce new products and product pricing
levels, which could reduce our sales or sales growth; and
. HEICO's ability to make acquisitions and achieve operating
synergies from acquired businesses, HEICO's ability to continue
to control costs and maintain quality, HEICO's ability to manage
customer credit and interest rate risks and economic conditions
within and outside of the aerospace, defense and electronics
industries, which could negatively impact our costs and
revenues.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
THE COMPANY
HEICO Corporation ("HEICO," "we," "us," "our" or "the Company") believes
it is the world's largest manufacturer of Federal Aviation Administration
(FAA)-approved jet engine and aircraft component replacement parts, other than
the original equipment manufacturers (OEMs) and their subcontractors. HEICO is
also a leading manufacturer of certain electronic equipment to the aerospace,
defense, medical, telecommunications and electronics industries. The Company's
businesses are comprised of two operating segments, the Flight Support Group
(FSG) consisting of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and its
subsidiaries and the Electronic Technologies Group (ETG) consisting of HEICO
Electronic Technologies Corp. (HEICO Electronic) and its subsidiaries. The FSG
uses proprietary technology to design and manufacture jet engine and aircraft
component replacement parts for sale at lower prices than those manufactured by
OEMs. These parts are approved by the FAA and are the functional equivalent of
parts sold by OEMs. In addition, the FSG repairs, refurbishes and overhauls jet
engine and aircraft components for domestic and foreign commercial air carriers
and aircraft repair companies, and manufactures thermal insulation products and
other component parts primarily for aerospace, defense and commercial
applications. In fiscal 2003, the FSG accounted for 73% of our revenues. The ETG
designs, manufactures and sells various types of electronic and electro-optical
products, including infrared simulation and test equipment, hybrid laser
rangefinder receivers, electrical power supplies, back-up power supplies,
electromagnetic interference and radio frequency interference shielding, high
power laser diode drivers, amplifiers, photodetectors, amplifier modules and
flash lamp drivers. In addition, the ETG also repairs and overhauls inertial
navigation systems and other avionics, instruments and components for
commercial, military and business aircraft operators. In fiscal 2003, the ETG
accounted for 27% of our revenues.
We have continuously operated in the aerospace industry for over 40
years. Since assuming control in 1990, current management has achieved
significant sales and profit growth through expanded product offerings, an
expanded customer base, increased research and development expenditures and the
completion of acquisitions. Since fiscal 1996, we have added thirteen
subsidiaries to our FSG and five subsidiaries to our ETG through acquisitions.
See Item 7 of this annual report, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," for details of our most recent
acquisitions. As a result of internal growth and acquisitions, our revenues from
continuing operations have grown from $34.6 million in fiscal 1996 to $176.5
million in fiscal 2003, a compound annual growth rate of approximately 26% over
the seven-year period.
In October 1997, we entered into a strategic alliance with Lufthansa
Technik AG (Lufthansa), the technical services subsidiary of Lufthansa German
Airlines AG. Lufthansa is the world's largest independent provider of
engineering and maintenance services for aircraft components and jet engines and
supports over 200 airlines, governments and other customers. As part of the
transaction, Lufthansa acquired a 20% minority interest in HEICO Aerospace, and
partially funded the accelerated development of additional FAA-approved
replacement parts for jet engines and aircraft components over the subsequent
four years pursuant to a research and development cooperation agreement. This
strategic alliance has enabled us to expand domestically and internationally by
enhancing our ability to (i) identify key jet engine and aircraft component
replacement parts with significant profit potential by utilizing Lufthansa's
extensive operating data on engine and component parts, (ii) introduce those
parts throughout the world in an efficient manner due to Lufthansa's testing and
diagnostic resources, and (iii) broaden our customer base by capitalizing on
Lufthansa's established relationships and alliances within the airline industry.
In February 2001, we entered into a joint venture with AMR Corporation
(AMR), parent company of American Airlines, one of the world's largest airlines,
to develop, design and sell FAA-approved jet engine and aircraft component
replacement parts through our subsidiary, HEICO Aerospace. As part of the joint
venture, AMR will reimburse HEICO Aerospace a portion of new product research
and development costs. The joint venture is 16% owned by AMR. AMR and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
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support on a worldwide basis. We believe that AMR's investment, along with its
vast technical experience as an operator and overhauler of aircraft and engines,
will allow us to accelerate the development of new FAA-approved replacement
parts and, accordingly, to manufacture and market such parts.
In May 2002, we entered into a strategic relationship with United
Airlines, Inc. (United Airlines) through our subsidiary, HEICO Aerospace. The
strategic relationship provides for the acceleration of HEICO's efforts in
developing a broad range of jet engine and aircraft component replacement parts
for FAA approval. United Airlines has agreed to purchase these newly developed
parts, and most of HEICO Aerospace's current FAA-approved parts product line, on
an exclusive basis from HEICO Aerospace.
In February 2003 and March 2003, we entered into five-year parts supply
and development agreements with Delta Air Lines, Inc. (Delta) and Air Canada,
respectively through our subsidiary, HEICO Aerospace. These strategic
relationships are the fourth and fifth such unique relationship between HEICO
Aerospace and a major international airline. These relationships will accelerate
HEICO's efforts in developing aircraft and engine parts slated for FAA approval.
Delta and Air Canada have each agreed to purchase these newly developed parts
and most of HEICO Aerospace's current FAA-approved parts on an exclusive basis
from HEICO Aerospace.
FLIGHT SUPPORT GROUP
The FSG is headquartered in Hollywood, Florida and designs, engineers,
manufactures, repairs and/or overhauls jet engine and aircraft parts and
components such as combustion chambers, compressor blades, vanes, seals and
various other engine and aircraft parts. The FSG also manufactures specialty
aviation and defense components as a subcontractor. The FSG serves a broad
spectrum of the aviation industry, including (i) commercial airlines and air
cargo carriers, (ii) repair and overhaul facilities, (iii) OEMs, and (iv) U.S.
and foreign governments.
Jet engine and aircraft component replacement parts can be categorized
by their ongoing ability to be repaired and returned to service. The general
categories (in all of which we participate) are as follows: (i) rotable; (ii)
repairable; and (iii) expendable. A rotable is a part which is removed
periodically as dictated by an operator's maintenance procedures or on an as
needed basis and is typically repaired or overhauled and re-used an indefinite
number of times. An important subset of rotables is "life limited" parts. A life
limited rotable has a designated number of allowable flight hours and/or cycles
(one take-off and landing generally constitutes one cycle) after which it is
rendered unusable. A repairable is similar to a rotable except that it can only
be repaired a limited number of times before it must be discarded. An expendable
is generally a part which is used and not thereafter repaired for further use.
Jet engine and aircraft component replacement parts are classified
within the industry as (i) factory-new, (ii) new surplus, (iii) overhauled, (iv)
serviceable, and (v) as removed. A factory-new or new surplus part is one that
has never been installed or used. Factory-new parts are purchased from
FAA-approved manufacturers (such as HEICO or OEMs) or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part is one that has
been completely repaired and inspected by a licensed repair facility such as
ours. An aircraft spare part is classified as "repairable" if it can be repaired
by a licensed repair facility under applicable regulations. A part may also be
classified as "repairable" if it can be removed by the operator from an aircraft
or engine while operating under an approved maintenance program and is airworthy
and meets any manufacturer or time and cycle restrictions applicable to the
part. A "factory-new," "new surplus," "overhauled" or "serviceable" part
designation indicates that the part can be immediately utilized on an aircraft.
A part in "as removed" condition requires inspection and possibly functional
testing, repair or overhaul by a licensed facility prior to being returned to
service in an aircraft.
Factory-New Jet Engine and Aircraft Component Replacement Parts. The
principal business of the FSG is the research and development, design,
manufacture and sale of FAA-approved replacement parts that are sold to domestic
and foreign commercial air carriers and aircraft repair and overhaul companies.
Our principal competitors
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are Pratt & Whitney, a division of United Technologies Corporation (UTC) and
General Electric Company (General Electric), including its CFM International
joint venture. The FSG's factory-new replacement parts include various jet
engine and aircraft component replacement parts. A key element of our growth
strategy is the continued design and development of an increasing number of
Parts Manufacturer Approval (PMA) replacement parts in order to further
penetrate our existing customer base and obtain new customers. We select the jet
engine and aircraft component replacement parts to design and manufacture
through a selection process which analyzes industry information to determine
which replacement parts are expected to generate the greatest profitability. As
part of Lufthansa's investment in the FSG, Lufthansa has the right to select 50%
of the parts for which we will seek PMAs, provided that such parts are
technologically and economically feasible and substantially comparable with the
profitability of our other PMA parts.
Repair and Overhaul Services. The FSG provides repair and overhaul
services on selected jet engine and aircraft component parts, as well as on
avionics, instruments, composites and flight surfaces of commercial aircraft.
The FSG also provides repair and overhaul services to military aircraft
operators and aircraft repair and overhaul companies. Our repair and overhaul
operations require a high level of expertise, advanced technology and
sophisticated equipment. Services include the repair, refurbishment and overhaul
of numerous accessories and parts mounted on gas turbine engines and airframes.
Components overhauled include fuel pumps, generators, fuel controls, pneumatic
valves, starters and actuators, turbo compressors and constant speed drives,
hydraulic pumps, valves and actuators, composite flight controls,
electro-mechanical equipment and auxiliary power unit accessories.
Manufacture of Specialty Aircraft/Defense Related Parts and
Subcontracting for OEMs. The FSG manufactures thermal insulation blankets
primarily for aerospace, defense and commercial applications. The FSG also
manufactures specialty components for sale as a subcontractor to OEMs and the
U.S. government.
FAA Approvals and Product Design
Non-OEM manufacturers of jet engine replacement parts must receive a
Parts Manufacture Approval (PMA) from the FAA to sell the part. The PMA approval
process includes the submission of sample parts, drawings and testing data to
one of the FAA's Aircraft Certification Offices where the submitted data are
analyzed. We believe that an applicant's ability to successfully complete the
PMA process is limited by several factors, including (i) the agency's confidence
level in the applicant, (ii) the complexity of the part, (iii) the volume of
PMAs being filed, and (iv) the resources available to the FAA. We also believe
that companies such as HEICO that have demonstrated their manufacturing
capabilities and established favorable track records with the FAA generally
receive a faster turnaround time in the processing of PMA applications. Finally,
we believe that the PMA process creates a significant barrier to entry in this
market niche through both its technical demands and its limits on the rate at
which competitors can bring products to market.
As part of our growth strategy, we have continued to increase our
research and development activities. Research and development expenditures by
the FSG increased from approximately $300,000 in 1991 to approximately $7.0
million in fiscal 2003. We believe that our FSG's research and development
capabilities are a significant component of our historical success and an
integral part of our growth strategy.
Our expanded research and development activities have included
development of more complex jet engine and aircraft component replacement parts.
In October 1999, we received our first PMA for a compressor blade from the FAA
and we are continuing research and development of other complex parts. We
believe the development and sale of complex parts represents a significant
long-term market opportunity. In fiscal 2003, the FAA granted us PMAs for
approximately 300 new parts; however, no assurance can be given that the FAA
will continue to grant PMAs or that we will achieve acceptable levels of net
sales and gross profits on such parts in the future.
We benefit from our proprietary rights relating to certain designs,
engineering, manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as
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to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our unique manufacturing capabilities are required by the
customer's specifications or designs, thereby necessitating reliance on us for
production of such designed products.
While we have developed proprietary techniques, software and
manufacturing expertise for the manufacture of jet engine and aircraft component
replacement parts, we have no patents for these proprietary techniques and
choose to rely on trade secret protection. We believe that although our
proprietary techniques, software and expertise are subject to misappropriation
or obsolescence, development of improved methods and processes and new
techniques by us will continue on an ongoing basis as dictated by the
technological needs of our business.
Continuing Impact of September 11, 2001 and the Economic Softness Thereafter
In the aftermath of the September 11, 2001 terrorist attacks and the
weak economy that followed, passenger traffic on commercial flights has been
significantly lower than prior to the attacks. In addition, many commercial
airlines have reduced their operating schedules and are struggling to return to
profitability. As a result, we have seen a direct decline in sales to commercial
aerospace markets, particularly sales of JT8D PMA replacement parts. However,
over 70% of our PMA parts offered for sale are non-JT8D and we are continually
working to increase our market penetration on non-JT8D parts and to develop new
FAA-approved replacement parts. In fiscal 2003, only approximately one-third of
the total of our sales of PMA parts were JT8D related.
We believe our products and services offer our customers substantial
opportunities for cost savings. In addition, our diversification of operations
beyond the commercial aerospace markets we have historically served has
cushioned the impact of the events of September 11, 2001 and the economic
softness thereafter. Revenues from the defense industry and other markets,
including industrial, medical, electronics and telecommunications, represented
approximately one-third of our total Company-wide revenues in fiscal 2003 with
defense customers representing approximately 22% of revenues.
ELECTRONIC TECHNOLOGIES GROUP
The ETG is headquartered in Miami, Florida and designs, manufactures and
sells various types of electrically and electro-optical engineered products,
such as power supplies, shielding for communications, computer and aerospace
applications, infrared simulation and test equipment, laser diode drivers and
hybrid laser rangefinder receivers. In addition, the ETG also repairs and
overhauls inertial navigation systems and other avionics, instruments and
components used on commercial, military and business aircraft.
Products of the ETG include:
. Electro-optical Infrared Simulation and Test Equipment. The ETG
is a leading international designer and manufacturer of
state-of-the-art aerospace and defense electro-optical infrared
simulation and test equipment. These products include high
precision blackbody sources, optical systems and fully
integrated test calibration systems. In addition, the MIRAGE IR
Scene Simulator is used to project infrared scenes to assist
with product development and training for complex infrared
targeting and imaging systems and other items.
. Electro-optical Laser Products. The ETG is engaged in the design
and manufacture of electro-optical laser products primarily for
use in the laser industry. These products include hybrid laser
rangefinder receivers, amplifiers, photodetectors, amplifier
modules, flash lamp drivers and power supplies.
. On-board Aircraft Power Supplies and Batteries. The ETG
manufactures power supply and current control products and
replacement components used in aircraft. These products include
battery and charger units to support emergency lighting,
emergency fuel shut-off devices, emergency exit door power
assists, static
5
inverters for emergency lighting and cockpit lighting dimmers.
While entire units may require replacement periodically, there
is an ongoing replacement market for batteries, which have an
estimated service life of approximately 3 to 5 years. These
products are mainly sold to OEM customers and customers in the
retrofit and modification market.
. Circuit Board Shielding. The ETG manufactures electromagnetic
interference and radio frequency interference shielding for
circuit boards and other items utilized in telecommunications,
aerospace, and microwave applications. The circuit board
shielding technology reduces electronic noise and protects
sensitive components. The ETG has a line of patented products
and the ability to fabricate in a wide variety of shapes and
applications, which we believe is a manufacturing advantage.
. Repair and Overhaul Services. The ETG is engaged in the repair
and overhaul of inertial navigation systems which are used by
commercial and military aircraft operators to ascertain their
location during flight operations. In addition, the ETG also
repairs and overhauls various avionics, instruments and other
components for a wide array of commercial, military and business
aircraft operators.
In December 2003, we expanded our capabilities within the ETG by an
acquisition within the satellite microwave component industry. See Note 17 to
the Consolidated Financial Statements for additional information.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
See Note 14 to the Consolidated Financial Statements for financial
information by operating segment and information about foreign and domestic
operations as well as export sales.
SALES, MARKETING AND CUSTOMERS
Each of our operating segments independently conducts sales and
marketing efforts directed at their respective customers and industries and, in
some cases, collaborates with other operating divisions and subsidiaries within
its group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association (AIA), the leading trade association representing the nation's
manufacturers of commercial, military and business aircraft, aircraft engines
and related components and equipment. Due in large part to our established
industry presence, we enjoy strong customer relations, name recognition and
repeat business.
We sell our products to a broad customer base consisting of domestic and
foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 27% of total net sales during the year
ended October 31, 2003.
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COMPETITION
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing of engine parts as a result of lower labor costs and other factors.
Our jet engine and aircraft component replacement parts business
competes primarily with Pratt & Whitney and General Electric. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the FSG, we compete with both the leading jet engine OEMs and a large number of
machining, fabrication and repair companies, some of which have greater
financial and other resources than we do. Competition is based mainly on price,
product performance, service and technical capability.
Competition for the repair and overhaul of jet engine and aircraft
components comes from three principal sources: OEMs, major commercial airlines
and other independent service companies. Some of these companies have greater
financial and other resources than we do. Some major commercial airlines own and
operate their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own aircraft components and for third
parties. OEMs also maintain service centers that provide repair and overhaul
services for the components they manufacture. Other independent service
organizations also compete for the repair and overhaul business of other users
of aircraft components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
Our ETG competes with several large and small domestic and foreign
competitors, some of which have greater financial and other resources than we
do. The market for our electronic products are niche markets with several
competitors with competition based mainly on design, technology, quality, price
and customer satisfaction.
RAW MATERIALS
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel,
pre-plated phospher bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
BACKLOGS
Our total backlog of unshipped orders was $34.6 million on October 31,
2003 versus $36.3 million on October 31, 2002. Our FSG had a backlog of
unshipped orders as of October 31, 2003 of $12.7 million as compared to $13.1
million as of October 31, 2002. This backlog excludes forecasted shipments for
certain contracts of the FSG pursuant to which customers provide only estimated
annual usage and not firm purchase orders. Our backlogs within the FSG are
typically short-lead in nature with many product orders being received within
the month of shipment. Our ETG had a backlog of $21.9 million as of October 31,
2003 as compared to $23.1 million as of October 31, 2002. Substantially all of
the backlog of orders as of October 31, 2003 are expected to be delivered during
fiscal 2004.
GOVERNMENT REGULATION
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aviation equipment are continuously maintained
in
7
proper condition to ensure safe operation of the aircraft. Similar rules apply
in other countries. All aircraft must be maintained under a continuous condition
monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for the various
types of aircraft and equipment are prescribed by regulatory authorities and can
be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us.
There has been no material adverse effect to our consolidated financial
statements as a result of these government regulations.
ENVIRONMENTAL REGULATION
Our operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the Environmental Protection Agency (the EPA).
Among other matters, these regulatory authorities impose requirements that
regulate the operation, handling, transportation, and disposal of hazardous
materials, the health and safety of workers, and require us to obtain and
maintain licenses and permits in connection with our operations. This extensive
regulatory framework imposes significant compliance burdens and risks on us.
Notwithstanding these burdens, we believe that we are in material compliance
with all federal, state, and local laws and regulations governing our
operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 mandates general requirements for safe workplaces for all
employees and established the Occupational Safety and Health Administration
(OSHA) in the Department of Labor. In particular, OSHA provides special
procedures and measures for the handling of some hazardous and toxic substances.
In addition, specific safety standards have been promulgated for workplaces
engaged in the treatment, disposal or storage of hazardous waste. Requirements
under state law, in some circumstances, may mandate additional measures for
facilities handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA's health and safety
requirements.
INSURANCE
We are a named insured under policies which include the following
coverage: (i) product liability, including grounding; (ii) personal property,
inventory and business income at our facilities; (iii) general liability
coverage; (iv) employee benefit liability; (v) international liability and
automobile liability; (vi) umbrella liability coverage; and (vii) various other
activities or items subject to certain limits and deductibles. We believe that
coverages are adequate to insure against the various liability risks of our
business.
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EMPLOYEES
As of October 31, 2003, we had 1,011 full-time employees, of which 744
were in the FSG, 254 were in the ETG, and 13 were corporate. None of our
employees are represented by a union. We believe that our employee relations are
good.
AVAILABLE INFORMATION
Our Internet web site address is http://www.heico.com. We make available
free of charge through our web site our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission. The information contained on or through our web site is not
incorporated into this annual report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers are elected by the Board of Directors at the
first meeting following the annual meeting of shareholders and serve at the
discretion of the Board. The names and ages of, and offices held by, the
executive officers of the Company are as follows:
NAME AGE POSITION(s) DIRECTOR SINCE
- ---- --- ----------- --------------
Laurans A. Mendelson 65 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 57 Executive Vice President and Chief Financial
Officer
Eric A. Mendelson 38 Executive Vice President and Director, President 1992
and Chief Executive Officer of HEICO
Aerospace Holdings Corp.
Victor H. Mendelson 36 Executive Vice President, General Counsel and 1996
Director, President and Chief Executive Officer
of HEICO Electronic Technologies Corp.
James L. Reum 72 Executive Vice President of HEICO
Aerospace Holdings Corp.
Laurans A. Mendelson has served as Chairman of the Board of the Company
since December 1990. Mr. Mendelson has also served as Chief Executive Officer of
the Company since February 1990, and as President of the Company since September
1991. Mr. Mendelson is a member of the Finance Committee of the Aerospace
Industries Association in Washington, D.C. and frequently serves on its board of
governors. Mr. Mendelson is also a member of the Board of Trustees, the
Executive Committee and Founders Club of Mount Sinai Medical Center in Miami
Beach, Florida. In addition, Mr. Mendelson served as a Trustee of Columbia
University in The City of New York from 1995 to 2001, as well as, Chairman of
the Trustees' Audit Committee. Mr. Mendelson currently serves as Trustee
Emeritus of Columbia University and maintains membership positions on the
Trustee Committees he had before becoming Trustee Emeritus. Mr. Mendelson is a
Certified Public Accountant. Laurans Mendelson is the father of Eric Mendelson
and Victor Mendelson.
Thomas S. Irwin has served as Executive Vice President and Chief
Financial Officer of the Company since September 1991 and served as Senior Vice
President of the Company from 1986 to 1991 and Vice President and Treasurer from
1982 to 1986. Mr. Irwin is a Certified Public Accountant.
9
Eric A. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1992 to 2001, and has been
President and Chief Executive Officer of HEICO Aerospace, a subsidiary of the
Company, since its formation in 1997 and President of HEICO Aerospace
Corporation since 1993. He also served as President of HEICO's Jet Avion
Corporation, a wholly owned subsidiary of HEICO Aerospace, from 1993 to 1996 and
served as Jet Avion's Executive Vice President and Chief Operating Officer from
1991 to 1993. From 1990 to 1991, Mr. Mendelson was Director of Planning and
Operations of the Company. Mr. Mendelson is a co-founder, and, since 1987, has
been Managing Director of Mendelson International Corporation (MIC), a private
investment company, which is a shareholder of HEICO. Eric Mendelson is the son
of Laurans Mendelson and the brother of Victor Mendelson.
Victor H. Mendelson has served as Executive Vice President of the
Company since 2001, Vice President of the Company from 1996 to 2001, as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of the Company, since September 1996 and as General Counsel of the
Company since 1993. He served as Executive Vice President of the Company's
former MediTek Health Corporation subsidiary from 1994 and its Chief Operating
Officer from 1995 until its sale in July 1996. He was the Company's Associate
General Counsel from 1992 until 1993. From 1990 until 1992, he worked on a
consulting basis with the Company, developing and analyzing various strategic
opportunities. Mr. Mendelson is a co-founder, and, since 1987, has been
President of MIC, a private investment company, which is a shareholder of HEICO.
He is a Trustee of the Greater Miami Chamber of Commerce and a Director of the
Florida Grand Opera. Victor Mendelson is the son of Laurans Mendelson and the
brother of Eric Mendelson.
James L. Reum retired from full-time service to HEICO Aerospace in
August 2001 and remains active on a part-time basis with HEICO Aerospace as
Executive Vice President. He served as Chief Operating Officer of HEICO
Aerospace and its predecessor from 1995 to 1999, President of LPI Industries
Corporation from 1991 to 1998 and President of Jet Avion Corporation from 1996
to 1998. From 1990 to 1991, he served as Director of Research and Development
for Jet Avion Corporation. From 1986 to 1989, Mr. Reum was self-employed as a
management and engineering consultant to companies primarily within the
aerospace industry. From 1957 to 1986, he was employed in various management
positions with Chromalloy Gas Turbine Corp., Cooper Airmotive (later named
Aviall, Inc.), United Airlines, Inc. and General Electric Company.
10
ITEM 2. PROPERTIES
The Company owns or leases a number of facilities, which are utilized by
its Flight Support Group (FSG), Electronic Technologies Group (ETG), and
Corporate office. Summary information on the facilities utilized within the FSG
and the ETG to support its principal operating activities is as follows:
FLIGHT SUPPORT GROUP
Manufacture of Jet Engine and Aircraft Component Replacement Parts
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 121,000 Owned Manufacturing and engineering facilities,
warehouse and corporate headquarters
Florida 2,000 Leased Engineering facility
California 93,000 Leased Manufacturing and engineering facility
New Mexico 35,000 Leased Manufacturing and engineering facility
Georgia 38,000 Owned Manufacturing and engineering facility
Washington 16,000 Leased Manufacturing and engineering facilities
Connecticut 10,000 Leased Manufacturing and engineering facility
Tennessee 6,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Jet Engine and Aircraft Components
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 104,000 Owned Overhaul and repair facility
Florida 10,000 Leased Overhaul and repair facility
California 54,000 Leased Overhaul and repair facilities
ELECTRONIC TECHNOLOGIES GROUP
Manufacture of Electronic and Electro-Optical Equipment
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 59,000 Leased Manufacturing and engineering facilities
California 26,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Aircraft Electronic Equipment
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Ohio 21,000 Leased Overhaul and repair facility
11
CORPORATE
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 4,000/(1)/ Owned Corporate headquarters and administrative
offices
- ----------
(1) Represents the square footage of administrative offices within Florida.
The square footage of the Company's corporate headquarters is included
within the square footage for Florida under the caption "FSG -
Manufacture of Jet Engine and Aircraft Component Replacement Parts."
All of the facilities listed in this Item 2 are in good operating
condition, are well maintained and are in regular use. The Company believes that
its existing facilities are sufficient to meet its operational needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2003.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock and Class A Common Stock are listed and
traded on the New York Stock Exchange (NYSE) under the symbols "HEI" and
"HEI.A," respectively. The following table sets forth, for the periods
indicated, the high and low share prices for the Common Stock and the Class A
Common Stock as reported on the NYSE, as well as the amount of cash dividends
paid per share during such periods. Lufthansa Technik AG, as a 20% shareholder
of our FSG, will be entitled to 20% of any dividends paid by our FSG with the
balance payable to the Company.
On December 15, 2003, the Company's Board of Directors declared a 10%
stock dividend on both classes of common stock outstanding payable in shares of
Class A Common Stock on January 16, 2004 to shareholders of record as of January
6, 2004. The quarterly high and low share prices and cash dividends per share
amounts set forth below have been adjusted retroactively to give effect to the
stock dividend.
COMMON STOCK
CASH DIVIDENDS
HIGH LOW PER SHARE
--------- --------- --------------
FISCAL 2002:
First Quarter .............................. $ 16.45 $ 12.45 $ .023
Second Quarter ............................. 15.95 12.91 --
Third Quarter .............................. 15.68 10.18 $ .023
Fourth Quarter ............................. 12.17 6.95 --
FISCAL 2003:
First Quarter .............................. $ 11.09 $ 8.18 $ .023
Second Quarter ............................. 10.11 6.68 --
Third Quarter .............................. 11.58 6.75 $ .023
Fourth Quarter ............................. 14.30 9.16 --
As of December 31, 2003, there were 1,038 holders of record of the
Company's Common Stock.
CLASS A COMMON STOCK
CASH DIVIDENDS
HIGH LOW PER SHARE
--------- --------- --------------
FISCAL 2002:
First Quarter .............................. $ 12.95 $ 9.68 $ .023
Second Quarter ............................. 13.16 11.05 --
Third Quarter .............................. 13.17 8.36 $ .023
Fourth Quarter ............................. 9.44 5.32 --
FISCAL 2003:
First Quarter .............................. $ 8.64 $ 6.59 $ .023
Second Quarter ............................. 7.79 5.18 --
Third Quarter .............................. 8.63 5.53 $ .023
Fourth Quarter ............................. 11.43 7.10 --
As of December 31, 2003, there were 1,044 holders of record of the
Company's Class A Common Stock.
13
DIVIDEND POLICY
The Company has historically paid regular semi-annual cash dividends on
both classes of its common stock. In fiscal 2003, HEICO paid its 50th
consecutive semi-annual cash dividend since 1979. HEICO's Board of Directors
presently intends to continue the payment of regular semi-annual cash dividends
on both classes of its common stock. The Company's ability to pay dividends
could be affected by future business performance, liquidity, capital needs,
alternative investment opportunities, and loan covenants.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of October 31, 2003. All common share data and per share
data has been adjusted retroactively to give effect to a 10% stock dividend
payable in shares of Class A Common Stock on January 16, 2004 as further
detailed in Note 17 to the Consolidated Financial Statements.
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE WEIGHTED-AVERAGE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE UNDER EQUITY
EXERCISE OF OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS WARRANTS AND REFLECTED IN COLUMN (a))
PLAN CATEGORY AND RIGHTS (a) RIGHTS (b) (c)
- ---------------------------------------- ------------------ ---------------- -------------------------
Equity compensation plans approved by
security holders/(1)/ 3,921,283 $ 8.27 166,423
Equity compensation plans not approved
by security holders/(2)/ 527,392 $ 11.19 -
------------------ ------------------------
Total 4,448,675 $ 8.62 166,423
================== ========================
- ----------
(1) Represents aggregated information pertaining to the Company's three
equity compensation plans: the 1993 Stock Option Plan, the Non-Qualified
Stock Option Plan and the 2002 Stock Option Plan. See Note 9 to the
Consolidated Financial Statements for further information regarding
these plans.
(2) Represents stock options granted to two former shareholders of Santa
Barbara Infrared, Inc. (SBIR) pursuant to employment agreements entered
into in connection with the Company's acquisition of SBIR in fiscal
1999. Such stock options were fully vested and transferable at the grant
date and expire ten years from the date of grant. The exercise price of
such options was the fair market value as of the date of grant.
14
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, /(1)/
-------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
OPERATING DATA:
Net sales ........................................ $ 141,269 $ 202,909 $ 171,259 $ 172,112 $ 176,453
------------ ------------ ------------ ------------ ------------
Gross profit ..................................... 57,532 75,811 71,146 61,502 58,104
Selling, general and administrative expenses ..... 24,717 37,888 40,155 39,102 34,899
------------ ------------ ------------ ------------ ------------
Operating income ................................. 32,815 37,923 30,991 22,400 23,205
------------ ------------ ------------ ------------ ------------
Interest expense ................................. 2,173 5,611 2,486 2,248 1,189
------------ ------------ ------------ ------------ ------------
Interest and other income ........................ 894 929 1,598 97 93
------------ ------------ ------------ ------------ ------------
Gain on sale of product line ..................... -- 17,296/(2)/ -- 1,230/(3)/ --
------------ ------------ ------------ ------------ ------------
Income (loss):
From continuing operations ................... 16,337 27,739/(2)/ 15,833 15,226/(4)/ 12,222
From gain on sale of discontinued operations . -- (1,422)/(5)/ -- -- --
------------ ------------ ------------ ------------ ------------
Net income ....................................... $ 16,337 $ 26,317/(2)/ $ 15,833 $ 15,226/(4)/ $ 12,222
============ ============ ============ ============ ============
Weighted average number of common shares
outstanding:/(6)/
Basic ........................................ 19,726 21,026 21,917 23,004 23,237
Diluted ...................................... 23,483 24,099 24,536 24,733 24,531
PER SHARE DATA:/(6)/
Income from continuing operations:
Basic ........................................ $ .83 $ 1.32/(2)/ $ .72 $ .66/(4)/ $ .53
Diluted ...................................... .70 1.15/(2)/ .65 .62/(4)/ .50
Net income:
Basic ........................................ .83 1.25/(2)/ .72 .66/(4)/ .53
Diluted ...................................... .70 1.09/(2)/ .65 .62/(4)/ .50
Cash dividends ................................... .038 .039 .041 .045 .045
BALANCE SHEET DATA (as of October 31):
Working capital .................................. $ 63,278 $ 55,469 $ 71,515 $ 69,235 $ 71,798
Total assets ..................................... 273,163 281,732 325,640 336,332 333,244
Total debt (including current portion) ........... 73,501 40,042 67,014 55,986 32,013
Minority interests in consolidated subsidiaries .. 30,022 33,351 36,845 38,313 40,577
Shareholders' equity ............................. 139,289 169,844 188,769 207,064 221,518
- ----------
(1) Results include the results of acquisitions and disposition of a product
line from each respective effective date.
(2) Represents the pretax gain on the sale of Trilectron Industries, Inc.
(Trilectron) in September 2000. The gain on sale of Trilectron increased
income from continuing operations and net income in fiscal 2000 by
$10,542,000, or $.50 per basic share and $.44 per diluted share, net of
tax.
(3) Represents an increase in the gain on sale of the Trilectron product
line of $1,230,000 ($765,000, or $.03 per basic and diluted share, net
of tax) resulting from the elimination of certain reserves upon
expiration of indemnification provisions of the sale.
(4) Includes the recovery of a portion of taxes paid in prior years
resulting from an income tax audit, which increased net income by
$2,107,000, or $.09 per basic and diluted share, net of related
expenses. The aggregate increase in net income from the gain on sale of
a product line (see Note (3) above) and the recovery of taxes was
$2,872,000, or $.12 per basic and diluted share.
(5) Represents an adjustment to the gain from sale of discontinued health
care operations ($.07 per basic share and $.06 per diluted share, net of
tax) that were sold in fiscal 1996.
(6) Information has been adjusted retroactively to give effect to 10% stock
dividends paid in shares of Class A Common Stock in July 2000 and August
2001 and for a 10% stock dividend payable in shares of Class A Common
Stock on January 16, 2004 as further detailed in Note 17 to the
Consolidated Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's operations are comprised of two operating segments, the
Flight Support Group (FSG) and the Electronic Technologies Group (ETG).
The FSG consists of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and
its subsidiaries, which primarily:
. Manufacture Jet Engine and Aircraft Component Replacement Parts
- The FSG designs and manufactures jet engine and aircraft
component replacement parts for sale at lower prices than those
manufactured by the original equipment manufacturers. The
Federal Aviation Administration (FAA) has approved these parts
and they are the functional equivalent of parts sold by original
equipment manufacturers. The FSG also manufactures and sells
specialty parts as a subcontractor for original equipment
manufacturers and the United States government.
. Repair and Overhaul Jet Engine and Aircraft Components - The FSG
repairs and overhauls jet engine and aircraft components for
domestic and foreign commercial air carriers, military aircraft
operators and aircraft repair and overhaul companies.
The ETG consists of HEICO Electronic Technologies Corp. (HEICO
Electronic) and its subsidiaries, which primarily:
. Manufacture Electronic and Electro-Optical Equipment - The ETG
designs, manufactures and sells electronic and electro-optical
equipment and components, including power supplies, laser
rangefinder receivers, infra-red simulation, calibration and
testing equipment and electromagnetic interference shielding for
commercial and military aircraft operators, electronics
companies and telecommunications equipment suppliers.
. Repair and Overhaul Aircraft Electronic Equipment - The ETG
repairs and overhauls inertial navigation systems and other
avionics equipment for commercial, military and business
aircraft operators.
The Company's results of operations during each of the past three fiscal
years have been affected by a number of transactions. This discussion of the
Company's financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included herein. For further information regarding the acquisitions and
strategic alliances discussed below, see Note 2 to the Consolidated Financial
Statements. The acquisitions have been accounted for using the purchase method
of accounting and are included in the Company's results of operations from the
effective dates of acquisition.
During fiscal 2001, the Company acquired Analog Modules, Inc., Aero
Design, Inc., Avitech Engineering Corporation, and Aviation Facilities, Inc. for
an aggregate purchase price of approximately $24.6 million. In addition, the
Company acquired Inertial Airline Services, Inc. for $20 million in cash and $5
million in HEICO Class A Common Stock (318,960 shares) paid at closing. The
Company guaranteed that the resale value of such Class A Common Stock would be
at least $5 million through August 31, 2002. Both parties originally agreed to
extend the guaranty to August 31, 2003 and then subsequently to August 31, 2004.
In October 2003, the seller sold 220,000 shares of the HEICO Class A Common
Stock and received net proceeds of $2.1 million. Based on the closing market
price of HEICO Class A Common Stock on October 31, 2003 and the value of the
remaining 98,960 shares, the Company would have been required to pay the seller
an additional amount of approximately $1.9 million in cash, which would have
been recorded as a reduction of shareholders' equity. Concurrent with the
purchase, the Company loaned the seller $5 million, which is due August 31, 2004
and was secured by the 318,960 shares of HEICO Class A Common Stock. The loan is
reflected as a reduction in the equity section of the Company's
16
consolidated balance sheet as a note receivable secured by Class A Common Stock.
The $2.1 million of net proceeds was used to reduce the $5 million loan.
During fiscal 2002 and fiscal 2003, the Company acquired Jetseal, Inc.
and Niacc Technology, Inc., respectively. The purchase price of each acquisition
was not significant to the Company's consolidated financial statements.
The purchase prices of these acquisitions were paid primarily by using
proceeds from the Company's credit facilities. Had the fiscal 2001, fiscal 2002,
and fiscal 2003 acquisitions been made at the beginning of their respective
fiscal years, the pro forma consolidated operating results would not have been
materially different from the reported results.
In October 1997, the Company entered into a strategic alliance with
Lufthansa Technik AG (Lufthansa), the technical services subsidiary of Lufthansa
German Airlines, whereby Lufthansa invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid to HEICO Aerospace pursuant to a
research and development cooperation agreement, which has partially funded the
accelerated development of additional FAA-approved replacement parts for jet
engines and aircraft components. The funds received as a result of the research
and development cooperation agreement reduced research and development expenses
in the periods such expenses were incurred. In addition, Lufthansa and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
support for jet engine and aircraft component replacement parts on a worldwide
basis. In connection with subsequent acquisitions by HEICO Aerospace, Lufthansa
invested additional amounts aggregating to approximately $21 million pursuant to
its option to maintain a 20% equity interest.
In February 2001, the Company entered into a joint venture with AMR
Corporation (AMR) to develop, design and sell FAA-approved jet engine and
aircraft component replacement parts through its subsidiary, HEICO Aerospace. As
part of the joint venture, AMR will reimburse HEICO Aerospace a portion of new
product research and development costs. The funds received as a result of the
new product research and development costs paid by AMR generally reduce new
product research and development expenses in the period such expenses are
incurred. The balance of the development costs are incurred by the joint
venture, which is 16% owned by AMR. In addition, AMR and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support on a
worldwide basis.
The Company's Board of Directors declared in December 2003 a 10% stock
dividend on both its Common Stock and its Class A Common Stock payable in shares
of its Class A Common Stock. The dividend is payable on January 16, 2004 to
shareholders of record as of January 6, 2004. All common share data and per
share data has been adjusted retroactively to give effect to the stock dividend.
CRITICAL ACCOUNTING POLICIES
The Company believes that the following are its most critical accounting
policies, some of which require management to make judgments about matters that
are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Variations in actual labor
performance, changes to estimated profitability and final contract settlements
may result in revisions to the cost estimates. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For contracts in which costs cannot be dependably estimated,
revenue is recognized on the completed-contract method. A contract is considered
complete
17
when all costs except insignificant items have been incurred or the item has
been accepted by the customer. The aggregate effects of changes in estimates
relating to inventories and/or long-term contracts did not have a significant
impact on net income and diluted net income per share in fiscal 2003 or fiscal
2002. Changes in estimates increased net income and diluted net income per share
by $700,000, or $.03 per share in fiscal 2001 as further explained in Notes 4
and 13 to the Consolidated Financial Statements.
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company set up an
allowance for estimated uncollectible accounts and record a corresponding charge
to bad debt expense. The Company estimates uncollectible receivables based on
such factors as its prior experience, its appraisal of a customer's ability to
pay, and economic conditions within and outside of the aerospace, defense and
electronics industries. Actual bad debt expense could differ from estimates
made.
Valuation of Inventories
Portions of the inventories are stated at the lower of cost or market,
with cost being determined on the first-in, first-out or the average cost basis.
The remaining portions of the inventories are stated at the lower of cost or
market, on a per contract basis, with estimated total contract costs being
allocated ratably to all units. The effects of changes in estimated total
contract costs are recognized in the period determined. Losses, if any, are
recognized fully when identified.
The Company periodically evaluates the carrying value of inventories,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates a reasonable amount to be provided for
slow moving, obsolete or damaged inventory. These estimates could vary
significantly, either favorably or unfavorably, from actual requirements based
upon future economic conditions, customer inventory levels or competitive
factors that were not foreseen or did not exist when the valuation allowances
were established.
Valuation of Goodwill
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 142,
the Company tests goodwill for impairment annually as of October 31 or more
frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any. The determination of fair value requires the Company
to make a number of estimates, assumptions and judgments. If there is a material
change in such assumptions used by the Company in determining fair value or if
there is a material change in the conditions or circumstances influencing fair
value, the Company could be required to recognize a material impairment charge.
Based on the annual goodwill test for impairment as of October 31, 2003, the
Company determined there is no impairment of its goodwill.
One of the Company's reporting units has experienced a decline in sales
to foreign military customers over the past fiscal year. The reporting unit is
actively developing various expanded capabilities, which are expected to result
in sales and earnings beginning in the later half of fiscal 2004 that the
Company believes will eventually more than offset the decline in foreign
military sales. The timing of such sales and earnings are primarily based upon
certain regulatory and sales matters. Using management's best estimates of these
assumptions, the Company determined that there is no impairment of the reporting
unit's goodwill as of October 31, 2003. Should the reporting unit incur a
significant delay in developing the expanded capabilities and successfully
selling and marketing them, the Company could be required to recognize an
impairment of all or a portion of the reporting unit's goodwill, which had a
carrying value of $17.0 million as of October 31, 2003.
18
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations, net
sales and operating income by operating segment, and the percentage of net sales
represented by the respective items in the Company's Consolidated Statements of
Operations.
For the year ended October 31,
---------------------------------------------------
2001 2002 2003
------------- ------------- -------------
Net sales $ 171,259,000 $ 172,112,000 $ 176,453,000
------------- ------------- -------------
Cost of sales 100,113,000 110,610,000 118,349,000
Selling, general and administrative expenses 40,155,000 39,102,000 34,899,000
------------- ------------- -------------
Total operating costs and expenses 140,268,000 149,712,000 153,248,000
------------- ------------- -------------
Operating income $ 30,991,000/(1)/ $ 22,400,000 $ 23,205,000
============= ============= =============
Net sales by segment:
Flight Support Group $ 132,459,000 $ 120,097,000 $ 128,277,000
Electronic Technologies Group 38,800,000 52,510,000 48,597,000
Intersegment sales -- (495,000) (421,000)
------------- ------------- -------------
$ 171,259,000 $ 172,112,000 $ 176,453,000
============= ============= =============
Operating income by segment:
Flight Support Group $ 27,454,000 $ 15,846,000 $ 19,187,000
Electronic Technologies Group 7,835,000 11,873,000 8,497,000
Other, primarily corporate (4,298,000) (5,319,000) (4,479,000)
------------- ------------- -------------
$ 30,991,000/(1)/ $ 22,400,000 $ 23,205,000
============= ============= =============
Net sales 100.0% 100.0% 100.0%
Gross profit 41.5% 35.7% 32.9%
Selling, general and administrative expenses 23.4% 22.7% 19.8%
Operating income 18.1% 13.0% 13.2%
Interest expense 1.5% 1.3% 0.7%
Interest and other income 0.9% 0.1% 0.1%
Gain on sale of product line -- 0.7% --
Income tax expense 6.7% 2.9% 4.5%
Minority interests 1.6% 0.8% 1.1%
Net income 9.2% 8.8% 6.9%
- ----------
(1) For the fiscal year ended October 31, 2001, pro forma operating income
as adjusted to exclude goodwill amortization as a result of the adoption
of SFAS No. 142, would have been $37,826,000 including pro forma
operating income of the Flight Support Group and the Electronic
Technologies Group of $32,469,000 and $9,655,000, respectively.
19
COMPARISON OF FISCAL 2003 TO FISCAL 2002
Net Sales
Net sales in fiscal 2003 totaled $176.5 million, up 3% when compared to
net sales of $172.1 million in fiscal 2002. The increase reflects higher sales
within the FSG, which increased 7% to $128.3 million in fiscal 2003 compared to
$120.1 million in fiscal 2002, partially offset by lower sales within the ETG,
which decreased 7% to $48.6 million in fiscal 2003 from $52.5 million in fiscal
2002. The sales increase within the FSG primarily reflects stronger repair and
overhaul related sales and higher commercial aftermarket parts and services
sales primarily attributable to sales of new products and services and improved
demand within the commercial aerospace industry in the later half of fiscal 2003
following the end of the impact of the military conflict in Iraq and SARS. The
sales decrease within the ETG is primarily attributed to a decline in demand
from certain foreign military customers.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 32.9% in fiscal 2003 as
compared to 35.7% in fiscal 2002. This decrease is primarily due to lower
margins within the ETG attributed to lower foreign military sales and lower
sales of other higher margin products. The FSG's gross profit margins in fiscal
2003 approximated fiscal 2002 margins. Cost of sales in fiscal 2003 and fiscal
2002 includes approximately $9.2 million and $9.7 million, respectively, of new
product research and development expenses net of reimbursements pursuant to
cooperation and joint venture agreements. The decline in new product research
and development expenses was in line with a decrease in the amount budgeted for
fiscal 2003 relative to actual fiscal 2002 expenses.
Selling, general and administrative (SG&A) expenses decreased $4.2
million to $34.9 million in fiscal 2003 from $39.1 million in fiscal 2002. The
decrease in SG&A expenses is mainly due to lower commission expenses within the
ETG due to the lower sales discussed previously, lower corporate expenses, and
reduced bad debt expenses within the FSG. Corporate expenses include the
reversal of approximately $400,000 of professional fees that were accrued in the
fourth quarter of fiscal 2002 pursuant to a contractual agreement, which was
renegotiated in the first quarter of fiscal 2003. Bad debt expenses were lower
within the FSG in fiscal 2003 due to bankruptcy filings by certain customers in
fiscal 2002. As a percentage of sales, SG&A expenses decreased to 19.8% in
fiscal 2003 compared to 22.7% in fiscal 2002. The decrease is primarily due to
higher sales volumes and lower bad debt expenses within the FSG, the reduction
in corporate expenses, and by lower sales of products bearing higher commission
rates within the ETG.
Operating Income
Operating income increased to $23.2 million in fiscal 2003 from $22.4
million in fiscal 2002. The increase in operating income reflects higher
operating income within the FSG, which increased to $19.2 million in fiscal 2003
from $15.8 million in fiscal 2002 and a $0.8 million reduction in corporate
expenses, partially offset by lower operating income within the ETG, which
decreased to $8.5 million in fiscal 2003 compared to $11.9 million in fiscal
2002. As a percentage of sales, operating income increased to 13.2% in fiscal
2003 from 13.0% in fiscal 2002. The increase in operating income as a percentage
of sales reflects an increase in the FSG's operating income as a percentage of
sales from 13.2% in fiscal 2002 to 15.0% in fiscal 2003, offset by a decrease in
the ETG's operating income as a percentage of sales from 22.6% in fiscal 2002 to
17.5% in fiscal 2003. The increase in the FSG's operating income as a percentage
of sales reflects the higher sales and lower bad debt expenses discussed above.
The decrease in the ETG's operating income as a percentage of sales reflects the
lower sales and gross profit margins discussed previously.
20
Interest Expense
Interest expense decreased to $1.2 million in fiscal 2003 from $2.2
million in fiscal 2002. The decrease was principally due to a lower weighted
average balance outstanding under the Company's revolving credit facilities in
fiscal 2003 and lower interest rates. Additional information about the Company's
credit facilities may be found within the caption "Financing Activities" which
follows within this Item 7.
Interest and Other Income
Interest and other income in fiscal 2003 approximated amounts in fiscal
2002.
Gain on Sale of Product Line
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 net of tax, or $.03 per diluted share) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions of the sales contract.
Income Tax Expense
The Company's effective tax rate was 35.6% in fiscal 2003 compared to
23.0% in fiscal 2002. Income tax expense in fiscal 2002 reflects the recovery of
a portion of taxes paid in prior years resulting from an income tax audit
completed in fiscal 2002, which increased net income by $2.1 million, or $.09
per diluted share, net of related expenses (including professional fees and
interest) as explained further in Note 7 to the Consolidated Financial
Statements. The recovery of taxes paid was the principal reason for the lower
effective tax in fiscal 2002. For a detailed analysis of the provision for
income taxes, see Note 7 to the Consolidated Financial Statements.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. Minority interests increased by $2.0 million
in fiscal 2003 as compared to an increase of $1.3 million in fiscal 2002 due
mainly to the higher earnings within the FSG.
Net Income
The Company's net income was $12.2 million, or $.50 per diluted share,
in fiscal 2003 compared to net income of $15.2 million, or $.62 per diluted
share in fiscal 2002. The lower net income in fiscal 2003 primarily reflects the
effect of the income tax recovery and gain on sale of a product line in fiscal
2002, which increased net income by an aggregate of $2.9 million, or $.12 per
diluted share, and higher minority interests in fiscal 2003 as discussed above
offset by slightly higher operating income in fiscal 2003.
Outlook
The Company experienced increased sales and operating income in the FSG
during fiscal 2003 compared to fiscal 2002. These improvements are a result of
the Company's ongoing new product development efforts and some strengthening in
the commercial aviation industry.
The Company's ETG saw improvement in sales and operating income during
the second half of fiscal 2003 compared to the prior year. The increase is
primarily due to strong product demand during the second half of the fiscal year
and the shipment of some products whose delivery was delayed in the first half
of the year.
21
The Company's acquisition within the satellite microwave component
industry (see Note 17 to the Consolidated Financial Statements) furthers its
product and customer diversification strategy. Revenues from the defense
industry and other markets, including industrial, medical, electronics and
telecommunications, represented approximately one-third of the Company's total
revenues in fiscal 2003.
Based on an anticipated strengthening of the economy, the Company's
continued success in introducing new products and services and the
aforementioned acquisition, the Company is targeting growth in fiscal 2004 sales
and earnings over fiscal 2003 results.
COMPARISON OF FISCAL 2002 TO FISCAL 2001
Net Sales
Net sales in fiscal 2002 totaled $172.1 million, up 1% when compared to
net sales of $171.3 million in fiscal 2001. The increase reflects higher sales
within the ETG, which increased 35% to $52.5 million in fiscal 2002 compared to
$38.8 million in fiscal 2001, partially offset by lower sales within the FSG,
which decreased 9% to $120.1 million in fiscal 2002 from $132.5 million in
fiscal 2001. The sales increase within the ETG is primarily attributed to
revenues resulting from acquisitions as the Company expanded its operations to
include laser and navigation technologies, partially offset by lower sales of
electromagnetic interference (EMI) shielding products to the electronics and
communications industries. The sales decrease within the FSG primarily reflects
lower commercial aftermarket parts and services sales as a result of the impact
of the September 11, 2001 terrorist attacks and continued weakness within the
commercial aviation industry, partially offset by sales from newly acquired
businesses. The fiscal 2002 increase in sales attributable to newly acquired
businesses of both the ETG and the FSG is approximately $22 million.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 35.7% in fiscal 2002 as
compared to 41.5% in fiscal 2001. This decrease is primarily due to lower
margins within the FSG attributed to lower sales of higher margin FAA-approved
replacement parts and a $1.9 million increase in new product research and
development expenses over fiscal 2001 spending. The decrease was partially
offset by slightly higher gross margins in the ETG due primarily to increased
sales of higher margin defense related products. Cost of sales in fiscal 2002
and fiscal 2001 includes approximately $9.7 million and $7.7 million,
respectively, of new product research and development expenses net of
reimbursements pursuant to cooperation and joint venture agreements. The fiscal
year-over-year increase in new product research and development expenses relates
primarily to the development of FAA-approved replacement parts. New product
development, which is critical to the Company's long-term growth, reduced
diluted earnings per share by approximately $.04 in fiscal 2002 versus fiscal
2001.
Selling, general and administrative (SG&A) expenses decreased $1.1
million to $39.1 million in fiscal 2002 from $40.2 million in fiscal 2001. The
decrease in SG&A expenses is mainly due to the elimination of goodwill
amortization as required under SFAS 142, partially offset by additional SG&A
expenses of newly acquired businesses and professional fees associated with a
recently completed income tax audit, which resulted in the recovery of a portion
of taxes paid in prior years as further explained within the caption "Income Tax
Expense" which follows within this Item 7. As a percentage of sales, SG&A
expenses decreased to 22.7% in fiscal 2002 compared to 23.4% in fiscal 2001. The
decrease is primarily due to the elimination of goodwill amortization, partially
offset by the impact of lower year-over-year sales, excluding sales from new
acquisitions, and the professional fees associated with the recently completed
income tax audit.
22
Operating Income
Operating income decreased to $22.4 million in fiscal 2002 from $31.0
million in fiscal 2001. As a percentage of sales, operating income decreased
from 18.1% in fiscal 2001 to 13.0% in fiscal 2002. The decrease in operating
income reflects lower operating income within the FSG, which decreased to $15.8
million in fiscal 2002 from $27.5 million in fiscal 2001, partially offset by
higher operating income within the ETG, which increased to $11.9 million in
fiscal 2002 compared to $7.8 million in fiscal 2001. The decline in operating
income as a percentage of sales reflects a decline in the FSG's operating income
as a percentage of sales from 20.7% in fiscal 2001 to 13.2% in fiscal 2002,
partially offset by an increase in the ETG's operating income as a percentage of
sales from 20.2% in fiscal 2001 to 22.6% in fiscal 2002. The decrease in the
FSG's operating income as a percentage of sales reflects the lower sales and
gross margins discussed above, partially offset by the elimination of goodwill
amortization. The increase in the ETG's operating income as a percentage of
sales reflects the higher sales and gross margins discussed above, and the
elimination of goodwill amortization.
Interest Expense
Interest expense decreased to $2.2 million in fiscal 2002 from $2.5
million in fiscal 2001. The decrease was principally due to lower interest rates
in fiscal 2002, partially offset by a higher weighted average balance
outstanding under the Company's former Credit Facility in fiscal 2002 related to
borrowings made during fiscal 2001 to fund acquisitions.
Interest and Other Income
Interest and other income decreased from $1.6 million in fiscal 2001 to
$97,000 in fiscal 2002. The decrease is mainly due to the inclusion in fiscal
2001 of a gain of $657,000 on the sale of property retained in the sale of the
Trilectron product line sold in fiscal 2000 and a realized gain of $180,000 on
the sale of long-term investments. The decrease also reflects lower investment
interest rates and other income in fiscal 2002.
Gain on Sale of Product Line
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 net of tax, or $.03 per diluted share) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions of the sales contract.
Income Tax Expense
Income tax expense in fiscal 2002 reflects the recovery of a portion of
taxes paid in prior years resulting from a recently completed income tax audit,
which increased net income by $2.1 million, or $.09 per diluted share, net of
related expenses (including professional fees and interest) as explained further
in Note 7 to the Consolidated Financial Statements. The recovery was the
principal reason for the reduction in the Company's effective tax rate from
38.1% in fiscal 2001 to 23.0% in fiscal 2002. The elimination of goodwill
amortization also contributed to the year-over-year decline in the effective tax
rate. For a detailed analysis of the provision for income taxes, see Note 7 to
the Consolidated Financial Statements.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. Minority interests decreased by $1.3 million
in fiscal 2002 as compared to an increase of $2.8 million in fiscal 2001 due
mainly to the lower earnings within the FSG.
23
Net Income
The Company's net income was $15.2 million, or $.62 per diluted share,
in fiscal 2002 compared to net income of $15.8 million, or $.65 per diluted
share in fiscal 2001. The slightly lower net income in fiscal 2002 reflects the
lower operating income discussed above, partially offset by the income tax
recovery, gain on sale of product line, and lower minority interests as
discussed above. Net income for fiscal 2001 as adjusted on a pro forma basis for
the adoption of SFAS 142 would have been $20.2 million, or $.82 per diluted
share.
INFLATION
The Company has generally experienced increases in its costs of labor,
materials and services consistent with overall rates of inflation. The impact of
such increases on the Company's net income has been generally minimized by
efforts to lower costs through manufacturing efficiencies and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
interest and principal on debt, capital expenditures and increases in working
capital.
The Company believes that its operating cash flow and available
borrowings under the Company's Credit Facility will be sufficient to fund cash
requirements for the foreseeable future.
Operating Activities
Cash flow from operations was $27.9 million for fiscal 2003, principally
reflecting net income of $12.2 million, depreciation and amortization of $5.1
million, deferred income tax provision of $3.5 million, minority interests in
consolidated subsidiaries of $2.0 million, and a decrease in net operating
assets of $4.7 million. The decrease in net operating assets (current assets
used in operations net of current liabilities) primarily reflects lower
inventories resulting from efforts to improve inventory turnover by reducing the
level of finished goods maintained on hand.
Cash flow from operations was $23.3 million for fiscal 2002, principally
reflecting net income of $15.2 million, depreciation and amortization of $4.5
million, deferred income tax provision of $3.9 million, and a tax benefit
related to stock option exercises of $2.9 million, partially offset by an
increase in net operating assets of $3.4 million. The increase in net operating
assets (current assets used in operations net of current liabilities) primarily
resulted from higher inventories and capitalized tooling costs in the FSG
associated with new products.
Cash flow from operations was $16.5 million for fiscal 2001, principally
reflecting net income of $15.8 million, depreciation and amortization of $10.6
million, and minority interests in consolidated subsidiaries of $2.8 million,
partially offset by an increase in net operating assets of $12.9 million. The
increase in net operating assets (current assets used in operations net of
current liabilities) primarily resulted from an increase in inventories to meet
increased PMA sales and the payment of income taxes of approximately $7 million
on the fiscal 2000 gain from the sale of Trilectron.
Investing Activities
Cash used in investing activities during the three fiscal year period
ended October 31, 2003 primarily relates to various acquisitions, including
contingent payments, totaling $67.3 million, including $61.2 million in fiscal
2001. For further details on acquisitions, see the caption "Overview" within
this Item 7. Capital expenditures aggregated to $16.6
24
million over the last three fiscal years, primarily reflecting the purchases of
new facilities and the expansion of existing production facilities and
capabilities. In fiscal 2001, the Company received $12.4 million as a result of
the sale of the Trilectron product line in fiscal 2000 and also received
proceeds of $9.2 million from the sale of long-term investments and property
that was held for disposition.
Financing Activities
The Company used cash provided by operating activities to make net
payments on its revolving credit facilities of $24.0 million in fiscal 2003 and
$11.0 million in fiscal 2002. In fiscal 2001, the Company incurred net
borrowings of $27.0 million under its former revolving credit facility to fund
acquisitions as further detailed within the caption "Overview" within this Item
7. For the three fiscal year period ended October 31, 2003, the Company received
proceeds from stock option exercises of $3.9 million and paid cash dividends
aggregating to $3.0 million.
In May 2003, the Company entered into a new $120 million revolving
credit agreement (new Credit Facility) with a bank syndicate, which contains
both revolving credit and term loan features. Borrowings outstanding under the
previous credit facility were repaid with borrowings under the new Credit
Facility, which expires in May 2006. The new Credit Facility may be used for
working capital and general corporate needs of the Company, including letters of
credit, and to finance acquisitions (generally not in excess of an aggregate
total of $30 million over any trailing twelve-month period without the requisite
approval of the bank syndicate). The Company has the option to extend the
revolving credit term for two one-year periods or to convert outstanding
advances as of the initial expiration date to term loans amortizing over the
subsequent twelve-month period subject to requisite bank syndicate approval.
Advances under the new Credit Facility accrue interest at the Company's choice
of the London Interbank Offered Rate (LIBOR), or the "Base Rate," plus
applicable margins (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, or "leverage
ratio"). The new Credit Facility is secured by substantially all assets other
than real property of the Company and its subsidiaries and contains covenants
which require, among other things, the maintenance of a leverage ratio and a
fixed charge coverage ratio as well as minimum net worth requirements. See Note
6 to the Consolidated Financial Statements for further information regarding the
Credit Facility.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating to
$1.2 million to meet the security requirement of its insurance company for
potential workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a $0.5 million
letter of credit expiring July 2004. These letters of credit are supported by
the Company's Credit Facility. In addition, the Company's industrial development
revenue bonds are secured by a $2.0 million letter of credit expiring February
2004 and a mortgage on the related properties pledged as collateral.
NEW ACCOUNTING STANDARDS
On November 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board (APB) Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 develops one accounting model (based on
the model in SFAS No. 121) for long-lived assets that are to be disposed of by
sale, as well as addresses the principal implementation issues. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of carrying value or fair value less cost to sell. That requirement
eliminates the requirement of APB Opinion No. 30 that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for
25
operating losses that have not yet occurred. Additionally, SFAS No. 144 expands
the scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS No. 144 did not have a material effect on the
Company's results of operations or financial position.
On November 1, 2002, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement eliminates the SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," requirement that gains and losses
from extinguishment of debt be classified as an extraordinary item, and requires
that such gains and losses be evaluated for extraordinary classification under
the criteria of APB Opinion No. 30. This statement also amends SFAS No. 13,
"Accounting for Leases," to require that certain lease modifications that have
economic effects that are similar to sales-leaseback transactions be accounted
for in the same manner as sales-leaseback transactions. SFAS No. 145 also makes
various other technical corrections to existing pronouncements. The adoption of
SFAS No. 145 did not have a material effect on the Company's results of
operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
(EITF 00-21). This Issue addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. EITF 00-21 provides guidance to determine how arrangement
consideration should be measured, whether an arrangement should be divided into
separate units of accounting, and how arrangement consideration should be
allocated among separate units of accounting. The provisions of EITF 00-21 are
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material effect
on the Company's results of operations or financial position.
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statement
periods ending after December 15, 2002. The Company adopted FIN 45 effective as
of its first quarter of fiscal 2003, which did not have a material effect on the
Company's results of operations or financial position. The disclosures made
pursuant to FIN 45 may be found in Note 15 to the Consolidated Financial
Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002. The
transition guidance and annual disclosure requirements are effective for fiscal
years ending after December 15, 2002. The adoption of SFAS No. 148 did not have
a material effect on the Company's results of operations or financial position.
The disclosures pursuant to SFAS No. 148 may be found in Notes 1 and 9 to the
Consolidated Financial Statements.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination
26
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires recognition of a liability for a
cost associated with an exit or disposal activity at fair value when the
liability is incurred. Previously, a liability for an exit cost was recognized
when the entity committed to an exit plan under EITF Issue No. 94-3. The
adoption of SFAS No. 146 did not have a material effect on the Company's results
of operations or financial position, but may affect the timing and amounts of
the recognition of future restructuring costs.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an enterprise
to consolidate a variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive a majority of
the entity's expected residual returns, or both. FIN 46 also requires
disclosures about unconsolidated variable interest entities in which an
enterprise holds a significant variable interest. FIN 46 is currently effective
for variable interest entities created or entered into after January 31, 2003.
FASB Staff Position 46-6, which was issued in October 2003, delayed the
effective date of FIN 46 to the first reporting period ending after December 15,
2003 for variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
the adoption of FIN 46 to have a material effect on its results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language of an "underlying" to conform it to
language used in FIN 45, and amends certain other existing pronouncements. The
provisions of SFAS No. 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect
on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances),
which, under previous guidance, may have been classified as equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall generally be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's results
of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in values of
financial instruments, including interest rate risk and liquidity risk. The
Company engages in transactions in the normal course of business that expose it
to market risks. The primary market risk to which the Company has exposure is
interest rate risk, mainly related to its revolving credit facility and
industrial revenue bonds, which had an aggregate outstanding balance of $32.0
million at October 31, 2003. Interest rates on the revolving credit facility
borrowings are based on LIBOR plus a variable margin, while interest rates on
the industrial development revenue bonds are based on variable rates. Interest
rate risk associated with the Company's variable rate debt is the potential
increase in interest expense from an increase in interest rates. Based on the
outstanding debt balance at October 31, 2003, a hypothetical 10% increase in
interest rates would increase the Company's interest expense by approximately
$80,000 in fiscal 2004.
27
The Company maintains a portion of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a hypothetical 10% increase in interest rates as of October 31,
2003 would not have a material effect on the Company's results of operations or
financial position.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.................................................................. 30
Consolidated Balance Sheets as of October 31, 2003 and 2002................................... 31
Consolidated Statements of Operations for the years ended October 31, 2003, 2002 and 2001..... 33
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years
ended October 31, 2003, 2002 and 2001........................................................ 34
Consolidated Statements of Cash Flows for the years ended October 31, 2003, 2002 and 2001..... 35
Notes to Consolidated Financial Statements.................................................... 36
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of HEICO Corporation:
We have audited the accompanying consolidated balance sheets of HEICO
Corporation and subsidiaries (the "Company") as of October 31, 2003 and 2002,
and the related consolidated statements of operations, of shareholders' equity
and comprehensive income, and of cash flows for each of the three years in the
period ended October 31, 2003. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
January 9, 2004
30
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 4,321,000 $ 4,539,000
Accounts receivable, net ..................................................... 28,820,000 28,407,000
Inventories .................................................................. 51,240,000 54,514,000
Prepaid expenses and other current assets .................................... 6,231,000 7,811,000
Deferred income taxes ........................................................ 3,872,000 3,295,000
-------------- --------------
Total current assets ....................................................... 94,484,000 98,566,000
Property, plant and equipment, net ............................................. 35,537,000 40,059,000
Goodwill, net .................................................................. 188,700,000 187,677,000
Other assets ................................................................... 14,523,000 10,030,000
-------------- --------------
Total assets ............................................................... $ 333,244,000 $ 336,332,000
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
31
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ......................................... $ 29,000 $ 6,756,000
Trade accounts payable ....................................................... 7,475,000 7,640,000
Accrued expenses and other current liabilities ............................... 14,362,000 14,935,000
Income taxes payable ......................................................... 820,000 --
-------------- --------------
Total current liabilities .................................................. 22,686,000 29,331,000
Long-term debt, net of current maturities ...................................... 31,984,000 49,230,000
Deferred income taxes .......................................................... 10,337,000 6,240,000
Other non-current liabilities .................................................. 6,142,000 6,154,000
-------------- --------------
Total liabilities .......................................................... 71,149,000 90,955,000
-------------- --------------
Minority interests in consolidated subsidiaries ................................ 40,577,000 38,313,000
-------------- --------------
Commitments and contingencies (Notes 2 and 15)
Shareholders' equity:
Preferred Stock, par value $.01 per share; Authorized -- 10,000,000
shares issuable in series; 200,000 shares designated as Series A Junior
Participating Preferred Stock, none issued .................................. -- --
Common Stock, $.01 par value; Authorized -- 30,000,000 shares;
Issued and Outstanding -- 9,690,945 and 9,380,174 shares,
respectively ................................................................ 97,000 94,000
Class A Common Stock, $.01 par value; Authorized -- 30,000,000
shares; Issued and Outstanding -- 13,876,496 and 13,665,232
shares, respectively (Note 17) .............................................. 117,000 116,000
Capital in excess of par value ............................................... 155,064,000 153,847,000
Retained earnings ............................................................ 69,172,000 58,007,000
-------------- --------------
224,450,000 212,064,000
Less: Note receivable secured by Class A Common Stock ........................ (2,932,000) (5,000,000)
-------------- --------------
Total shareholders' equity ................................................. 221,518,000 207,064,000
-------------- --------------
Total liabilities and shareholders' equity ................................. $ 333,244,000 $ 336,332,000
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
32
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net sales ................................................................. $ 176,453,000 $ 172,112,000 $ 171,259,000
-------------- -------------- --------------
Operating costs and expenses:
Cost of sales ........................................................... 118,349,000 110,610,000 100,113,000
Selling, general and administrative expenses ............................ 34,899,000 39,102,000 40,155,000
-------------- -------------- --------------
Total operating costs and expenses ........................................ 153,248,000 149,712,000 140,268,000
-------------- -------------- --------------
Operating income .......................................................... 23,205,000 22,400,000 30,991,000
Interest expense .......................................................... (1,189,000) (2,248,000) (2,486,000)
Interest and other income ................................................. 93,000 97,000 1,598,000
Gain on sale of product line .............................................. -- 1,230,000 --
-------------- -------------- --------------
Income before income taxes and minority interests ......................... 22,109,000 21,479,000 30,103,000
Income tax expense ........................................................ 7,872,000 4,930,000 11,480,000
-------------- -------------- --------------
Income before minority interests .......................................... 14,237,000 16,549,000 18,623,000
Minority interests in consolidated subsidiaries ........................... 2,015,000 1,323,000 2,790,000
-------------- -------------- --------------
Net income ................................................................ $ 12,222,000 $ 15,226,000 $ 15,833,000
============== ============== ==============
Net income per share (Note 17):
Basic ................................................................... $ .53 $ .66 $ .72
Diluted ................................................................. $ .50 $ .62 $ .65
Weighted average number of common shares outstanding (Note 17):
Basic ................................................................... 23,236,841 23,003,784 21,917,458
Diluted ................................................................. 24,531,280 24,732,679 24,535,902
The accompanying notes are an integral part of these
consolidated financial statements.
33
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE
STOCK STOCK PAR VALUE LOSS
-------- --------- -------------- -------------
Balances as of October 31, 2000 ....................... $ 85,000 $ 90,000 $ 111,138,000 $ (632,000)
10% Common and Class A stock dividend
paid in Class A shares ............................... -- 19,000 31,648,000 --
Shares issued in connection with business
acquisition (Note 2) ................................. -- 3,000 4,997,000 --
Exercises of stock options ............................ 8,000 3,000 2,420,000 --
Tax benefit from stock option exercises ............... -- -- 334,000 --
Payment on note receivable from employee
savings and investment plan .......................... -- -- -- --
Cash dividends ($.041 per share) ...................... -- -- -- --
Net income for the year ............................... -- -- -- --
Unrealized gain on investments, net of tax
expense of $394,000 .................................. -- -- -- 632,000
Unrealized loss on interest rate swap, net of
tax benefit of $144,000 .............................. -- -- -- (226,000)
Comprehensive income .................................. -- -- -- --
Other ................................................. -- -- 68,000 --
-------- --------- -------------- -------------
Balances as of October 31, 2001 ....................... 93,000 115,000 150,605,000 (226,000)
Repurchase of stock ................................... -- -- (200,000) --
Exercises of stock options ............................ 1,000 1,000 436,000 --
Tax benefit from stock option exercises ............... -- -- 2,944,000 --
Payment on note receivable from employee
savings and investment plan .......................... -- -- -- --
Cash dividends ($.045 per share) ...................... -- -- -- --
Net income for the year ............................... -- -- -- --
Unrealized gain on interest rate swap, net of
tax expense of $144,000 .............................. -- -- -- 226,000
Comprehensive income .................................. -- -- -- --
Other ................................................. -- -- 62,000 --
-------- --------- -------------- -------------
Balances as of October 31, 2002 ....................... 94,000 116,000 153,847,000 --
Repurchase of stock ................................... -- -- (120,000) --
Exercises of stock options ............................ 3,000 1,000 985,000 --
Tax benefit from stock option exercises ............... -- -- 348,000 --
Cash dividends ($.045 per share) ...................... -- -- -- --
Net income for the year ............................... -- -- -- --
Comprehensive income .................................. -- -- -- --
Proceeds from shares sold in connection
with business acquisition (Note 15) .................. -- -- -- --
Other ................................................. -- -- 4,000 --
-------- --------- -------------- -------------
Balances as of October 31, 2003 ....................... $ 97,000 $ 117,000 $ 155,064,000 $ --
======== ========= ============== =============
RETAINED NOTES COMPREHENSIVE
EARNINGS RECEIVABLE INCOME
-------------- ------------- -------------
Balances as of October 31, 2000 ....................... $ 60,614,000 $ (1,451,000)
10% Common and Class A stock dividend
paid in Class A shares ............................... (31,709,000) --
Shares issued in connection with business
acquisition (Note 2) ................................. -- (5,000,000)
Exercises of stock options ............................ -- --
Tax benefit from stock option exercises ............... -- --
Payment on note receivable from employee
savings and investment plan .......................... -- 803,000
Cash dividends ($.041 per share) ...................... (900,000) --
Net income for the year ............................... 15,833,000 -- $ 15,833,000
Unrealized gain on investments, net of tax
expense of $394,000 .................................. -- -- 632,000
Unrealized loss on interest rate swap, net of
tax benefit of $144,000 .............................. -- -- (226,000)
-------------
Comprehensive income .................................. -- -- $ 16,239,000
=============
Other ................................................. (8,000) --
-------------- -------------
Balances as of October 31, 2001 ....................... 43,830,000 (5,648,000)
Repurchase of stock ................................... -- --
Exercises of stock options ............................ -- --
Tax benefit from stock option exercises ............... -- --
Payment on note receivable from employee
savings and investment plan .......................... -- 648,000
Cash dividends ($.045 per share) ...................... (1,045,000) --
Net income for the year ............................... 15,226,000 -- $ 15,226,000
Unrealized gain on interest rate swap, net of
tax expense of $144,000 .............................. -- -- 226,000
-------------
Comprehensive income .................................. -- -- $ 15,452,000
=============
Other ................................................. (4,000) --
-------------- -------------
Balances as of October 31, 2002 ....................... 58,007,000 (5,000,000)
Repurchase of stock ................................... -- --
Exercises of stock options ............................ -- --
Tax benefit from stock option exercises ............... -- --
Cash dividends ($.045 per share) ...................... (1,055,000) --
Net income for the year ............................... 12,222,000 -- $ 12,222,000
-------------
Comprehensive income .................................. -- -- $ 12,222,000
=============
Proceeds from shares sold in connection
with business acquisition (Note 15) .................. -- 2,068,000
Other ................................................. (2,000) --
-------------- -------------
Balances as of October 31, 2003 ....................... $ 69,172,000 $ (2,932,000)
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
34
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Operating Activities:
Net income ................................................................ $ 12,222,000 $ 15,226,000 $ 15,833,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................... 5,081,000 4,532,000 10,588,000
Gain on sale of product line ............................................ -- (1,230,000) --
Gain on sale of property held for disposition ........................... -- -- (657,000)
Gain on sale of investments ............................................. -- -- (180,000)
Deferred income tax provision ........................................... 3,520,000 3,917,000 760,000
Minority interests in consolidated subsidiaries ......................... 2,015,000 1,323,000 2,790,000
Tax benefit from stock option exercises ................................. 348,000 2,944,000 334,000
Change in assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in accounts receivable ............................ (101,000) 3,421,000 1,194,000
Decrease (increase) in inventories .................................... 3,705,000 (2,996,000) (6,773,000)
Decrease (increase) in prepaid expenses and other current assets ...... 1,653,000 (2,967,000) (329,000)
(Decrease) increase in trade account payables, accrued expenses
and other current liabilities ........................................ (1,390,000) (588,000) 1,154,000
Increase (decrease) in income taxes payable ........................... 820,000 (564,000) (8,147,000)
Other ................................................................. 6,000 267,000 (37,000)
-------------- -------------- --------------
Net cash provided by operating activities ................................. 27,879,000 23,285,000 16,530,000
-------------- -------------- --------------
Investing Activities:
Capital expenditures .................................................... (3,771,000) (5,853,000) (6,927,000)
Acquisitions, net of cash acquired, including contingent payments ....... (1,554,000) (4,515,000) (61,207,000)
Proceeds from receivable from sale of product line ...................... -- -- 12,412,000
Proceeds from sale of long-term investments ............................. -- -- 7,039,000
Proceeds from sale of property held for disposition ..................... -- -- 2,157,000
Payment received from employee savings and investment plan note
receivable ............................................................. -- 648,000 803,000
Other ................................................................... 118,000 (1,664,000) (160,000)
-------------- -------------- --------------
Net cash used in investing activities ................................... (5,207,000) (11,384,000) (45,883,000)
-------------- -------------- --------------
Financing Activities:
(Payments) borrowings on revolving credit facilities, net ............... (24,000,000) (11,000,000) 27,000,000
Proceeds from exercises of stock options ................................ 989,000 438,000 2,431,000
Cash dividends paid ..................................................... (1,055,000) (1,045,000) (941,000)
Repurchases of common stock ............................................. (120,000) (200,000) --
Minority interest investment ............................................ 249,000 -- 414,000
Other ................................................................... 1,047,000 112,000 (25,000)
-------------- -------------- --------------
Net cash (used in) provided by financing activities ..................... (22,890,000) (11,695,000) 28,879,000
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents .................... (218,000) 206,000 (474,000)
Cash and cash equivalents at beginning of year .......................... 4,539,000 4,333,000 4,807,000
-------------- -------------- --------------
Cash and cash equivalents at end of year ................................ $ 4,321,000 $ 4,539,000 $ 4,333,000
============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
35
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HEICO Corporation, through its principal subsidiaries HEICO Aerospace
Holdings Corp. (HEICO Aerospace) and HEICO Electronic Technologies Corp. (HEICO
Electronic) and their subsidiaries (collectively, the Company), is principally
engaged in the design, manufacture and sale of aerospace, defense and
electronics related products and services throughout the United States and
internationally. HEICO Aerospace's principal subsidiaries include HEICO
Aerospace Corporation, Jet Avion Corporation, LPI Industries Corporation,
Aircraft Technology, Inc., Northwings Accessories Corporation, McClain
International, Inc., Rogers-Dierks, Inc., Air Radio & Instruments Corp., Turbine
Kinetics, Inc., Thermal Structures, Inc., Future Aviation, Inc., Aero Design,
Inc., Avitech Engineering Corporation, HEICO Aerospace Parts Corp., Aviation
Facilities, Inc., Jetseal, Inc. and Niacc Technology, Inc. HEICO Electronic's
principal subsidiaries include Radiant Power Corp., Leader Tech, Inc., Santa
Barbara Infrared, Inc., Analog Modules, Inc. and Inertial Airline Services, Inc.
The Company's customer base is primarily the commercial airline, defense and
electronics industries. As of October 31, 2003, the Company's principal
operations are located in Glastonbury, Connecticut; Atlanta, Georgia; Cleveland,
Ohio; Anacortes and Spokane, Washington; Corona, Fresno, Hayward, and Santa
Barbara, California; and Fort Myers, Hollywood, Miami, Orlando, Sarasota, Tampa
and Titusville, Florida.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HEICO
Corporation and its subsidiaries, all of which are wholly-owned except for HEICO
Aerospace, which is 20%-owned by Lufthansa Technik AG (Lufthansa), the technical
services subsidiary of Lufthansa German Airlines. In addition, HEICO Aerospace
consolidates a joint venture formed in February 2001 (Note 2), which is
16%-owned by American Airlines' parent company, AMR Corporation (AMR), and an
80%-owned subsidiary. HEICO Aerospace also accounts for a 50%-owned joint
venture formed in fiscal 2002 under the equity method. The Company's investment
in the 50%-owned joint venture and its share of its operating results were not
significant to the Company's consolidated financial statements. All significant
intercompany balances and transactions are eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
36
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
INVENTORIES
Portions of the inventories are stated at the lower of cost or market,
with cost being determined on the first-in, first-out or the average cost basis.
The remaining portions of the inventories are stated at the lower of cost or
market, on a per contract basis, with estimated total contract costs being
allocated ratably to all units. The effects of changes in estimated total
contract costs are recognized in the period determined. Losses, if any, are
recognized fully when identified.
TOOLING COSTS
Tooling costs are capitalized, generally as a component of other assets,
and amortized over their estimated useful lives, ranging from 2 to 5 years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided mainly on the straight-line method over the estimated
useful lives of the various assets. Property, plant and equipment useful lives
are as follows:
Buildings and components..................... 7 to 55 years
Building and leasehold improvements.......... 3 to 15 years
Machinery and equipment...................... 3 to 20 years
The costs of major renewals and betterments are capitalized. Repairs and
maintenance are charged to operations as incurred. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any
related gain or loss is reflected in earnings.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective
November 1, 2001. SFAS No. 142 eliminated the amortization of goodwill. Prior to
the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis
over periods ranging from 20 to 40 years. Pursuant to SFAS No. 142, the Company
tests goodwill for impairment annually as of October 31 or more frequently if
events or changes in circumstance indicate that the carrying amount of these
assets may not be fully recoverable. The test requires the Company to compare
the fair value of each of its reporting units to its carrying value to determine
potential impairment. If the carrying value of a reporting unit exceeds its fair
value, the implied fair value of that reporting unit's goodwill is to be
calculated and an impairment loss shall be recognized in the amount by which the
carrying value of a reporting unit's goodwill exceeds its implied fair value, if
any.
The Company's intangible assets subject to amortization under SFAS No.
142 consist primarily of licenses, patents and non-compete covenants and are
amortized on the straight-line method over their legal or estimated useful
lives, ranging from 3 to 20 years.
37
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
trade accounts payable and accrued expenses and other current liabilities
approximate fair value due to the relatively short maturity of the respective
instruments. The carrying value of long-term debt approximates fair market value
due to its floating interest rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions and limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different geographical regions.
Long-term investments (included within the caption "Other assets" in the
Company's consolidated balance sheet) are stated at fair value based on quoted
market prices.
INTEREST RATE SWAP AGREEMENTS
Periodically, the Company enters into interest rate swap agreements to
manage interest expense related to its $120 million revolving credit facility
(Credit Facility). Interest rate risk associated with the Company's variable
rate Credit Facility is the potential increase in interest expense from an
increase in interest rates. A derivative instrument (e.g. interest rate swap
agreement) that hedges the variability of cash flows related to a recognized
liability is designated as a cash flow hedge.
On an ongoing basis, the Company assesses whether derivative instruments
used in hedging transactions are highly effective in offsetting changes in cash
flows of the hedged items and therefore qualify as cash flow hedges. For a
derivative instrument that qualifies as a cash flow hedge, the effective portion
of changes in fair value of the derivative is deferred and recorded as a
component of other comprehensive income until the hedged transaction occurs and
is recognized in earnings. All other portions of changes in the fair value of a
cash flow hedge are recognized in earnings immediately.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For contracts in which costs cannot be dependably estimated,
revenue is recognized on the completed-contract method. A contract is considered
complete when all costs except insignificant items have been incurred or the
item has been accepted by the customer. The aggregate effects of changes in
estimates relating to inventories and/or long-term contracts were not material
except as noted in Notes 4 and 13 to the Consolidated Financial Statements.
Revenues earned from rendering services represented less than 10% of
consolidated net sales for all periods presented.
LONG-TERM CONTRACTS
Accounts receivable and accrued expenses and other current liabilities
include amounts related to the production of products under fixed-price
contracts exceeding terms of one year. Revenues are recognized on the
percentage-of-completion method for certain of these contracts, measured by the
percentage of costs incurred to date to estimated total costs for each contract.
This method is used because management considers costs incurred to be the best
available measure of progress on these contracts. Revenues are recognized on the
completed-contract method for certain other
38
contracts. This method is used when the Company does not have adequate
historical data to ensure that estimates are reasonably dependable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Variations in actual labor performance, changes to
estimated profitability and final contract settlements may result in revisions
to cost estimates and are recognized in income in the period in which the
revisions are determined.
The asset, "costs and estimated earnings in excess of billings" on
uncompleted percentage-of-completion contracts, included in accounts receivable,
represents revenues recognized in excess of amounts billed. The liability,
"billings in excess of costs and estimated earnings," included in accrued
expenses and other current liabilities, represents billings in excess of
revenues recognized on contracts accounted for under either the
percentage-of-completion method or the completed-contract method. Billings are
made based on the completion of certain milestones as provided for in the
contracts.
INCOME TAXES
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from periods
recognized for income tax purposes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period plus potentially dilutive
common shares arising from the assumed exercise of stock options, if dilutive.
The dilutive impact of potentially dilutive common shares is determined by
applying the treasury stock method. All common share data and per share data has
been adjusted retroactively to give effect to any stock dividends (see Notes 8
and 17).
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation expense has been recorded in the accompanying
consolidated financial statements for those options granted below fair market
value of the underlying stock on the date of grant. The following table
illustrates the pro forma effects on net income and net income per share as if
the Company had applied the fair-value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model.
39
For the year ended October 31,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net income, as reported ......................................... $ 12,222,000 $ 15,226,000 $ 15,833,000
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects ............. 3,000 38,000 41,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects ............................................ (1,724,000) (3,883,000) (4,395,000)
-------------- -------------- --------------
Pro forma net income ............................................ $ 10,501,000 $ 11,381,000 $ 11,479,000
============== ============== ==============
Net income per share:
Basic - as reported ........................................... $ .53 $ .66 $ .72
Basic - pro forma ............................................. $ .45 $ .49 $ .52
Diluted - as reported ......................................... $ .50 $ .62 $ .65
Diluted - pro forma ........................................... $ .43 $ .46 $ .47
CONTINGENCIES
Losses for contingencies such as product warranties, litigation and
environmental matters are recognized in income when they are probable and can be
reasonably estimated. Gain contingencies are not recognized in income until they
have been realized.
NEW ACCOUNTING STANDARDS
On November 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board (APB) Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 develops one accounting model (based on
the model in SFAS No. 121) for long-lived assets that are to be disposed of by
sale, as well as addresses the principal implementation issues. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of carrying value or fair value less cost to sell. That requirement
eliminates the requirement of APB Opinion No. 30 that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that have
not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The adoption of SFAS
No. 144 did not have a material effect on the Company's results of operations or
financial position.
On November 1, 2002, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement eliminates the SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," requirement that gains and losses
from extinguishment of debt be classified as an extraordinary item, and requires
that such gains and losses be evaluated for extraordinary
40
classification under the criteria of APB Opinion No. 30. This statement also
amends SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects that are similar to sales-leaseback
transactions be accounted for in the same manner as sales-leaseback
transactions. SFAS No. 145 also makes various other technical corrections to
existing pronouncements. The adoption of SFAS No. 145 did not have a material
effect on the Company's results of operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
(EITF 00-21). This Issue addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. EITF 00-21 provides guidance to determine how arrangement
consideration should be measured, whether an arrangement should be divided into
separate units of accounting, and how arrangement consideration should be
allocated among separate units of accounting. The provisions of EITF 00-21 are
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material effect
on the Company's results of operations or financial position.
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statement
periods ending after December 15, 2002. The Company adopted FIN 45 effective as
of its first quarter of fiscal 2003, which did not have a material effect on the
Company's results of operations or financial position. The disclosures made
pursuant to FIN 45 may be found in Note 15.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002. The
transition guidance and annual disclosure requirements are effective for fiscal
years ending after December 15, 2002. The adoption of SFAS No. 148 did not have
a material effect on the Company's results of operations or financial position.
The disclosures pursuant to SFAS No. 148 may be found in Notes 1 and 9.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition
of a liability for a cost associated with an exit or disposal activity at fair
value when the liability is incurred. Previously, a liability for an exit cost
was recognized when the entity committed to an exit plan under EITF Issue No.
94-3. The adoption of SFAS No. 146 did not have a material effect on the
Company's results of operations or financial position, but may affect the timing
and amounts of the recognition of future restructuring costs.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling
41
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 requires an enterprise to consolidate a variable interest
entity if that enterprise will absorb a majority of the entity's expected
losses, is entitled to receive a majority of the entity's expected residual
returns, or both. FIN 46 also requires disclosures about unconsolidated variable
interest entities in which an enterprise holds a significant variable interest.
FIN 46 is currently effective for variable interest entities created or entered
into after January 31, 2003. FASB Staff Position 46-6, which was issued in
October 2003, delayed the effective date of FIN 46 to the first reporting period
ending after December 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not expect the adoption of FIN 46 to have a material effect on
its results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language of an "underlying" to conform it to
language used in FIN 45, and amends certain other existing pronouncements. The
provisions of SFAS No. 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect
on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances),
which, under previous guidance, may have been classified as equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall generally be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's results
of operations or financial position.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
ACQUISITIONS
In April 2001, the Company, through a subsidiary, acquired substantially
all of the assets and certain liabilities of Analog Modules, Inc. (AMI) for
$15.6 million in cash. The purchase price was paid using proceeds from the
Company's Credit Facility. AMI is engaged in the design and manufacture of
electronic products primarily for use in the laser and electro-optics
industries.
In August 2001, the Company, through a subsidiary, acquired Inertial
Airline Services, Inc. (IAS) pursuant to a stock purchase agreement, for $20
million in cash and $5 million in HEICO Class A Common Stock (318,960 shares)
paid at closing. The Company guaranteed that the resale value of such Class A
Common Stock would be at least $5 million. Concurrent with the purchase, the
Company loaned the seller $5 million, which was secured by the 318,960 shares of
HEICO Class A Common Stock. The purchase price, including the loan, was financed
using proceeds from the Company's Credit Facility. IAS is engaged primarily in
the repair and overhaul of inertial navigation systems and other avionics
equipment, which are used by commercial, military and business aircraft. See
Note 15 - Commitments and Contingencies for additional disclosures related to
this transaction.
During fiscal 2001, the Company, through subsidiaries, also acquired
certain assets and liabilities of Avitech Engineering Corporation (Avitech),
Aviation Facilities, Inc. (AFI) and Aero Design, Inc. The purchase price of each
acquisition was insignificant and in total aggregated to approximately $9
million. Aero Design, Inc. and AFI are in the business of design and manufacture
of FAA-approved replacement parts. Avitech is engaged in the repair
42
and overhaul of aircraft components and accessories principally serving the
regional commuter and business aircraft market.
In November 2001, the Company, through a subsidiary, acquired certain
assets and liabilities of Jetseal, Inc. (Jetseal). Jetseal is engaged in the
manufacture of compression seals. In May 2003, the Company, through a
subsidiary, acquired substantially all of the assets and liabilities of Niacc
Technology, Inc. (Niacc). Niacc is engaged in the repair and overhaul of
aircraft components and accessories principally serving the regional commuter
and business aircraft market.
All of the acquisitions described above were accounted for using the
purchase method of accounting and the results of each company were included in
the Company's results from their effective purchase dates. The purchase price of
each acquisition was not significant to the Company's consolidated financial
statements and the pro forma consolidated operating results assuming each
acquisition had been consummated as of the beginning of its respective fiscal
year would not have been materially different from the reported results. The
costs of each acquisition have been allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition as
determined by management (See Note 16 - Supplemental Disclosures of Cash Flow
Information). The allocation of the purchase price for the fiscal 2003
acquisition of Niacc is preliminary while the Company obtains final information
regarding the fair value of assets acquired and liabilities assumed.
STRATEGIC ALLIANCES AND SALE OF MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
In October 1997, the Company entered into a strategic alliance with
Lufthansa, whereby Lufthansa invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid over four years to HEICO Aerospace
pursuant to a research and development cooperation agreement, which has
partially funded the accelerated development of additional Federal Aviation
Administration (FAA)-approved replacement parts for jet engines and aircraft
components. The funds received as a result of the research and development
cooperation agreement reduced research and development expenses in the periods
such expenses were incurred. In addition, Lufthansa and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support for jet
engine and aircraft component replacement parts on a worldwide basis. In
connection with subsequent acquisitions by HEICO Aerospace, Lufthansa invested
additional amounts aggregating to approximately $21 million pursuant to its
option to maintain a 20% equity interest.
In February 2001, the Company entered into a joint venture with AMR to
develop, design and sell FAA-approved jet engine and aircraft component
replacement parts through its subsidiary, HEICO Aerospace. As part of the joint
venture, AMR will reimburse HEICO Aerospace a portion of new product research
and development costs. The funds received as a result of the new product
research and development costs paid by AMR generally reduce new product research
and development expenses in the period such expenses are incurred. The balance
of the development costs are incurred by the joint venture, which is 16% owned
by AMR. In addition, AMR and HEICO Aerospace have agreed to cooperate regarding
technical services and marketing support on a worldwide basis. See Note 11 for
additional disclosures on research and development expenses.
3. SALE OF PRODUCT LINE
In September 2000, the Company consummated the sale of all of the
outstanding capital stock of HEICO Electronic's wholly-owned subsidiary,
Trilectron Industries, Inc. (Trilectron), to a subsidiary of Illinois Tool Works
Inc. In consideration of the sale of Trilectron's capital stock, the Company
received $52.5 million in cash, an unsecured non-interest bearing promissory
note for $12.0 million payable in three equal installments over 90 days, a
purchase price adjustment of $4.5 million based on the net worth of Trilectron
as of the closing date of the sale, and retained certain property having a book
value of approximately $1.5 million, which was sold in fiscal 2001. The proceeds
from the sale were used to pay down the outstanding balance on the Company's
Credit Facility.
43
The sale of Trilectron resulted in a pretax gain in fiscal 2000 of
$17,296,000 ($10,542,000 or $.44 per diluted share, net of income tax). The
pretax gain is net of expenses of $10.8 million directly related to the
transaction.
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 or $.03 per diluted share, net of income tax) on the sale
of the Trilectron product line due to the elimination of certain reserves upon
the expiration of indemnification provisions entered into in connection with the
sale of Trilectron.
4. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Accounts receivable ........................................ $ 29,455,000 $ 30,029,000
Less: Allowance for doubtful accounts ...................... (635,000) (1,622,000)
-------------- --------------
Accounts receivable, net ............................. $ 28,820,000 $ 28,407,000
============== ==============
In fiscal 2002 and fiscal 2001, the Company wrote off receivables
aggregating to $813,000 and $577,000, respectively, as a result of bankruptcy
filings by certain customers. The charges are included in selling, general and
administrative expenses in the Company's consolidated statements of operations.
The charges reduced fiscal 2002 and fiscal 2001 net income by $442,000 ($.02 per
diluted share) and $291,000 ($.01 per diluted share), respectively. Write offs
of receivables did not have a material effect on net income or diluted net
income per share in fiscal 2003.
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Costs incurred on uncompleted contracts .................... $ 9,635,000 $ 4,453,000
Estimated earnings ......................................... 7,861,000 4,252,000
-------------- --------------
17,496,000 8,705,000
Less: Billings to date ..................................... (15,223,000) (8,551,000)
-------------- --------------
$ 2,273,000 $ 154,000
============== ==============
Included in accompanying consolidated balance
sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) ......................... $ 3,520,000 $ 1,737,000
Accrued expenses and other current liabilities (billings
in excess of costs and estimated earnings) .............. (1,247,000) (1,583,000)
-------------- --------------
$ 2,273,000 $ 154,000
============== ==============
During fiscal 2001, the Company made certain changes in estimates due to
estimated costs to complete long-term contracts accounted for under the
percentage-of-completion method being lower than originally projected. The
change in estimates increased net income and diluted net income per share by
$700,000 ($.03 per diluted share). Changes in estimates did not have a material
effect on net income or diluted net income per share in fiscal 2003 or fiscal
2002.
44
INVENTORIES
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Finished products .......................................... $ 28,958,000 $ 32,501,000
Work in process ............................................ 9,333,000 8,603,000
Materials, parts, assemblies and supplies .................. 12,949,000 13,410,000
-------------- --------------
Total inventories ....................................... $ 51,240,000 $ 54,514,000
============== ==============
Inventories related to long-term contracts were not significant as of
October 31, 2003 and 2002.
PROPERTY, PLANT AND EQUIPMENT
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Land ....................................................... $ 1,750,000 $ 2,627,000
Buildings and improvements ................................. 18,981,000 20,846,000
Machinery and equipment .................................... 43,629,000 41,739,000
Construction in progress ................................... 1,623,000 1,702,000
-------------- --------------
65,983,000 66,914,000
Less: Accumulated depreciation ............................. (30,446,000) (26,855,000)
-------------- --------------
Property, plant and equipment, net ................... $ 35,537,000 $ 40,059,000
============== ==============
Depreciation and amortization expense on property, plant, and equipment
amounted to approximately $4,659,000, $4,193,000 and $3,090,000 for the fiscal
years ended October 31, 2003, 2002 and 2001, respectively.
Included in the Company's property, plant and equipment is rotable
equipment located at various customer locations in connection with certain
repair and maintenance agreements. The rotables are stated at a net book value
of $3,912,000 and $4,417,000 as of October 31, 2003 and 2002, respectively.
Under the terms of the agreements, the customers may cancel the agreements and
purchase the equipment at specified prices. The equipment is currently being
depreciated over its estimated life.
In fiscal 2003, the Company consolidated the operations of two of its
Florida-based owned facilities utilized by its Flight Support Group. In the
fourth quarter of fiscal 2003, the Company listed the vacated property for sale
with a real estate agent and reclassified the building and associated land as
held for sale. The carrying value of the property is $3,468,000 and is included
within the caption "Other assets" in the Company's consolidated balance sheet.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
AS OF OCTOBER 31,
-------------------------------
2003 2002
-------------- -------------
Accrued customer rebates and credits ....................... $ 5,008,000 $ 3,893,000
Accrued employee compensation and related payroll taxes .... 4,079,000 4,714,000
Billings in excess of costs and estimated earnings on
uncompleted percentage-of-completion contracts ............ 1,247,000 1,583,000
Other ...................................................... 4,028,000 4,745,000
-------------- --------------
Total accrued expenses and other current liabilities . $ 14,362,000 $ 14,935,000
============== ==============
Other non-current liabilities include deferred compensation of
$5,075,000 and $4,724,000 as of October 31, 2003 and 2002, respectively.
45
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 at the beginning of fiscal 2002. Under SFAS No. 142 goodwill is no
longer amortized but rather is tested at least annually for impairment.
The following table reflects net income and net income per share for the
fiscal year ended October 31, 2001 adjusted to give effect to the adoption of
SFAS No. 142:
Reported net income ......................... $ 15,833,000
Add-back after tax goodwill amortization .... 4,398,000
--------------
Adjusted net income ......................... $ 20,231,000
==============
Reported net income per share - basic ....... $ .72
Add-back after tax goodwill amortization .... .20
--------------
Adjusted net income per share - basic ....... $ .92
==============
Reported net income per share - diluted ..... $ .65
Add-back after tax goodwill amortization .... .17
--------------
Adjusted net income per share - diluted ..... $ .82
==============
The changes in the carrying amount of goodwill during fiscal 2003 by
segment are as follows:
CONSOLIDATED
FSG ETG TOTAL
-------------- -------------- --------------
Balances as of November 1, 2002 .................. $ 118,706,000 $ 68,971,000 $ 187,677,000
Goodwill acquired during the year ................ 400,000 -- 400,000
Adjustments to goodwill .......................... 623,000 -- 623,000
-------------- -------------- --------------
Balances as of October 31, 2003 .................. $ 119,729,000 $ 68,971,000 $ 188,700,000
============== ============== ==============
The goodwill acquired during fiscal 2003 is a result of the Company's
acquisition of substantially all of the assets and liabilities of Niacc
Technology, Inc. in May 2003 (see Note 2 - Acquisitions). Adjustments to
goodwill consist primarily of contingent purchase price payments to previous
owners of acquired businesses.
Other intangible assets are recorded within the caption "Other assets"
in the Company's consolidated balance sheets. Other intangible assets subject to
amortization consist primarily of licenses, patents, and non-compete covenants.
The gross carrying amount of other intangible assets was $1,420,000 and
$2,462,000 as of October 31, 2003 and 2002, respectively. Accumulated
amortization of other intangible assets was $147,000 and $1,176,000 as of
October 31, 2003 and 2002, respectively. Amortization expense of other
intangible assets was $98,000, $104,000 and $408,000 for the fiscal years ended
October 31, 2003, 2002 and 2001, respectively. Amortization expense for each of
the next five fiscal years is expected to be $107,000 in fiscal 2004, $127,000
in fiscal 2005, $127,000 in fiscal 2006, $127,000 in fiscal 2007, and $105,000
in fiscal 2008.
46
6. LONG-TERM DEBT
Long-term debt consists of:
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Borrowings under revolving credit facility ...................... $ 30,000,000 $ 54,000,000
Industrial Development Revenue Refunding Bonds -- Series 1988 ... 1,980,000 1,980,000
Capital leases and equipment loans .............................. 33,000 6,000
-------------- --------------
32,013,000 55,986,000
Less: Current maturities of long-term debt ...................... (29,000) (6,756,000)
-------------- --------------
$ 31,984,000 $ 49,230,000
============== ==============
The aggregate amount of long-term debt maturing in each of the next five
fiscal years is $29,000 in fiscal 2004, $4,000 in fiscal 2005, $15,000,000 in
fiscal 2006, $15,000,000 in fiscal 2007, and $1,980,000 in fiscal 2008.
REVOLVING CREDIT FACILITY
In May 2003, the Company entered into a new $120 million revolving
credit agreement (new Credit Facility) with a bank syndicate, which contains
both revolving credit and term loan features. Borrowings outstanding under the
previous credit facility were repaid with borrowings under the new Credit
Facility, which expires in May 2006. The new Credit Facility may be used for
working capital and general corporate needs of the Company, including letters of
credit, and to finance acquisitions (generally not in excess of an aggregate
total of $30 million over any trailing twelve-month period without the requisite
approval of the bank syndicate). The Company has the option to extend the
revolving credit term for two one-year periods or to convert outstanding
advances as of the initial expiration date to term loans amortizing over the
subsequent twelve-month period subject to requisite bank syndicate approval.
Advances under the new Credit Facility accrue interest at the Company's choice
of the London Interbank Offered Rate (LIBOR), or the "Base Rate," plus
applicable margins (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, or "leverage
ratio"). The Base Rate is the higher of (i) the Prime Rate or (ii) the Federal
Funds rate plus .50%. The applicable margins range from 1.00% to 2.25% for LIBOR
based borrowings and from .00% to .75% for Base Rate based borrowings. A fee is
charged on the amount of the unused commitment ranging from .25% to .50%
(depending on the leverage ratio of the Company). The new Credit Facility is
secured by substantially all assets other than real property of the Company and
its subsidiaries and contains covenants which require, among other things, the
maintenance of the leverage ratio and a fixed charge coverage ratio as well as
minimum net worth requirements.
As of October 31, 2003 and 2002, the Company had a total of $30 million
and $54 million, respectively, borrowed under its respective $120 million
revolving credit facilities at weighted average interest rates of 2.6% and 2.9%,
respectively. The amounts were primarily borrowed to partially fund acquisitions
(Note 2).
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds outstanding as of October 31,
2003 represent bonds issued by Broward County, Florida in 1988 (the 1988 bonds).
The 1988 bonds are due April 2008 and bear interest at a variable rate
calculated weekly (1.2% and 1.9% as of October 31, 2003 and 2002, respectively).
The 1988 bonds as amended are secured by a letter of credit expiring February
2004 and a mortgage on the related properties pledged as collateral.
47
7. INCOME TAXES
The provision for income taxes on income from continuing operations for
each of the three fiscal years ended October 31 is as follows:
2003 2002 2001
-------------- -------------- --------------
Current:
Federal ............................. $ 3,908,000 $ 849,000 $ 9,611,000
State ............................... 444,000 164,000 1,109,000
-------------- -------------- --------------
4,352,000 1,013,000 10,720,000
Deferred ............................... 3,520,000 3,917,000 760,000
-------------- -------------- --------------
Total income tax expense ............... $ 7,872,000 $ 4,930,000 $ 11,480,000
============== ============== ==============
In fiscal 2002, the Company completed a tax audit of its fiscal 1998 and
fiscal 1999 income tax returns with the IRS that resulted in the recovery of a
portion of income taxes paid in prior years. The recovery was based on a
settlement reached with the IRS under which a portion of the reimbursements
received pursuant to a research and development cooperation agreement was
treated as shareholder reimbursements excluded from taxable income. The
recovery, net of expenses (including related professional fees and interest),
increased net income in fiscal 2002 by $2.1 million ($.09 per diluted share).
The following table reconciles the federal statutory tax rate to the
Company's effective tax rate for each of the three fiscal years ended October
31:
2003 2002 2001
-------- -------- --------
Federal statutory tax rate ........................................... 35.0% 35.0% 35.0%
State taxes, less applicable federal income tax reduction ............ 2.5 2.8 2.6
Net tax benefits on export sales ..................................... (2.3) (2.7) (2.4)
Nondeductible amortization of intangible assets ...................... -- -- 2.7
Recovery of taxes paid in prior years resulting from tax audit ....... -- (11.6) --
Other, net ........................................................... .4 (.5) .2
-------- -------- --------
Effective tax rate ............................................... 35.6% 23.0% 38.1%
======== ======== ========
48
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Deferred tax assets:
Inventories .............................................. $ 2,770,000 $ 1,868,000
Deferred compensation liability .......................... 2,034,000 1,769,000
Capitalized research and development expenses ............ 897,000 1,088,000
Bad debt allowances ...................................... 229,000 619,000
Vacation accruals ........................................ 269,000 384,000
Warranty accruals ........................................ 246,000 269,000
Other .................................................... 983,000 561,000
-------------- --------------
Total deferred tax assets .............................. 7,428,000 6,558,000
-------------- --------------
Deferred tax liabilities:
Intangible asset amortization ............................ 10,841,000 7,077,000
Accelerated depreciation ................................. 2,974,000 2,355,000
Other .................................................... 78,000 71,000
-------------- --------------
Total deferred tax liabilities ......................... 13,893,000 9,503,000
-------------- --------------
Net deferred tax liability ............................. $ (6,465,000) $ (2,945,000)
============== ==============
The net deferred tax liability is classified on the balance sheet as
follows:
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
Current .................................................... $ 3,872,000 $ 3,295,000
Long term .................................................. (10,337,000) (6,240,000)
-------------- --------------
Net deferred tax liability ............................. $ (6,465,000) $ (2,945,000)
============== ==============
A deferred tax charge of $144,000 relating to an unrealized gain on an
interest rate swap was recorded as an adjustment to shareholders' equity in
fiscal 2002. A net deferred tax charge of $250,000 relating to unrealized gains
on long-term investments and an unrealized loss on an interest rate swap was
recorded as an adjustment to shareholders' equity in fiscal 2001.
No deferred tax assets or liabilities were assumed in connection with
the Company's acquisitions in fiscal 2003, fiscal 2002 or fiscal 2001.
49
8. SHAREHOLDERS' EQUITY
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company's Board of Directors adopted, as of November 2, 2003, a new
Shareholder Rights Agreement (the "2003 Plan") to replace the expiring one (the
"1993 Plan"). Pursuant to the 2003 Plan, the Board declared a dividend of one
preferred share purchase right for each outstanding share of Common Stock and
Class A Common Stock (with the preferred share purchase rights collectively as
"the Rights"). The Rights trade with the common stock and are not exercisable or
transferable apart from the Common Stock and Class A Common Stock until after a
person or group either acquires 15% or more of the outstanding common stock or
commences or announces an intention to commence a tender offer for 15% (formerly
30% under the 1993 Plan) or more of the outstanding common stock. Absent either
of the aforementioned events transpiring, the Rights will expire as of the close
of business on November 2, 2013.
The Rights have certain anti-takeover effects and, therefore, will cause
substantial dilution to a person or group who attempts to acquire the Company on
terms not approved by the Company's Board of Directors or who acquires 15% or
more of the outstanding common stock without approval of the Company's Board of
Directors. The Rights should not interfere with any merger or other business
combination approved by the Board since they may be redeemed by the Company at
$.01 per Right at any time until the close of business on the tenth day after a
person or group has obtained beneficial ownership of 15% or more of the
outstanding common stock or until a person commences or announces an intention
to commence a tender offer for 15% (formerly 30% under the 1993 Plan) or more of
the outstanding common stock. The 2003 Plan also contains a provision to help
ensure a potential acquiror pays all shareholders a fair price for the Company.
COMMON STOCK AND CLASS A COMMON STOCK
Each share of Common Stock is entitled to one vote per share. Each share
of Class A Common Stock is entitled to a 1/10 vote per share. Holders of the
Company's Common Stock and Class A Common Stock are entitled to receive when, as
and if declared by the Board of Directors, dividends and other distributions
payable in cash, property, stock, or otherwise. In the event of liquidation,
after payment of debts and other liabilities of the Company, and after making
provision for the holders of preferred stock, if any, the remaining assets of
the Company will be distributable ratably among the holders of all classes of
common stock.
SHARE REPURCHASES
In accordance with the Company's share repurchase program, 22,000 shares
of Class A Common Stock were repurchased at a total cost of $120,000 in fiscal
2003 and 36,300 shares of Class A Common Stock were repurchased at a total cost
of $200,000 in fiscal 2002. No shares were repurchased in fiscal 2001.
STOCK DIVIDENDS
In August 2001, the Company paid a 10% stock dividend on both classes of
common stock outstanding with shares of Class A Common Stock. The 10% dividend
was valued based on the closing market price of the Company's Class A Common
Stock as of the day prior to the declaration date. As further detailed in Note
17, the Company's Board of Directors declared, on December 15, 2003, a 10% stock
dividend on both classes of common stock outstanding payable in shares of Class
A Common Stock on January 16, 2004 to shareholders of record as of January 6,
2004. All net income per share, dividend per share, price and other data per
share, exercise price, stock option, and common share data has been adjusted
retroactively to give effect to the stock dividends.
50
9. STOCK OPTIONS
The Company currently has three stock option plans, the 1993 Stock
Option Plan (1993 Plan), the Non-Qualified Stock Option Plan (NQSOP), and the
2002 Stock Option Plan (2002 Plan). In addition, the Company granted stock
options to two former shareholders of Santa Barbara Infrared, Inc. (SBIR)
pursuant to employment agreements entered into in connection with the Company's
acquisition of SBIR in fiscal 1999. A total of 4,615,098 shares of the Company's
stock are reserved for issuance to employees, directors, officers, and
consultants as of October 31, 2003, including 4,448,675 shares currently under
option and 166,423 shares available for future grants. Options issued under the
1993 Plan and the 2002 Plan may be designated as incentive stock options (ISOs)
or non-qualified stock options (NQSOs). ISOs are granted at not less than 100%
of the fair market value at the date of grant (110% thereof in certain cases)
and are exercisable in percentages specified at the date of grant over a period
up to ten years. Only employees are eligible to receive ISOs. NQSOs may be
granted at less than fair market value and may be immediately exercisable.
Options granted under the NQSOP may be granted at no less than the fair market
value at the date of grant and are generally exercisable in four equal annual
installments commencing one year from the date of grant. The options granted
pursuant to the 2002 Plan may be with respect to Common Stock and/or Class A
Common Stock, in such proportions as shall be determined by the Board of
Directors or the Stock Option Plan Committee in its sole discretion. The stock
options granted to two former shareholders of SBIR were fully vested and
transferable as of the grant date and expire ten years from the date of grant.
The exercise price of such options was the fair market value as of the date of
grant. The 1993 Plan terminated in March 2003 on the tenth anniversary of its
effective date. No options may be granted under the 1993 Plan after such
termination date, however, options outstanding as of the termination date may be
exercised pursuant to their terms. Options under all stock option plans expire
not later than ten years after the date of grant, unless extended by the Stock
Option Plan Committee or the Board of Directors.
Information concerning stock option activity for each of the three
fiscal years ended October 31 is as follows:
SHARES UNDER OPTION
SHARES -------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------- ----------- ----------------
Outstanding as of October 31, 2000 ........ 886,576 5,442,019 $ 6.32
Shares approved by Board of Directors for
grant to former shareholders of SBIR ..... 252,890 -- --
Granted ................................... (1,094,720) 1,094,720 $ 13.24
Cancelled ................................. 168,707 (456,947) $ 14.10
Exercised ................................. -- (1,512,291) $ 2.64
----------- -----------
Outstanding as of October 31, 2001 ........ 213,453 4,567,501 $ 8.24
Shares approved by Board of Directors for
grant to former shareholders of SBIR ..... 275,000 -- --
Shares approved by the Shareholders for the
2002 Stock Option Plan ................... 572,000 -- --
Granted ................................... (770,990) 770,990 $ 9.74
Cancelled ................................. 49,128 (306,839) $ 13.75
Exercised ................................. -- (165,151) $ 2.65
----------- -----------
Outstanding as of October 31, 2002 ........ 338,591 4,866,501 $ 8.31
Granted ................................... (503,250) 503,250 $ 7.20
Cancelled ................................. 331,082 (334,749) $ 13.10
Exercised ................................. -- (586,327) $ 2.30
----------- -----------
Outstanding as of October 31, 2003 ........ 166,423 4,448,675 $ 8.62
=========== ===========
51
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of October 31, 2003 is as follows:
COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (Years) EXERCISABLE EXERCISE PRICE
- ----------------- ----------- -------------- ------------------------ ----------- --------------
$ 1.09 - $ 2.50 290,598 $ 1.43 0.9 290,598 $ 1.43
$ 2.51 - $ 5.50 288,225 $ 3.45 2.0 288,225 $ 3.45
$ 5.51 - $ 9.29 638,440 $ 7.68 6.2 358,440 $ 7.55
$ 9.30 - $21.92 713,501 $ 13.69 7.5 436,500 $ 13.75
----------- -------------- ------------------------ ----------- --------------
1,930,764 $ 8.33 5.3 1,373,763 $ 7.36
=========== ============== ======================== =========== ==============
CLASS A COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (Years) EXERCISABLE EXERCISE PRICE
- ----------------- ----------- -------------- ------------------------ ----------- --------------
$ 1.09 - $ 2.50 290,321 $ 1.43 0.8 290,321 $ 1.43
$ 2.51 - $ 5.50 382,420 $ 3.99 3.9 292,209 $ 3.47
$ 5.51 - $ 9.29 918,207 $ 7.66 6.8 674,096 $ 7.56
$ 9.30 - $21.92 926,963 $ 14.40 6.3 649,452 $ 15.28
----------- -------------- ------------------------ ----------- --------------
2,517,911 $ 8.88 5.5 1,906,078 $ 8.69
=========== ============== ======================== =========== ==============
If there were a change in control of the Company, options for an
additional 431,267 shares of Common Stock and 579,119 shares of Class A Common
Stock would become immediately exercisable.
The estimated weighted average fair value of options granted was $4.64
per share for Common Stock and $3.55 per share for Class A Common Stock in
fiscal 2003, $7.30 per share for Common Stock and $5.35 per share for Class A
Common Stock in fiscal 2002, and $10.21 per share for Common Stock and $8.13 per
share for Class A Common Stock in fiscal 2001.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions for each of the three fiscal years ended October 31:
2003 2002 2001
-------------------- -------------------- --------------------
CLASS A CLASS A CLASS A
COMMON COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
-------- -------- -------- -------- -------- --------
Expected stock price volatility ........ 52.65% 52.24% 53.61% 52.87% 55.65% 55.47%
Risk free interest rate ................ 3.37% 3.43% 4.51% 4.12% 5.24% 5.22%
Dividend yield ......................... .26% .33% .25% .32% .30% .34%
Expected option life (years) ........... 8 8 8 8 8 8
52
10. RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the
Plan) under which eligible employees of the Company and its participating
subsidiaries may contribute up to 15% of their annual compensation as defined by
the Plan. Prior to January 1, 2002, participants were able to contribute up to
10% of their annual compensation. The Company generally contributes a 25% or 50%
matching contribution, as determined by the Board of Directors, based on a
participant's Elective Deferral Contribution up to 6% of the Participant's
compensation for the Elective Deferral Contribution period. The match is made in
the Company's common stock or cash, as determined by the Company. Effective
January 2002, the Company's match of employee contributions paid in common stock
is based on the fair market value of the shares at the date of contribution.
Prior to January 2002, the Company made matching contributions through the
promissory note discussed below. The Plan also provides that the Company may
contribute additional amounts in its common stock or cash at the discretion of
the Board of Directors. Employee contributions can not be invested in Company
stock.
In 1992, the Company sold 987,699 shares of the Company's Common Stock
and 984,242 shares of Class A Common Stock to the Plan for an aggregate price of
$4,122,000 entirely financed through a promissory note with the Company. The
promissory note was payable in nine equal annual installments, inclusive of
principal and interest at the rate of 8% per annum, with a final installment due
in September 2002. The promissory note was fully paid off effective December
2001. As the Plan accrued each payment of principal, an appropriate percentage
of stock was allocated to eligible employees' accounts in accordance with
applicable regulations under the Internal Revenue Code. The unallocated shares
of stock collateralized the 1992 promissory note. The per share cost to the Plan
for the 1992 stock sale ($2.09 per share) was determined based on the average
closing market price of the Company's stock on the twenty business days prior to
the effective date of the sale. In accordance with the provisions of the Plan,
the Company was obligated to make cash contributions in amounts sufficient to
meet the debt service requirements on the promissory note. Principal amounts
repaid on the promissory note were determined based on the value of the shares
released during the preceding twelve months but could not be less than the
minimum annual installments required. Dividends on allocated shares were issued
to participants' accounts. Dividends on unallocated shares were held in the Plan
and could be used to make note payments.
Participants receive 100% vesting in employee contributions. Vesting in
Company contributions is based on number of years of service. Contributions to
the Plan charged to income in fiscal 2003, fiscal 2002, and fiscal 2001 totaled
$403,000, $691,000, and $493,000, respectively, exclusive of interest income
earned on the note received from the Plan of $9,000 in fiscal 2002 and $52,000
in fiscal 2001.
In 1991, the Company established a Directors Retirement Plan covering
its then current directors. The net assets of this plan as of October 31, 2003,
2002 and 2001 are not material to the financial position of the Company. During
fiscal 2003, fiscal 2002, and fiscal 2001, $34,000, $34,000, and $21,000,
respectively, was expensed for this plan.
11. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales amounts in fiscal 2003, fiscal 2002, and fiscal 2001
include approximately $9,224,000, $9,742,000 and $7,737,000, respectively, of
new product research and development expenses. The expenses are net of
reimbursements pursuant to research and development cooperation and joint
venture agreements (Note 2). Such reimbursements were $1,275,000 in fiscal 2001
and were not significant in fiscal 2003 and fiscal 2002.
53
12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for each of the three fiscal years ended October 31:
2003 2002 2001
------------ ------------ ------------
Numerator:
Net income ............................................. $ 12,222,000 $ 15,226,000 $ 15,833,000
============ ============ ============
Denominator:
Weighted average common shares outstanding - basic ..... 23,236,841 23,003,784 21,917,458
Effect of dilutive stock options ....................... 1,294,439 1,728,895 2,618,444
------------ ------------ ------------
Weighted average common shares outstanding - diluted ... 24,531,280 24,732,679 24,535,902
============ ============ ============
Net income per share - basic ............................. $ .53 $ .66 $ .72
Net income per share - diluted ........................... $ .50 $ .62 $ .65
Anti-dilutive stock options excluded ..................... 2,144,694 1,431,543 709,432
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Net sales:
2003 ................................................... $ 41,788,000 $ 41,591,000 $ 45,412,000 $ 47,662,000
2002 ................................................... 41,012,000 43,001,000 42,587,000 45,512,000
2001 ................................................... 39,650,000 41,742,000 43,845,000 46,022,000
Gross profit:
2003 ................................................... 13,776,000 13,901,000 15,136,000 15,291,000
2002 ................................................... 14,850,000 15,359,000 14,936,000 16,357,000
2001 ................................................... 17,032,000 18,376,000 18,043,000 17,695,000
Net income:
2003 ................................................... 2,834,000 2,608,000 3,240,000 3,540,000
2002 ................................................... 2,828,000 3,970,000 2,829,000 5,599,000
2001 ................................................... 3,908,000 4,814,000 3,964,000 3,147,000
Net income per share:
Basic
2003 ................................................... $ .12 $ .11 $ .14 $ .15
2002 ................................................... .12 .17 .12 .24
2001 ................................................... .18 .23 .18 .14
Diluted
2003 ................................................... .12 .11 .13 .14
2002 ................................................... .11 .16 .11 .23
2001 ................................................... .16 .20 .16 .13
Net income in the second quarter of fiscal 2002 includes an additional
gain on the sale of Trilectron as referenced in Note 3. The impact of the gain
was an increase to net income of $765,000 ($.03 per diluted share).
54
Net income in the fourth quarter of fiscal 2002 includes the recovery of
a portion of taxes paid in prior years resulting from a tax audit as referenced
in Note 7. The impact of the recovery was an increase to net income of
$2,107,000 ($.09 per diluted share).
During the first and second quarters of fiscal 2001, the Company made
certain changes in estimates due to estimated costs to complete long-term
contracts accounted for under the percentage-of-completion method being lower
than originally projected. The change in estimates increased net income and
diluted net income per share by $200,000 ($.01 per diluted share) and $400,000
($.02 per diluted share) in the first and second quarters of fiscal 2001,
respectively. Changes in estimates did not have a material effect on net income
or diluted net income per share in the third and fourth quarters of fiscal 2001
or in any quarter during fiscal 2003 and fiscal 2002.
Due to changes in the average number of common shares outstanding, net
income per share for the full fiscal year may not equal the sum of the four
individual quarters.
14. OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG), consisting of HEICO Electronic and its subsidiaries.
See Note 1 for a list of operating subsidiaries aggregated in each reportable
operating segment. The FSG designs and manufactures FAA-approved jet engine and
aircraft component replacement parts, provides FAA-authorized repair and
overhaul services and provides subcontracting services to OEMs in the aviation
industry and the U.S. Government. The ETG designs and manufactures commercial
and military power supplies, circuit board shielding, laser and electro-optical
products and infrared simulation and test equipment and repairs and overhauls
aircraft electronic equipment primarily for the aerospace, defense and
electronics industries.
The Company's reportable business divisions offer distinctive products
and services that are marketed through different channels. They are managed
separately because of their unique technology and service requirements.
55
SEGMENT PROFIT OR LOSS
The accounting policies for segments are the same as those described in
the summary of significant accounting policies (Note 1). Management evaluates
segment performance based on segment operating income.
OTHER,
SEGMENTS PRIMARILY
----------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------- ------------- ------------- -------------
For the year ended October 31, 2003:
Net sales $ 128,277,000 $ 48,597,000 $ (421,000) $ 176,453,000
Depreciation and amortization 3,256,000 1,399,000 426,000 5,081,000
Operating income 19,187,000 8,497,000 (4,479,000) 23,205,000
Total assets 214,292,000 103,798,000 15,154,000 333,244,000
Capital expenditures 1,150,000 2,617,000 4,000 3,771,000
For the year ended October 31, 2002:
Net sales $ 120,097,000 $ 52,510,000 $ (495,000) $ 172,112,000
Depreciation and amortization 3,012,000 1,213,000 307,000 4,532,000
Operating income 15,846,000 11,873,000 (5,319,000) 22,400,000
Total assets 219,903,000 103,260,000 13,169,000 336,332,000
Capital expenditures 3,083,000 1,969,000 801,000 5,853,000
For the year ended October 31, 2001:
Net sales $ 132,459,000 $ 38,800,000 $ -- $ 171,259,000
Depreciation and amortization 7,641,000 2,648,000 299,000 10,588,000
Operating income 27,454,000 7,835,000 (4,298,000) 30,991,000
Total assets 213,001,000 101,817,000 10,822,000 325,640,000
Capital expenditures 4,916,000 1,281,000 730,000 6,927,000
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
No one customer accounted for 10 percent or more of the Company's
consolidated net sales during the last three fiscal years. The Company had no
material sales originating or long-lived assets held outside of the United
States during the last three fiscal years.
Export sales were $47,013,000 in fiscal 2003, $51,061,000 in fiscal 2002
and $46,014,000 in fiscal 2001.
15. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these matters will not
have a significant effect on the Company's consolidated financial statements.
LEASE COMMITMENTS
The Company leases certain property and equipment, including
manufacturing facilities and office equipment under operating leases. Some of
these leases provide the Company with the option after the initial lease term
either
56
to purchase the property at the then fair market value or renew its lease at the
then fair rental value. Generally, management expects that leases will be
renewed or replaced by other leases in the normal course of business.
Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows:
Year ending October 31,
2004 .................................................. $ 2,381,000
2005 .................................................. 1,900,000
2006 .................................................. 1,613,000
2007 .................................................. 954,000
2008 .................................................. 657,000
Thereafter ............................................ 1,915,000
------------
Total minimum lease commitments ....................... $ 9,420,000
============
Total rent expense charged to operations for operating leases in fiscal
2003, fiscal 2002, and fiscal 2001 amounted to $2,768,000, $2,956,000 and
$2,217,000, respectively.
GUARANTEES
The Company adopted FASB Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," effective as of its first quarter of
fiscal 2003. FIN 45 requires, among other things as further detailed in Note 1,
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. Such disclosures for the Company are set forth
below.
The Company has arranged for standby letters of credit aggregating to
$1.2 million to meet the security requirement of its insurance company for
potential workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a $0.5 million
letter of credit expiring July 2004. These letters of credit are supported by
the Company's Credit Facility. In addition, the Company's industrial development
revenue bonds are secured by a $2.0 million letter of credit expiring February
2004 and a mortgage on the related properties pledged as collateral.
The Company's accounting policy for product warranties is to accrue an
estimated liability at the time of shipment. Warranty reserves are included in
the Company's consolidated balance sheets under the caption "Accrued expenses
and other current liabilities." The amount recognized is based on historical
claims cost experience. Changes in the product warranty liability for fiscal
2003 are as follows:
Balance as of October 31, 2002......................... $ 685,000
Accruals for warranties issued during the period....... 147,000
Warranty claims settled during the period.............. (199,000)
------------
Balance as of October 31, 2003......................... $ 633,000
============
In connection with the Company's acquisition of Inertial Airline
Services, Inc. in August 2001 for $20 million in cash and $5 million in HEICO
Class A Common Stock (318,960 shares), the Company guaranteed that the resale
value of such Class A Common Stock would be at least $5 million through August
31, 2002. Both parties originally agreed to extend the guaranty to August 31,
2003 and then subsequently to August 31, 2004. In October 2003, the seller sold
220,000 shares of the HEICO Class A Common Stock and received net proceeds of
$2.1 million. Based on the closing market price of HEICO Class A Common Stock on
October 31, 2003, and the value of the remaining 98,960 shares, the Company
would have been required to pay the seller an additional amount of approximately
$1.9
57
million in cash, which would have been recorded as a reduction of shareholders'
equity. Concurrent with the purchase, the Company loaned the seller $5 million,
which is due August 31, 2004 and was secured by the 318,960 shares of HEICO
Class A Common Stock. The loan is reflected as a reduction in the equity section
of the Company's consolidated balance sheet as a note receivable secured by
Class A Common Stock. The $2.1 million of net proceeds was used to reduce the $5
million loan.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was $1,291,000, $2,407,000 and $2,379,000 in
fiscal 2003, fiscal 2002, and fiscal 2001, respectively. Cash paid for income
taxes was $3,460,000, $1,373,000 and $18,563,000 in fiscal 2003, fiscal 2002,
and fiscal 2001, respectively.
Non-cash investing and financing activities related to acquisitions,
including contingent payments, for each of the three fiscal years ended October
31 is as follows:
2003 2002 2001
------------- ------------- -------------
Fair value of assets acquired:
Liabilities assumed .......................... $ 698,000 $ 247,000 $ 468,000
Less:
Goodwill and other intangible assets ....... 1,023,000 3,778,000 37,579,000
Inventories ................................ 431,000 371,000 10,882,000
Accounts receivable ........................ 312,000 351,000 3,147,000
Property, plant and equipment .............. 408,000 258,000 8,479,000
Other assets ............................... 78,000 4,000 1,588,000
------------- ------------- -------------
Cash paid, including contingent payments ..... $ (1,554,000) $ (4,515,000) $ (61,207,000)
============= ============= =============
As part of the consideration in connection with the sale of the
Trilectron product line in fiscal 2000, the Company received an unsecured
promissory note for $12.0 million that was paid in full in fiscal 2001 (Note 3).
In connection with the purchase of IAS (Note 2), the Company issued 318,960
shares of HEICO Class A Common Stock then valued at $5 million and issued a $5
million note receivable guaranteed by the issued shares. Additionally, retained
earnings was impacted by $31,709,000 in fiscal 2001 as a result of the 10% stock
dividend described in Note 8. There were no significant capital lease financing
activities during fiscal 2003, fiscal 2002, and fiscal 2001.
17. SUBSEQUENT EVENTS (UNAUDITED)
In December 2003, the Company, through its HEICO Electronics
Technologies Corp. subsidiary, acquired 80% of the business of Sierra Microwave
Technology, Inc. (Sierra). Under the transaction, the Company formed a new
subsidiary, Sierra Microwave Technology, LLC, which acquired substantially all
of the assets and certain liabilities of Sierra. The new subsidiary is owned 80%
by the Company and 20% by Sierra's management. The purchase price was not
significant to the Company's consolidated financial statements. The purchase
price was paid principally using proceeds from the Company's Credit Facility and
some shares of the Company's Class A Common Stock. Sierra is engaged in the
design and manufacture of certain niche microwave components used in satellites
and military products.
On December 15, 2003, the Company's Board of Directors declared a 10%
stock dividend on both its Common Stock and its Class A Common Stock payable in
shares of its Class A Common Stock. The dividend is payable on January 16, 2004
to shareholders of record as of January 6, 2004. All net income per share,
dividend per share, price and other data per share, exercise price, stock option
and common share data has been adjusted retroactively to give effect to stock
dividends.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
concluded that the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective, based on their
evaluation as of the end of the period covered by this annual report on Form
10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company is hereby
incorporated by reference to the Company's definitive proxy statement, which
will be filed with the Securities and Exchange Commission (Commission) within
120 days after the close of fiscal 2003.
Information concerning the Executive Officers of the Company is set
forth in Item 1 of Part I hereof under the caption "Executive Officers of the
Registrant."
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. The code of ethics is
located on the Company's Internet web site at http://www.heico.com. Any
amendments to or waivers from a provision of this code of ethics will be posted
on the Company's web site.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is hereby incorporated by reference to the Company's definitive
proxy statement, which will be filed with the Commission within 120 days after
the close of fiscal 2003.
Equity compensation plan information is set forth in Item 5 of Part II
hereof under the caption "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2003.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services is hereby
incorporated by reference to the Company's definitive proxy statement, which
will be filed with the Commission within 120 days after the close of fiscal
2003.
60
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
subsidiaries are included in Part II, Item 8:
PAGE(s)
-------
Independent Auditors' Report.................................................. 30
Consolidated Balance Sheets at October 31, 2003 and 2002...................... 31 - 32
Consolidated Statements of Operations for the years ended October 31, 2003,
2002 and 2001................................................................ 33
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended October 31, 2003, 2002 and 2001.......................... 34
Consolidated Statements of Cash Flows for the years ended October 31, 2003,
2002 and 2001................................................................ 35
Notes to Consolidated Financial Statements.................................... 36 - 58
(a)(2) FINANCIAL STATEMENT SCHEDULES
No schedules have been submitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a)(3) EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
2.1 -- Amended and Restated Agreement of Merger and Plan of
Reorganization, dated as of March 22, 1993, by and among HEICO
Corporation, HEICO Industries, Corp. and New HEICO, Inc. is
incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-57624)
Amendment No. 1 filed on March 19, 1993.*
2.2 -- Stock Purchase Agreement, dated August 1, 2000, by and between
HEICO Aviation Products Corp., N/K/A HEICO Electronic Technologies
Corp. and Hobart Brothers Company (without schedules and exhibits)
is incorporated by reference to Exhibit 2.1 to Form 8-K dated
September 14, 2000.*
2.3 -- First Amendment to Stock Purchase Agreement, effective as of
September 14, 2000, between HEICO Aviation Products Corp. N/K/A
HEICO Electronic Technologies Corp. and Hobart Brothers Company is
incorporated by reference to Exhibit 2.2 to Form 8-K dated
September 14, 2000.*
3.1 -- Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (Registration No. 33-57624) Amendment No. 1 filed on
March 19, 1993.*
61
EXHIBIT DESCRIPTION
- ------- -----------
3.2 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated April 27, 1993, are incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form 8-B
dated April 29, 1993.*
3.3 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated November 3, 1993, are incorporated by reference
to Exhibit 3.3 to the Form 10-K for the year ended October 31,
1993.*
3.4 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated March 19, 1998, are incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on Form S-3
(Registration No. 333-48439) filed on March 23, 1998.*
3.5 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated as of November 2, 2003.**
3.6 -- Bylaws of the Registrant are incorporated by reference to Exhibit
3.4 to the Form 10-K for the year ended October 31, 1996.*
4.0 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunBank, N.A., as Rights Agent, dated as of November 2, 1993,
incorporated by reference to Exhibit 1 to the Form 8-K dated
November 2, 1993.*
4.1 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunTrust Bank, N.A., as Rights Agent, dated as of November 2,
2003, incorporated by reference to Exhibit 4.0 to the Form 8-K
dated November 2, 2003.*
10.1 -- Loan Agreement, dated March 1, 1988, between HEICO Corporation and
Broward County, Florida is incorporated by reference to Exhibit
10.1 to the Form 10-K for the year ended October 31, 1994.*
10.2 -- SunBank Reimbursement Agreement, dated February 28, 1994, between
HEICO Aerospace Corporation and SunBank/South Florida, N.A. is
incorporated by reference to Exhibit 10.2 to the Form 10-K for the
year ended October 31, 1994.*
10.3 -- Amendment, dated March 1, 1995, to the SunBank Reimbursement
Agreement dated February 28, 1994 between HEICO Aerospace
Corporation and SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.3 to the Form 10-K from the year ended
October 31, 1995.*
10.4 -- Amendment and Extension, dated February 28, 1999 to the SunBank
Reimbursement Agreement dated February 28, 1994, between SunTrust
Bank, South Florida, N.A. and HEICO Aerospace Corporation is
incorporated by reference to Exhibit 10.4 to the Form 10-K for the
year ended October 31, 1999.*
10.5 -- Amendment, dated July 20, 2000, to the SunBank Reimbursement
Agreement dated February 28, 1994, between HEICO Aerospace
Corporation and SunTrust Bank is incorporated by reference to
Exhibit 10.5 to the Form 10-K for the year ended October 31,
2000.*
62
EXHIBIT DESCRIPTION
- ------- -----------
10.6 -- HEICO Savings and Investment Plan, as amended and restated
effective as of January 1, 2002 is incorporated by reference to
Exhibit 10.6 to the Form 10-K for the year ended October 31,
2002.*
10.7 -- First Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan.**
10.8 -- Second Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan.**
10.9 -- Third Amendment, effective as of October 1, 2003, to the HEICO
Savings and Investment Plan.**
10.10 -- Non-Qualified Stock Option Agreement for Directors, Officers and
Employees is incorporated by reference to Exhibit 10.8 to the Form
10-K for the year ended October 31, 1985.*
10.11 -- HEICO Corporation 1993 Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81789)
filed on June 29, 1999.*
10.12 -- HEICO Corporation 2002 Stock Option Plan, effective March 19,
2002, is incorporated by reference to Exhibit 10.10 to the Form
10-K for the year ended October 31, 2002.*
10.13 -- HEICO Corporation Directors' Retirement Plan, as amended, dated as
of May 31, 1991, is incorporated by reference to Exhibit 10.19 to
the Form 10-K for the year ended October 31, 1992.*
10.14 -- Key Employee Termination Agreement, dated as of April 5, 1988,
between HEICO Corporation and Thomas S. Irwin is incorporated by
reference to Exhibit 10.20 to the Form 10-K for the year ended
October 31, 1992.*
10.15 -- Stock Purchase Agreement, dated October 30, 1997, by and among
HEICO Corporation, HEICO Aerospace Holdings Corp. and Lufthansa
Technik AG is incorporated by reference to Exhibit 10.31 to Form
10-K/A for the year ended October 31, 1997.*
10.16 -- Shareholders Agreement, dated October 30, 1997, by and between
HEICO Aerospace Holdings Corp., HEICO Aerospace Corporation and
all of the shareholders of HEICO Aerospace Holdings Corp. and
Lufthansa Technik AG is incorporated by reference to Exhibit 10.32
to Form 10-K/A for the year ended October 31, 1997.*
10.17 -- Credit Agreement among HEICO Corporation and SunTrust Bank, South
Florida, N.A., as Agent, dated as of July 30, 1998, is
incorporated by reference to Exhibit 10.2 to Form 8-K dated August
4, 1998.*
63
EXHIBIT DESCRIPTION
- ------- -----------
10.18 -- First Amendment, dated July 30, 1998 to Credit Agreement among
HEICO Corporation and SunTrust Bank, South Florida, N.A., as
agent, dated as of July 31, 1998 is incorporated by reference to
Exhibit 10.31 to the Form 10-K for the year ended October 31,
1999.*
10.19 -- Second Amendment, dated May 12, 1999, to Credit Agreement among
HEICO Corporation and SunTrust Bank, South Florida, N.A., as
agent, dated as of July 31, 1998 is incorporated by reference to
Exhibit 10.32 to the Form 10-K for the year ended October 31,
1999.*
10.20 -- Third Amendment, dated as of June 23, 2000, to Credit Agreement
among HEICO Corporation and SunTrust Bank (formerly known as
SunTrust Bank, South Florida, N.A.) as Agent dated as of July 31,
1998, is incorporated by reference to Exhibit 10.1 to Form 10-Q
for the quarterly period ended July 31, 2000.*
10.21 -- Revolving Credit Agreement, dated as of May 15, 2003, among HEICO
Corporation and SunTrust Bank, as Administrative Agent, is
incorporated by reference to Exhibit 10.1 to the Form 8-K filed on
May 29, 2003.*
14 -- HEICO Corporation Code of Ethics for Senior Financial and other
Officers.**
21 -- Subsidiaries of the Company.**
23 -- Consent of Deloitte & Touche LLP.**
31.1 -- Section 302 Certification of the Chief Executive Officer.**
31.2 -- Section 302 Certification of the Chief Financial Officer.**
32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***
32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***
- ----------
* Previously filed.
** Filed herewith.
*** Furnished herewith.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter ended October 31, 2003. The Company did furnish a report on Form 8-K to
the Securities and Exchange Commission on August 27, 2003 for the purpose of
furnishing a press release announcing the Company's financial results for the
third quarter ended July 31, 2003.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
Date: January 12, 2004 By: /s/ THOMAS S. IRWIN
-------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
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/ LAURANS A. MENDELSON Chairman, President, Chief Executive
- ----------------------------------------- Officer and Director (Principal
Laurans A. Mendelson Executive Officer)
/s/ SAMUEL L. HIGGINBOTTOM Director
- -----------------------------------------
Samuel L. Higginbottom
/s/ WOLFGANG MAYRHUBER Director
- -----------------------------------------
Wolfgang Mayrhuber
/s/ ERIC A. MENDELSON Director
- -----------------------------------------
Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director
- -----------------------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR Director
- -----------------------------------------
Albert Morrison, Jr.
/s/ ALAN SCHRIESHEIM Director
- -----------------------------------------
Alan Schriesheim
65
EXHIBIT INDEX
Exhibit # Description
- --------- -----------
3.5 Articles of Amendment of the Articles of Incorporation of the
Registrant, dated as of November 2, 2003.
10.7 First Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan.
10.8 Second Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan.
10.9 Third Amendment, effective as of October 1, 2003, to the HEICO
Savings and Investment Plan.
14 HEICO Corporation Code of Ethics for Senior Financial and other
Officers.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
31.1 Section 302 Certification of the Chief Executive Officer.
31.2 Section 302 Certification of the Chief Financial Officer.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, or adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, or adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 3.5
ARTICLES OF AMENDMENT
OF
HEICO CORPORATION
The undersigned, being a Director HEICO Corporation, a Florida
corporation (the "Corporation"), does hereby file these Articles of Amendment to
the Corporation's Articles of Incorporation, pursuant to Sections 607.1006 and
607.0602 of the Florida Business Corporation Act.
1. The name of the Corporation is HEICO Corporation.
2. Article III of the Corporation's Articles of Incorporation shall be
amended by deleting current Section (f) and adding a new Section (f) and (g)
thereto, to read as follows:
"(f) SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
(1) Designation and Amount. The shares of such series shall be
designated as "Series B Junior Participating Preferred Stock" (the "Series B
Preferred Stock") and the number of shares constituting such series shall be
300,000.
(2) Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set
forth, the holders of shares of Series B Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, (i) cash dividends in an amount per share (rounded to
the nearest cent) equal to 100 times the aggregate per share amount of all cash
dividends declared or paid on the Common Stock of the Corporation and (ii) a
preferential cash dividend (the "Series B Preferential Cash Dividends"), if any,
on the first day of February, May, August and November of each year (each a
"Series B Quarterly Dividend Payment Date"), commencing on the first Series B
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series B Preferred Stock, in an amount equal to $.75 per share of
Series B Preferred Stock less the per share amount of all cash dividends
declared on the Series B Preferred Stock pursuant to clause (i) of this sentence
since the immediately preceding Series B Quarterly Dividend Payment Date or,
with respect to the first Series B Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series B Preferred Stock.
In the event the Corporation shall, at any time after the issuance of any share
or fraction of a share of Series B Preferred Stock, make any distribution on the
shares of Common Stock of the Corporation, whether by way of a dividend or a
reclassification of stock, a recapitalization, reorganization or partial
liquidation of the Corporation or otherwise, which is payable in cash or any
debt security, debt instrument, real or personal property or any other property
(other than cash dividends subject to the immediately preceding sentence, a
distribution of shares of Common Stock or other capital stock of the Corporation
or a distribution of rights or warrants to acquire any such share, including any
debt security convertible into or exchangeable for any such share, at a price
less than the Fair Market Value (as defined in Section (f)(7)(D) of this Article
III) of such share), then and in each such event the Corporation shall
simultaneously pay on each then outstanding share of Series B Preferred Stock of
the Corporation a distribution, in like kind, of 100 times such distribution
paid on a share of Common Stock (subject to the provisions for adjustment
hereinafter set forth). The dividends and distributions on the Series B
Preferred Stock to which holders thereof are entitled pursuant to clause (i)
of the first sentence of this paragraph and pursuant to the second sentence of
this paragraph are hereinafter referred to as "Series B Participating Dividends"
and the multiple of such cash and non-cash dividends on the Common Stock
applicable to the determination of the Series B Participating Dividends, which
shall be 100 initially but shall be adjusted from time to time as hereinafter
provided, is hereinafter referred to as the "Series B Dividend Multiple". In the
event the Corporation shall at any time after November 2, 2003 declare or pay
any dividend or make any distribution on Common Stock payable in shares of
Common Stock, or effect a subdivision or split or a combination, consolidation
or reverse split of the outstanding shares of Common Stock into a greater or
lesser number of shares of Common Stock, then in each such case the Series B
Dividend Multiple thereafter applicable to the determination of the amount of
Series B Participating Dividends which holders of shares of Series B Preferred
Stock shall be entitled to receive shall be the Series B Dividend Multiple
applicable immediately prior to such event multiplied by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare each Series B
Participating Dividend at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Series B
Participating Dividend is required to be paid. No cash or non-cash dividend or
distribution on the Common Stock in respect of which a Series B Participating
Dividend is required to be paid shall be paid or set aside for payment on the
Common Stock unless a Series B Participating Dividend in respect of such
dividend or distribution on the Common Stock shall be simultaneously paid, or
set aside for payment, on the Series B Preferred Stock.
(C) Series B Preferential Cash Dividends shall begin to
accrue on outstanding shares of Series B Preferred Stock from the Series B
Quarterly Dividend Payment Date next preceding the date of issuance of any
shares of Series B Preferred Stock. Accrued but unpaid Series B Preferential
Cash Dividends shall be cumulative but shall not bear interest. Series B
Preferential Cash Dividends paid on the shares of Series B Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
(3) Voting Rights. The holders of shares of Series B Preferred Stock
shall have the following voting rights:
(A) Subject to the provisions for adjustment hereinafter set
forth, each share of Series B Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the shareholders of the
Corporation. The number of votes which a holder of a share of Series B Preferred
Stock is entitled to cast, as the same may be adjusted from time to time as
hereinafter provided, is hereinafter referred to as the "Series B Vote
Multiple". In the event the Corporation shall at any time after November 2, 2003
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or effect a subdivision or split or a combination, consolidation or reverse
split of the outstanding shares of Common Stock into a greater or lesser number
of shares of Common Stock, then in each such case the Series B Vote Multiple
thereafter applicable to the determination of the number of votes per share to
which holders of shares of Series B Preferred Stock shall be entitled after such
event shall be the Series B Vote Multiple immediately prior to such event
multiplied by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
2
(B) Except as otherwise provided in these Articles of
Incorporation or the Bylaws of the Corporation, the holders of shares of Series
B Preferred Stock and Series C Preferred Stock and the holders of shares of
Common Stock and Class A Common Stock shall vote together as a single voting
group on all matters submitted to a vote of shareholders of the Corporation.
(C) Unless otherwise provided in these Articles of
Incorporation, in the event that any preferential cash dividend to which the
holders of any currently existing or future series of the Series B Preferred
Stock are entitled (collectively, the "Series B Preferred Cash Dividends") has
accrued for four or more quarterly dividend periods, whether consecutive or not,
and shall not have been declared and paid (or a sum sufficient for the payment
thereof has been set aside) in full, the holders of record of such series of
Preferred Stock, other than any series in respect of which such right is
expressly withheld by these Articles of Incorporation (such holders existing
from time to time being hereinafter referred to as the "Unpaid Series B
Holders"), acting as a single voting group, shall have the right, at the next
meeting of shareholders called for the election of Directors, to elect one
member to the Board of Directors, which Director (hereinafter, the "Series B
Preferred Director") shall be in addition to the number of Directors required by
the Bylaws of the Corporation prior to such event, to serve until the next
annual meeting of shareholders and until their successors are elected and
qualified or their earlier resignation, removal or incapacity or until such
earlier time as all accrued and unpaid Series B Preferred Cash Dividends shall
have been paid (or a sum sufficient for the payment thereof has been set aside)
in full. If at any annual meeting of shareholders at which the term of a Series
B Preferred Director is fixed to expire there are accrued Series B Preferred
Cash Dividends which have not been paid (or a sum sufficient for payment thereof
has not been set aside) in full, the Unpaid Series B Holders shall have the
right to elect a Series B Preferred Director to the vacant Directorship
resulting from the expiration of the term of such Series B Preferred Director in
the manner provided in the immediately preceding sentence until all accrued and
unpaid Series B Preferred Cash Dividends shall have been paid (or a sum
sufficient for payment thereof has been set aside) in full; provided, however,
that at no time shall more than one Series B Preferred Director be a member of
the Board of Directors. The Series B Preferred Director may be removed, with or
without cause, by the Unpaid Series B Holders. Vacancies in such Directorships
(whether caused by death, resignation, removal or otherwise) may be filled (if
any accrued Series B Preferred Cash Dividends remain unpaid or a sum sufficient
for payment thereof has not been set aside) only by the Unpaid Series B Holders
in the manner permitted by law; provided, however, that any such action by the
Unpaid Series B Holders shall be taken at a meeting of shareholders and shall
not be taken by written consent; provided further, however, that by a vote of a
majority of the Board of Directors in office other than the Series B Preferred
Director, the Series B Preferred Director may be removed immediately after all
accrued and unpaid Series B Preferred Cash Dividends shall have been paid (or a
sum sufficient for the payment thereof has been set aside) in full.
(D) Except as otherwise provided in these Articles of
Incorporation or the Bylaws of the Corporation, holders of Series B Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for the taking of any corporate action.
(4) Certain Restrictions.
(A) Whenever Series B Preferential Cash Dividends or Series
B Participating Dividends are in arrears or the Corporation shall be in default
of payment thereof, thereafter and until all accrued and unpaid Series B
Preferential Cash Dividends and Series B Participating Dividends, whether or not
declared, on shares of Series B Preferred Stock outstanding shall have been paid
(or a sum sufficient for payment thereof has been set aside) in full, and in
addition to any and all other rights which
3
any holder of shares of Series B Preferred Stock may have in such circumstances,
the Corporation shall not
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series B Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity as to
dividends with the Series B Preferred Stock, unless dividends
are paid ratably on the Series B Preferred Stock and all such
parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled if the full dividends accrued thereon
were to be paid;
(iii) except as permitted by subparagraph (iv) of this
paragraph (4)(A), redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up)
with the Series B Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (both as to dividends and upon
liquidation, dissolution or winding up) to the Series B
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration
any shares of Series B Preferred Stock, or any shares of stock
ranking on a parity with the Series B Preferred Stock (either as
to dividends or upon liquidation, dissolution or winding up),
except in accordance with a purchase offer made to all holders
of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any Subsidiary (as
hereinafter defined) of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner. A "Subsidiary" of the Corporation shall
mean any corporation or other entity of which securities or other ownership
interests having ordinary voting power sufficient to elect a majority of the
Board of Directors or other persons performing similar functions are
beneficially owned, directly or indirectly, by the Corporation or by any
corporation or other entity that is otherwise controlled by the Corporation.
(C) The Corporation shall not issue any shares of Series B
Preferred Stock except upon exercise of Rights (the "Series B Rights") issued
pursuant to that certain Rights Agreement dated as of November 2, 2003 between
the Corporation and SunTrust Bank, as rights agent, a copy of which is on file
with the Secretary of the Corporation at its principal executive office and
shall be made available to shareholders of record without charge upon written
request therefor addressed to said Secretary. Notwithstanding the foregoing
sentence, nothing contained in the provisions hereof shall prohibit or restrict
the Corporation from issuing for any purpose any series of Preferred Stock with
rights and privileges similar to, different from, or greater than, those of the
Series B Preferred Stock.
4
(5) Reacquired Shares. Any shares of Series B Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares upon their retirement and cancellation shall become authorized but
unissued shares of preferred stock, without designation as to series, and such
shares may be reissued as part of a new series of preferred stock to be created
by resolution or resolutions of the Board of Directors.
(6) Liquidation, Dissolution or Winding Up. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (A) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series B Preferred Stock unless the holders of shares of Series B Preferred
Stock shall have received, subject to adjustment as hereinafter provided, (i)
$45 per one-hundredth share plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
or (ii) if greater than the amount specified in clause (A)(i) of this sentence,
an amount equal to 100 times the aggregate amount to be distributed per share to
holders of Common Stock, as the same may be adjusted as hereinafter provided,
and (B) to the holders of stock ranking on a parity upon liquidation,
dissolution or winding up with the Series B Preferred Stock, unless
simultaneously therewith distributions are made ratably on the Series B
Preferred Stock and all other shares of such parity stock in proportion to the
total amounts to which the holders of shares of Series B Preferred Stock are
entitled under clause (A)(i) of this sentence and to which the holders of such
parity shares are entitled, in each case upon such liquidation, dissolution or
winding up. The amount to which holders of Series B Preferred Stock may be
entitled upon liquidation, dissolution or winding up of the Corporation pursuant
to clause (A) of the foregoing sentence is hereinafter referred to as the
"Series B Participating Liquidation Amount" and the multiple of the amount to be
distributed to holders of shares of Common Stock upon the liquidation,
dissolution or winding up of the Corporation applicable pursuant to said clause
to the determination of the Series B Participating Liquidation Amount, as said
multiple may be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Series B Liquidation Multiple". In the event the
Corporation shall at any time after November 2, 2003 declare or pay any dividend
on Common Stock payable in shares of Common Stock, or effect a subdivision or
split or a combination, consolidation or reverse split of the outstanding shares
of Common Stock into a greater or lesser number of shares of Common Stock, then
in each such case the Series B Liquidation Multiple thereafter applicable to the
determination of the Series B Participating Liquidation Amount to which holders
of Series B Preferred Stock shall be entitled after such event shall be the
Series B Liquidation Multiple applicable immediately prior to such event
multiplied by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(7) Certain Reclassifications and Other Events.
(A) In the event that holders of shares of Common Stock of
the Corporation receive after November 2, 2003 in respect of their shares of
Common Stock any share of capital stock of the Corporation (other than any share
of Common Stock of the Corporation), whether by way of reclassification,
recapitalization, reorganization, dividend or other distribution or otherwise (a
"Common Stock Transaction"), then and in each such event the dividend rights,
voting rights and rights upon the liquidation, dissolution or winding up of the
Corporation of the shares of Series B Preferred Stock shall be adjusted so that
after such event the holders of Series B Preferred Stock shall be entitled, in
respect of each share of Series B Preferred Stock held, in addition to such
rights in respect thereof to which such holder was entitled immediately prior to
such adjustment, to (i) such additional dividends as equal the
5
Series B Dividend Multiple in effect immediately prior to such Common Stock
Transaction multiplied by the additional dividends which the holder of a share
of Common Stock shall be entitled to receive by virtue of the receipt in the
Common Stock Transaction of such capital stock, (ii) such additional voting
rights as equal the Series B Vote Multiple in effect immediately prior to such
Common Stock Transaction multiplied by the additional voting rights which the
holder of a share of Common Stock shall be entitled to receive by virtue of the
receipt in the Common Stock Transaction of such capital stock and (iii) such
additional distributions upon liquidation, dissolution or winding up of the
Corporation as equal the Series B Liquidation Multiple in effect immediately
prior to such Common Stock Transaction multiplied by the additional amount which
the holder of a share of Common Stock shall be entitled to receive upon
liquidation, dissolution or winding up of the Corporation by virtue of the
receipt in the Common Stock Transaction of such capital stock, as the case may
be, all as provided by the terms of such capital stock.
(B) In the event that holders of shares of Common Stock of
the Corporation receive after November 2, 2003 in respect of their shares of
Common Stock any right or warrant to purchase Common Stock (including as such a
right, for all purposes of this paragraph, any security convertible into or
exchangeable for Common Stock) at a purchase price per share less than the Fair
Market Value (as hereinafter defined) of a share of Common Stock on the date of
issuance of such right or warrant, then and in each such event the dividend
rights, voting rights and rights upon the liquidation, dissolution or winding up
of the Corporation of the shares of Series B Preferred Stock shall each be
adjusted so that after such event the Series B Dividend Multiple, the Series B
Vote Multiple and the Series B Liquidation Multiple shall each be the product of
the Series B Dividend Multiple, the Series B Vote Multiple and the Series B
Liquidation Multiple, as the case may be, in effect immediately prior to such
event multiplied by a fraction the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock which could be
acquired upon exercise in full of all such rights or warrants and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately before such issuance of rights or warrants plus the number of shares
of Common Stock which could be purchased, at the Fair Market Value of the Common
Stock at the time of such issuance, by the maximum aggregate consideration
payable upon exercise in full of all such rights or warrants.
(C) In the event that holders of shares of Common Stock of
the Corporation receive after November 2, 2003 in respect of their shares of
Common Stock any right or warrant to purchase capital stock of the Corporation
(other than shares of Common Stock), including as such a right, for all purposes
of this paragraph, any security convertible into or exchangeable for capital
stock of the Corporation (other than Common Stock), at a purchase price per
share less than the Fair Market Value of such shares of capital stock on the
date of issuance of such right or warrant, then and in each such event the
dividend rights, voting rights and rights upon liquidation, dissolution or
winding up of the Corporation of the shares of Series B Preferred Stock shall
each be adjusted so that after such event each holder of a share of Series B
Preferred Stock shall be entitled, in respect of each share of Series B
Preferred Stock held, in addition to such rights in respect thereof to which
such holder was entitled immediately prior to such event, to receive (i) such
additional dividends as equal the Series B Dividend Multiple in effect
immediately prior to such event multiplied, first, by the additional dividends
to which the holder of a share of Common Stock shall be entitled upon exercise
of such right or warrant by virtue of the capital stock which could be acquired
upon such exercise and multiplied again by the Discount Fraction (as hereinafter
defined) and (ii) such additional voting rights as equal the Series B Vote
Multiple in effect immediately prior to such event multiplied, first, by the
additional voting rights to which the holder of a share of Common Stock shall be
entitled upon exercise of such right or warrant by virtue of the capital stock
which could be acquired upon such exercise and multiplied again by the Series B
Discount Fraction and (iii) such additional distributions upon liquidation,
dissolution or winding up of
6
the Corporation as equal the Series B Liquidation Multiple in effect immediately
prior to such event multiplied, first, by the additional amount which the holder
of a share of Common Stock shall be entitled to receive upon liquidation,
dissolution or winding up of the Corporation upon exercise of such right or
warrant by virtue of the capital stock which could be acquired upon such
exercise and multiplied again by the Series B Discount Fraction. For purposes of
this paragraph, the "Series B Discount Fraction" shall be a fraction the
numerator of which shall be the difference between the Fair Market Value of a
share of the capital stock subject to a right or warrant distributed to holders
of shares of Common Stock of the Corporation as contemplated by this paragraph
immediately after the distribution thereof and the purchase price per share for
such share of capital stock pursuant to such right or warrant and the
denominator of which shall be the Fair Market Value of a share of such capital
stock immediately after the distribution of such right or warrant.
(D) For purposes of this Section (e) of Article III, the
"Fair Market Value" of a share of capital stock of the Corporation (including a
share of Common Stock) on any date shall be deemed to be the average of the
daily closing price per share thereof over the 30 consecutive Trading Days (as
such term is hereinafter defined) immediately prior to such date; provided,
however, that, in the event that such Fair Market Value of any such share of
capital stock is determined during a period which includes any date that is
within 30 Trading Days after (i) the ex-dividend date for a dividend or
distribution on stock payable in shares of such stock or securities convertible
into shares of such stock, or (ii) the effective date of any subdivision, split,
combination, consolidation, reverse stock split or reclassification of such
stock, then, and in each such case, the Fair Market Value shall be appropriately
adjusted by the Board of Directors of the Corporation to take into account
ex-dividend or post-effective date trading. The closing price for any day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way (in
either case, as reported in the applicable transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange), or, if the shares are not listed or admitted to trading on the New
York Stock Exchange, as reported in the applicable transaction reporting system
with respect to securities listed on the principal national, securities exchange
on which the shares are listed or admitted to trading or, if the shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System's National Market System
("NASDAQ/NMS") or such other system then in use, or if on any such date the
shares are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the shares selected by the Board of Directors of the Corporation. The term
"Trading Day" shall mean a day on which the principal national securities
exchange on which the shares are listed or admitted to trading is open for the
transaction of business or, if the shares are not listed or admitted to trading
on any national securities exchange, on which the NASDAQ/NMS or such national
securities exchange as may be selected by the Board of Directors of the
Corporation is open. If the shares are not publicly held or not so listed or
traded on any day within the period of 30 Trading Days applicable to the
determination of Fair Market Value thereof as aforesaid, "Fair Market Value"
shall mean the fair market value thereof per share as determined in good faith
by the Board of Directors of the Corporation. In either case referred to in the
foregoing sentence, the determination of Fair Market Value shall be described in
a statement filed with the Secretary of the Corporation.
(8) Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
outstanding share of Series B Preferred Stock shall at the same time be
similarly exchanged for or
7
changed into the aggregate amount of stock, securities, cash and/or other
property (payable in like kind), as the case may be, for which or into which
each share of Common Stock is changed or exchanged multiplied by the highest of
the Series B Vote Multiple, the Series B Dividend Multiple or the Series B
Liquidation Multiple in effect immediately prior to such event.
(9) Effective Time of Adjustments.
(A) Adjustments to the Series B Preferred Stock required by
the provisions hereof shall be effective as of the time at which the event
requiring such adjustments occurs.
(B) The Corporation shall give prompt written notice to each
holder of a share of Series B Preferred Stock of the effect of any adjustment to
the voting rights, dividend rights or rights upon liquidation, dissolution or
winding up of the Corporation of such shares required by the provisions hereof.
Notwithstanding the foregoing sentence, the failure of the Corporation to give
such notice shall not affect the validity of or the force or effect of or the
requirement for such adjustment.
(10) No Redemption. The shares of Series B Preferred Stock shall not
be redeemable at the option of the Corporation or any holder thereof.
Notwithstanding the foregoing sentence of this Section 10, the Corporation may
acquire shares of Series B Preferred Stock in any other manner permitted by law
and the Articles of Incorporation.
(11) Ranking. Unless otherwise provided in these Articles of
Incorporation, the Series B Preferred Stock shall rank pari pasu with the Series
C Preferred Stock and junior to all other series of the Corporation's Preferred
Stock as to the payment of dividends and the distribution of assets on
liquidation, dissolution or winding up and shall rank senior to the Common
Stock.
(12) Amendment. These Articles of Incorporation of the Corporation
shall not be amended in any manner which would adversely affect the rights,
preferences or limitations of the Series B Preferred Stock without, in addition
to any other vote of shareholders required by law, the approval of (1) the
holders of the then outstanding Rights (as defined in Section (f)(4)(C) of this
Article III) and (2) the holders of the then outstanding shares of the Series B
Preferred Stock, with the holders of the Rights and the holders of the Series B
Preferred Stock voting together as a single voting group; provided, however,
that the holder of each share of Series B Preferred Stock shall have one vote
and the holder of each Right shall have one one-hundredth of a vote with respect
to each such amendment."
"(g) SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
(1) Designation and Amount. The shares of such series shall be
designated as "Series C Junior Participating Preferred Stock" (the "Series C
Preferred Stock") and the number of shares constituting such series shall be
300,000.
(2) Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set
forth, the holders of shares of Series C Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, (i) cash dividends in an amount per share (rounded to
the nearest cent) equal to 100 times the aggregate per share amount of all cash
dividends declared or paid on the Class A Common Stock of the Corporation and
(ii) a preferential cash dividend (the "Series C Preferential Cash Dividends"),
if any, on the first day of February, May, August and
8
November of each year (each a "Series C Quarterly Dividend Payment Date"),
commencing on the first Series C Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series C Preferred Stock, in an
amount equal to $.65 per share of Series C Preferred Stock less the per share
amount of all cash dividends declared on the Series C Preferred Stock pursuant
to clause (i) of this sentence since the immediately preceding Series C
Quarterly Dividend Payment Date or, with respect to the first Series C Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series C Preferred Stock. In the event the Corporation shall, at any
time after the issuance of any share or fraction of a share of Series C
Preferred Stock, make any distribution on the shares of Cass A Common Stock of
the Corporation, whether by way of a dividend or a reclassification of stock, a
recapitalization, reorganization or partial liquidation of the Corporation or
otherwise, which is payable in cash or any debt security, debt instrument, real
or personal property or any other property (other than cash dividends subject to
the immediately preceding sentence, a distribution of shares of Class A Common
Stock or other capital stock of the Corporation or a distribution of rights or
warrants to acquire any such share, including any debt security convertible into
or exchangeable for any such share, at a price less than the Fair Market Value
(as defined in Section (g)(7)(D) of this Article III) of such share), then and
in each such event the Corporation shall simultaneously pay on each then
outstanding share of Series C Preferred Stock of the Corporation a distribution,
in like kind, of 100 times such distribution paid on a share of Class A Common
Stock (subject to the provisions for adjustment hereinafter set forth). The
dividends and distributions on the Series C Preferred Stock to which holders
thereof are entitled pursuant to clause (i) of the first sentence of this
paragraph and pursuant to the second sentence of this paragraph are hereinafter
referred to as "Series C Participating Dividends" and the multiple of such cash
and non-cash dividends on the Class A Common Stock applicable to the
determination of the Series C Participating Dividends, which shall be 100
initially but shall be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Series C Dividend Multiple". In the event the
Corporation shall at any time after November 2, 2003 declare or pay any dividend
or make any distribution on Class A Common Stock payable in shares of Class A
Common Stock, or effect a subdivision or split or a combination, consolidation
or reverse split of the outstanding shares of Class A Common Stock into a
greater or lesser number of shares of Class A Common Stock, then in each such
case the Series C Dividend Multiple thereafter applicable to the determination
of the amount of Series C Participating Dividends which holders of shares of
Series C Preferred Stock shall be entitled to receive shall be the Series C
Dividend Multiple applicable immediately prior to such event multiplied by a
fraction the numerator of which is the number of shares of Class A Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Class A Common Stock that were outstanding immediately prior
to such event.
(B) The Corporation shall declare each Series C
Participating Dividend at the same time it declares any cash or non-cash
dividend or distribution on the Class A Common Stock in respect of which a
Series C Participating Dividend is required to be paid. No cash or non-cash
dividend or distribution on the Class A Common Stock in respect of which a
Series C Participating Dividend is required to be paid shall be paid or set
aside for payment on the Class A Common Stock unless a Series C Participating
Dividend in respect of such dividend or distribution on the Class A Common Stock
shall be simultaneously paid, or set aside for payment, on the Series C
Preferred Stock.
(C) Series C Preferential Cash Dividends shall begin to
accrue on outstanding shares of Series C Preferred Stock from the Series C
Quarterly Dividend Payment Date next preceding the date of issuance of any
shares of Series C Preferred Stock. Accrued but unpaid Series C Preferential
Cash Dividends shall be cumulative but shall not bear interest. Series C
Preferential Cash Dividends paid on the shares of Series C Preferred Stock in an
amount less than the total amount of such dividends at the
9
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.
(3) Voting Rights. The holders of shares of Series C Preferred Stock
shall have the following voting rights:
(A) Subject to the provisions for adjustment hereinafter set
forth, each share of Series C Preferred Stock shall entitle the holder thereof
to 10 votes on all matters submitted to a vote of the shareholders of the
Corporation. The number of votes which a holder of a share of Series C Preferred
Stock is entitled to cast, as the same may be adjusted from time to time as
hereinafter provided, is hereinafter referred to as the "Series C Vote
Multiple". In the event the Corporation shall at any time after November 2, 2003
declare or pay any dividend on Class A Common Stock payable in shares of Class A
Common Stock, or effect a subdivision or split or a combination, consolidation
or reverse split of the outstanding shares of Class A Common Stock into a
greater or lesser number of shares of Class A Common Stock, then in each such
case the Series C Vote Multiple thereafter applicable to the determination of
the number of votes per share to which holders of shares of Series C Preferred
Stock shall be entitled after such event shall be the Series C Vote Multiple
immediately prior to such event multiplied by a fraction the numerator of which
is the number of shares of Class A Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Class A
Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided in these Articles of
Incorporation or the Bylaws of the Corporation, the holders of shares of Series
C Preferred Stock and Series B Preferred Stock and the holders of shares of
Class A Common Stock and Common Stock shall vote together as a single voting
group on all matters submitted to a vote of shareholders of the Corporation.
(C) Unless otherwise provided in these Articles of
Incorporation, in the event that any preferential cash dividend to which the
holders of any currently existing or future series of the Series C Preferred
Stock are entitled (collectively, the "Series C Preferred Cash Dividends") has
accrued for four or more quarterly dividend periods, whether consecutive or not,
and shall not have been declared and paid (or a sum sufficient for the payment
thereof has been set aside) in full, the holders of record of such series of
Series C Preferred Stock, other than any series in respect of which such right
is expressly withheld by these Articles of Incorporation (such holders existing
from time to time being hereinafter referred to as the "Unpaid Series C
Holders"), acting as a single voting group, shall have the right, at the next
meeting of shareholders called for the election of Directors, to elect one
member to the Board of Directors, which Director (hereinafter, the "Series C
Preferred Director") shall be in addition to the number of Directors required by
the Bylaws of the Corporation prior to such event, to serve until the next
annual meeting of shareholders and until their successors are elected and
qualified or their earlier resignation, removal or incapacity or until such
earlier time as all accrued and unpaid Series C Preferred Cash Dividends shall
have been paid (or a sum sufficient for the payment thereof has been set aside)
in full. If at any annual meeting of shareholders at which the term of a Series
C Preferred Director is fixed to expire there are accrued Series C Preferred
Cash Dividends which have not been paid (or a sum sufficient for payment thereof
has not been set aside) in full, the Unpaid Series C Holders shall have the
right to elect a Series C Preferred Director to the vacant Directorship
resulting from the expiration of the term of such Series C Preferred Director in
the manner provided in the immediately preceding sentence until all accrued and
unpaid Series C Preferred Cash Dividends shall have been paid (or a sum
sufficient for payment thereof has been set aside) in full; provided, however,
that at no time shall more than one Series C Preferred Director be a member of
the Board of Directors. The Series C Preferred Director may be removed, with or
without cause, by the Unpaid Series C Holders. Vacancies in such Directorship
10
(whether caused by death, resignation, removal or otherwise) may be filled (if
any accrued Series C Preferred Cash Dividends remain unpaid or a sum sufficient
for payment thereof has not been set aside) only by the Unpaid Series C Holders
in the manner permitted by law; provided, however, that any such action by the
Unpaid Series C Holders shall be taken at a meeting of shareholders and shall
not be taken by written consent; provided further, however, that by a vote of a
majority of the Board of Directors in office other than the Series C Preferred
Director, the Series C Preferred Director may be removed immediately after all
accrued and unpaid Series C Preferred Cash Dividends shall have been paid (or a
sum sufficient for the payment thereof has been set aside) in full.
(D) Except as otherwise provided in these Articles of
Incorporation or the Bylaws of the Corporation, holders of Series C Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Class A
Common Stock as set forth herein) for the taking of any corporate action.
(4) Certain Restrictions.
(A) Whenever Series C Preferential Cash Dividends or Series
C Participating Dividends are in arrears or the Corporation shall be in default
of payment thereof, thereafter and until all accrued and unpaid Series C
Preferential Cash Dividends and Series C Participating Dividends, whether or not
declared, on shares of Series C Preferred Stock outstanding shall have been paid
(or a sum sufficient for payment thereof has been set aside) in full, and in
addition to any and all other rights which any holder of shares of Series C
Preferred Stock may have in such circumstances, the Corporation shall not
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series C Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity as to
dividends with the Series C Preferred Stock, unless dividends
are paid ratably on the Series C Preferred Stock and all such
parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled if the full dividends accrued thereon
were to be paid;
(iii) except as permitted by subparagraph (iv) of this
paragraph (4)(A), redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up)
with the Series C Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (both as to dividends and upon
liquidation, dissolution or winding up) to the Series C
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration
any shares of Series C Preferred Stock, or any shares of stock
ranking on a parity with the Series C Preferred Stock (either as
to dividends or upon liquidation, dissolution or winding up),
except in accordance with a purchase offer made to all holders
of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine
11
in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any Subsidiary (as
hereinafter defined) of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner. A "Subsidiary" of the Corporation shall
mean any corporation or other entity of which securities or other ownership
interests having ordinary voting power sufficient to elect a majority of the
Board of Directors or other persons performing similar functions are
beneficially owned, directly or indirectly, by the Corporation or by any
corporation or other entity that is otherwise controlled by the Corporation.
(C) The Corporation shall not issue any shares of Series C
Preferred Stock except upon exercise of Rights (the "Series C Rights") issued
pursuant to that certain Rights Agreement dated as of November 2, 2003 between
the Corporation and SunTrust Bank, as rights agent, a copy of which is on file
with the Secretary of the Corporation at its principal executive office and
shall be made available to shareholders of record without charge upon written
request therefor addressed to said Secretary. Notwithstanding the foregoing
sentence, nothing contained in the provisions hereof shall prohibit or restrict
the Corporation from issuing for any purpose any series of preferred stock with
rights and privileges similar to, different from, or greater than, those of the
Series C Preferred Stock.
(5) Reacquired Shares. Any shares of Series C Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares upon their retirement and cancellation shall become authorized but
unissued shares of preferred stock, without designation as to series, and such
shares may be reissued as part of a new series of preferred stock to be created
by resolution or resolutions of the Board of Directors.
(6) Liquidation, Dissolution or Winding Up. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (A) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series C Preferred Stock unless the holders of shares of Series C Preferred
Stock shall have received, subject to adjustment as hereinafter provided, (i)
$39 per one-hundredth share plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
or (ii) if greater than the amount specified in clause (A)(i) of this sentence,
an amount equal to 100 times the aggregate amount to be distributed per share to
holders of Class A Common Stock, as the same may be adjusted as hereinafter
provided, and (B) to the holders of stock ranking on a parity upon liquidation,
dissolution or winding up with the Series C Preferred Stock, unless
simultaneously therewith distributions are made ratably on the Series C
Preferred Stock and all other shares of such parity stock in proportion to the
total amounts to which the holders of shares of Series C Preferred Stock are
entitled under clause (A)(i) of this sentence and to which the holders of such
parity shares are entitled, in each case upon such liquidation, dissolution or
winding up. The amount to which holders of Series C Preferred Stock may be
entitled upon liquidation, dissolution or winding up of the Corporation pursuant
to clause (A) of the foregoing sentence is hereinafter referred to as the
"Series C Participating Liquidation Amount" and the multiple of the amount to be
distributed to holders of shares of Class A Common Stock upon the liquidation,
dissolution or winding up of the Corporation applicable pursuant to said clause
to the determination of the Participating Liquidation Amount, as said multiple
may be adjusted from time to time as hereinafter provided, is hereinafter
referred to as the "Series C Liquidation Multiple". In the event the Corporation
shall at any time after November 2, 2003 declare or pay any dividend on Class A
12
Common Stock payable in shares of Class A Common Stock, or effect a subdivision
or split or a combination, consolidation or reverse split of the outstanding
shares of Class A Common Stock into a greater or lesser number of shares of
Class A Common Stock, then in each such case the Series C Liquidation Multiple
thereafter applicable to the determination of the Series C Participating
Liquidation Amount to which holders of Series C Preferred Stock shall be
entitled after such event shall be the Series C Liquidation Multiple applicable
immediately prior to such event multiplied by a fraction the numerator of which
is the number of shares of Class A Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Class A
Common Stock that were outstanding immediately prior to such event.
(7) Certain Reclassifications and Other Events.
(A) In the event that holders of shares of Class A Common
Stock of the Corporation receive after November 2, 2003 in respect of their
shares of Class A Common Stock any share of capital stock of the Corporation
(other than any share of Class A Common Stock of the Corporation), whether by
way of reclassification, recapitalization, reorganization, dividend or other
distribution or otherwise (a "Class A Common Stock Transaction"), then and in
each such event the dividend rights, voting rights and rights upon the
liquidation, dissolution or winding up of the Corporation of the shares of
Series C Preferred Stock shall be adjusted so that after such event the holders
of Series C Preferred Stock shall be entitled, in respect of each share of
Series C Preferred Stock held, in addition to such rights in respect thereof to
which such holder was entitled immediately prior to such adjustment, to (i) such
additional dividends as equal the Series C Dividend Multiple in effect
immediately prior to such Class A Common Stock Transaction multiplied by the
additional dividends which the holder of a share of Class A Common Stock shall
be entitled to receive by virtue of the receipt in the Class A Common Stock
Transaction of such capital stock, (ii) such additional voting rights as equal
the Series C Vote Multiple in effect immediately prior to such Class A Common
Stock Transaction multiplied by the additional voting rights which the holder of
a share of Class A Common Stock shall be entitled to receive by virtue of the
receipt in the Class A Common Stock Transaction of such capital stock and (iii)
such additional distributions upon liquidation, dissolution or winding up of the
Corporation as equal the Series C Liquidation Multiple in effect immediately
prior to such Class A Common Stock Transaction multiplied by the additional
amount which the holder of a share of Class A Common Stock shall be entitled to
receive upon liquidation, dissolution or winding up of the Corporation by virtue
of the receipt in the Class A common Stock Transaction of such capital stock, as
the case may be, all as provided by the terms of such capital stock.
(B) In the event that holders of shares of Class A Common
Stock of the Corporation receive after November 2, 2003 in respect of their
shares of Class A Common Stock any right or warrant to purchase Class A Common
Stock (including as such a right, for all purposes of this paragraph, any
security convertible into or exchangeable for Class A Common Stock) at a
purchase price per share less than the Fair Market Value (as hereinafter
defined) of a share of Class A Common Stock on the date of issuance of such
right or warrant, then and in each such event the dividend rights, voting rights
and rights upon the liquidation, dissolution or winding up of the Corporation of
the shares of Series C Preferred Stock shall each be adjusted so that after such
event the Series C Dividend Multiple, the Series C Vote Multiple and the Series
C Liquidation Multiple shall each be the product of the Series C Dividend
Multiple, the Series C Vote Multiple and the Series C Liquidation Multiple, as
the case may be, in effect immediately prior to such event multiplied by a
fraction the numerator of which shall be the number of shares of Class A
13
Common Stock outstanding immediately before such issuance of rights or warrants
plus the maximum number of shares of Class A Common Stock which could be
acquired upon exercise in full of all such rights or warrants and the
denominator of which shall be the number of shares of Class A Common Stock
outstanding immediately before such issuance of rights or warrants plus the
number of shares of Class A Common Stock which could be purchased, at the Fair
Market Value of the Class A Common Stock at the time of such issuance, by the
maximum aggregate consideration payable upon exercise in full of all such rights
or warrants.
(C) In the event that holders of shares of Class A Common
Stock of the Corporation receive after November 2, 2003 in respect of their
shares of Class A Common Stock any right or warrant to purchase capital stock of
the Corporation (other than shares of Class A Common Stock), including as such a
right, for all purposes of this paragraph, any security convertible into or
exchangeable for capital stock of the Corporation (other than Class A Common
Stock), at a purchase price per share less than the Fair Market Value of such
shares of capital stock on the date of issuance of such right or warrant, then
and in each such event the dividend rights, voting rights and rights upon
liquidation, dissolution or winding up of the Corporation of the shares of
Series C Preferred Stock shall each be adjusted so that after such event each
holder of a share of Series C Preferred Stock shall be entitled, in respect of
each share of Series C Preferred Stock held, in addition to such rights in
respect thereof to which such holder was entitled immediately prior to such
event, to receive (i) such additional dividends as equal the Series C Dividend
Multiple in effect immediately prior to such event multiplied, first, by the
additional dividends to which the holder of a share of Class A Common Stock
shall be entitled upon exercise of such right or warrant by virtue of the
capital stock which could be acquired upon such exercise and multiplied again by
the Series C Discount Fraction (as hereinafter defined) and (ii) such additional
voting rights as equal the Series C Vote Multiple in effect immediately prior to
such event multiplied, first, by the additional voting rights to which the
holder of a share of Class A Common Stock shall be entitled upon exercise of
such right or warrant by virtue of the capital stock which could be acquired
upon such exercise and multiplied again by the Series C Discount Fraction and
(iii) such additional distributions upon liquidation, dissolution or winding up
of the Corporation as equal the Series C Liquidation Multiple in effect
immediately prior to such event multiplied, first, by the additional amount
which the holder of a share of Class A Common Stock shall be entitled to receive
upon liquidation, dissolution or winding up of the Corporation upon exercise of
such right or warrant by virtue of the capital stock which could be acquired
upon such exercise and multiplied again by the Series C Discount Fraction. For
purposes of this paragraph, the "Series C Discount Fraction" shall be a fraction
the numerator of which shall be the difference between the Fair Market Value of
a share of the capital stock subject to a right or warrant distributed to
holders of shares of Class A Common Stock of the Corporation as contemplated by
this paragraph immediately after the distribution thereof and the purchase price
per share for such share of capital stock pursuant to such right or warrant and
the denominator of which shall be the Fair Market Value of a share of such
capital stock immediately after the distribution of such right or warrant.
(D) For purposes of this Section (e) of Article III, the
"Fair Market Value" of a share of capital stock of the Corporation (including a
share of Class A Common Stock) on any date shall be deemed to be the average of
the daily closing price per share thereof over the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
however, that, in the event that such Fair Market Value of any such share of
capital stock is determined during a period which includes any date that is
within 30 Trading Days after (i) the ex-dividend date for a dividend or
distribution on stock payable in shares of such stock or securities convertible
into shares of such stock, or (ii) the effective date of any subdivision, split,
combination, consolidation, reverse stock split or reclassification of such
stock, then, and in each such case, the Fair Market Value shall be appropriately
adjusted by the Board of Directors of the Corporation to take into account
ex-dividend or post-effective date trading. The closing price for any day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way (in
either case, as reported in the applicable transaction reporting system with
respect to securities listed or admitted to
14
trading on the New York Stock Exchange), or, if the shares are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
applicable transaction reporting system with respect to securities listed on the
principal national, securities exchange on which the shares are listed or
admitted to trading or, if the shares are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System's National Market System ("NASDAQ/NMS") or such other system
then in use, or if on any such date the shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the shares selected by the Board of
Directors of the Corporation. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares are listed or
admitted to trading is open for the transaction of business or, if the shares
are not listed or admitted to trading on any national securities exchange, on
which the NASDAQ/NMS or such national securities exchange as may be selected by
the Board of Directors of the Corporation is open. If the shares are not
publicly held or not so listed or traded on any day within the period of 30
Trading Days applicable to the determination of Fair Market Value thereof as
aforesaid, "Fair Market Value" shall mean the fair market value thereof per
share as determined in good faith by the Board of Directors of the Corporation.
In either case referred to in the foregoing sentence, the determination of Fair
Market Value shall be described in a statement filed with the Secretary of the
Corporation.
(8) Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Class A Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
outstanding share of Series C Preferred Stock shall at the same time be
similarly exchanged for or changed into the aggregate amount of stock,
securities, cash and/or other property (payable in like kind), as the case may
be, for which or into which each share of Class A Common Stock is changed or
exchanged multiplied by the highest of the Series C Vote Multiple, the Series C
Dividend Multiple or the Series C Liquidation Multiple in effect immediately
prior to such event.
(9) Effective Time of Adjustments.
(A) Adjustments to the Series C Preferred Stock required by
the provisions hereof shall be effective as of the time at which the event
requiring such adjustments occurs.
(B) The Corporation shall give prompt written notice to each
holder of a share of Series C Preferred Stock of the effect of any adjustment to
the voting rights, dividend rights or rights upon liquidation, dissolution or
winding up of the Corporation of such shares required by the provisions hereof.
Notwithstanding the foregoing sentence, the failure of the Corporation to give
such notice shall not affect the validity of or the force or effect of or the
requirement for such adjustment.
(10) No Redemption. The shares of Series C Preferred Stock shall not
be redeemable at the option of the Corporation or any holder thereof.
Notwithstanding the foregoing sentence of this Section 10, the Corporation may
acquire shares of Series C Preferred Stock in any other manner permitted by law
and the Articles of Incorporation.
(11) Ranking. Unless otherwise provided in these Articles of
Incorporation, the Series C Preferred Stock shall rank pari pasu with the Series
B Preferred Stock and junior to all other series of the Corporation's Preferred
Stock as to the payment of dividends and the distribution of assets on
liquidation, dissolution or winding up and shall rank senior to the Class A
Common Stock.
15
(12) Amendment. These Articles of Incorporation of the Corporation
shall not be amended in any manner which would adversely affect the rights,
preferences or limitations of the Series C Preferred Stock without, in addition
to any other vote of shareholders required by law, the approval of (1) the
holders of the then outstanding Rights (as defined in Section (g)(4)(C) of this
Article III) and (2) the holders of the then outstanding shares of the Series C
Preferred Stock, with the holders of the Rights and the holders of the Series C
Preferred Stock voting together as a single voting group; provided, however,
that the holder of each share of Series C Preferred Stock shall have one vote
and the holder of each Right shall have one one-hundredth of a vote with respect
to each such amendment."
3. The foregoing amendment was adopted by the Board of Directors on
November 2, 2003. A vote of shareholders of the Corporation was not needed for
the adoption of these Articles of Amendment.
IN WITNESS WHEREOF, the undersigned Officer of the Corporation has
executed these Articles of Amendment on November 2, 2003.
HEICO CORPORATION
/s/ Thomas S. Irwin
---------------------------------
By: Thomas S. Irwin
Title: Executive Vice President
and Treasurer
16
Exhibit 10.7
FIRST AMENDMENT
HEICO SAVINGS AND INVESTMENT PLAN
WHEREAS, HEICO Corporation (the "Company") maintains the HEICO Savings
and Investment Plan (the "Plan");
WHEREAS, the Plan was amended and restated effective January 1, 2002;
WHEREAS, pursuant to the terms of the Plan, the Company is authorized
and empowered to amend the Plan;
WHEREAS, the Company deems it advisable to amend the Plan; and
WHEREAS, the Company has delegated to the undersigned officer of the
Company the power and authority to make changes to the Plan as deemed necessary
or desirable.
NOW, THEREFORE, by virtue and in exercise of the power reserved to the
Company by Section 15.01 of the Plan and pursuant to the authority delegated to
the undersigned officer of the Company by the Board of Directors, the Plan is
hereby amended, effective January 1, 2002, unless such other date is
specifically mentioned, as follows:
FIRST: Sections 2.02, 2.06, 2.07, 7.01, 7.02 and 7.03 are amended as follows:
All references in Sections 2.02, 2.06, 2.07, 7.01, 7.02 and
7.03 to the singular or the plural form of the terms
"Eligible Employee" and "Employee" shall be substituted with
the singular or plural form of the term "Participant" where
appropriate.
SECOND: Section 2.14 is amended by adding the following paragraph at the end
thereof:
"Notwithstanding the above, Compensation for purposes of
Section 2.02, Section 2.15, Article 4 and Article 7 for the
Plan Year in which an Employee first becomes a Participant
shall be determined based on the Employee's Compensation for
the portion of the Plan Year in which the Employee is
eligible to participate in the Plan. Notwithstanding the
preceding
sentence, Compensation for purposes of Section 5.01 and
Section 5.02 (Limit on Annual Additions) shall be based on
the amount actually paid or made available to the
Participant during the Plan Year."
THIRD: Section 2.15 is replaced with the following which shall read:
"2.15 "Actual Contribution Percentage" shall mean the ratio,
expressed as a percentage, of the sum of the after tax
contributions and Employer Contributions under the Plan on
behalf of a Participant for the Plan Year to the
Participant's Compensation for the Plan Year. The Actual
Contribution Percentage of each Participant shall be rounded
to the nearest 100th of such Participant's Compensation."
FOURTH: Subsection (c)(1) of Section 4.03 is amended to read as follows:
"(1) Employer Matching Contributions shall be allocated
among and credited to the Employer Matching Contributions
Account of Participants who elect to make Elective Deferral
Contributions during each calendar quarter."
FIFTH: Sections 7.02 and 7.03 are amended as follows:
All references in Sections 7.02 and 7.03 to the terms
"Contribution Percentage" and "Average Contribution
Percentage" shall be substituted with the terms "Actual
Contribution Percentage" (for the term "Contribution
Percentage") and "Average Actual Contribution Percentage"
(for the term "Average Contribution Percentage").
SIXTH: Subsection (c)(1) of Section 10.01 is amended by adding the following
sentence at the end thereof:
"For purposes of this Section, if the value of a
Participant's vested Account balance is zero, the
Participant shall be deemed to have received a distribution
of such vested Account balance."
2
IN WITNESS WHEREOF, HEICO Corporation has caused this Amendment to be
duly executed and its seal to be hereunto affixed on the date indicated below.
ATTEST: HEICO CORPORATION
(Corporate Seal)
By: /s/ Thomas S. Irwin
Title: Treasurer
/s/ Elizabeth Letendre Date: May 31, 2002
3
Exhibit 10.8
SECOND AMENDMENT
HEICO SAVINGS AND INVESTMENT PLAN
WHEREAS, the HEICO Savings and Investment Plan (the "Plan") was amended and
restated, effective January 1, 2002;
WHEREAS, HEICO Corporation (the "Company") has previously adopted the Plan;
WHEREAS, pursuant to the terms of the Plan, the Company is authorized and
empowered to amend the Plan; and
WHEREAS, the Company deems it advisable to amend the Plan.
NOW, THEREFORE, the Plan is hereby amended effective January 1, 2002 (except for
those sections that have an alternate effective date) as follows:
FIRST: A new appendix "Appendix D" is hereby added which shall read;
APPENDIX D
MINIMUM DISTRIBUTION REQUIREMENTS
SECTION 1. GENERAL RULES
1.1. Effective Date. The provisions of this Appendix D will apply for
purposes of determining required minimum distributions for calendar
years beginning with the 2003 calendar year.
1.2. Precedence. The requirements of this Appendix D will take precedence
over any inconsistent provisions of the Plan.
1.3. Requirements of Treasury Regulations Incorporated. All distributions
required under this article will be determined and made in accordance
with the treasury regulations under Code Section 401(a)(9).
1.4. TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions
of this Appendix D, distributions may be made under a designation made
before January 1, 1984, in accordance with section 242(b)(2) of the Tax
Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the
Plan that relate to section 242(b)(2) of TEFRA.
SECTION 2. TIME AND MANNER OF DISTRIBUTION.
2.1. Required Beginning Date. The Participant's entire interest will be
distributed, or begin to be distributed, to the Participant no later
than the Participant's required beginning date, as defined in section
10.06 of the Plan.
2.2. Death of Participant Before Distributions Begin. If the Participant dies
before distributions begin, the Participant's entire interest will be
distributed, or begin to be distributed, no later than as follows:
(a) If the Participant's surviving spouse is the Participant's sole
designated beneficiary, then distributions to the surviving spouse
will begin by December 31 of the calendar year immediately following
the calendar year in which the Participant died, or by December 31 of
the calendar year in which the Participant would have attained age 70
1/2, if later.
(b) If the Participant's surviving spouse is not the Participant's
sole designated beneficiary, then distributions to the designated
beneficiary will begin by December 31 of the calendar year immediately
following the calendar year in which the Participant died.
(c) If there is no designated beneficiary as of September 30 of the
year following the year of the Participant's death, the Participant's
entire interest will be distributed by December 31 of the calendar
year containing the fifth anniversary of the Participant's death.
(d) If the Participant's surviving spouse is the Participant's sole
designated beneficiary and the surviving spouse dies after the
Participant but before distributions to the surviving spouse begin,
this section 2.2, other than section 2.2(a), will apply as if the
surviving spouse was the Participant.
For purposes of this section 2.2 and section 4, unless section 2.2(d) applies,
distributions are considered to begin on the Participant's required beginning
date. If section 2.2(d) applies, distributions are considered to begin on the
date distributions are required to begin to the surviving spouse under section
2.2(a). If distributions under an annuity purchased from an insurance company
irrevocably commence to the Participant before the Participant's required
beginning date (or to the Participant's surviving spouse before the date
distributions are required to begin to the surviving spouse under section
2.2(a)), the date distributions are considered to begin is the date
distributions actually commence.
2.3. Forms of Distribution. Unless the Participant's interest is distributed
in the form of an annuity purchased from an insurance company or in a
single sum on or before the required beginning date, as of the first
distribution calendar year distributions will be made in accordance with
sections 3 and 4 of this Appendix. If the Participant's interest is
distributed in the form of an annuity purchased from an insurance
company, distributions thereunder will be made in accordance with the
requirements of section Code Section 401(a)(9) and the treasury
regulations.
SECTION 3. REQUIRED MINIMUM DISTRIBUTIONS DURING PARTICIPANT'S LIFETIME.
3.1. Amount of Required Minimum Distribution For Each Distribution Calendar
Year. During the Participant's lifetime, the minimum amount that will be
distributed for each distribution calendar year is the lesser of:
2
(a) the quotient obtained by dividing the Participant's account
balance by the distribution period in the Uniform Lifetime Table set
forth in section 1.401(a)(9)-9 of the Treasury regulations, using the
Participant's age as of the Participant's birthday in the distribution
calendar year; or
(b) if the Participant's sole designated beneficiary for the
distribution calendar year is the Participant's spouse, the quotient
obtained by dividing the Participant's account balance by the number
in the Joint and Last Survivor Table set forth in section
1.401(a)(9)-9 of the Treasury regulations, using the Participant's and
spouse's attained ages as of the Participant's and spouse's birthdays
in the distribution calendar year.
3.2. Lifetime Required Minimum Distributions Continue Through Year of
Participant's Death. Required minimum distributions will be determined
under this section 3 beginning with the first distribution calendar year
and up to and including the distribution calendar year that includes the
Participant's date of death.
SECTION 4. REQUIRED MINIMUM DISTRIBUTIONS AFTER PARTICIPANT'S DEATH.
4.1. Death On or After Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the Participant
dies on or after the date distributions begin and there is a
designated beneficiary, the minimum amount that will be distributed
for each distribution calendar year after the year of the
Participant's death is the quotient obtained by dividing the
Participant's account balance by the longer of the remaining life
expectancy of the Participant or the remaining life expectancy of the
Participant's designated beneficiary, determined as follows:
(1) The Participant's remaining life expectancy is calculated
using the age of the Participant in the year of death, reduced
by one for each subsequent year.
(2) If the Participant's surviving spouse is the Participant's
sole designated beneficiary, the remaining life expectancy of
the surviving spouse is calculated for each distribution
calendar year after the year of the Participant's death using
the surviving spouse's age as of the spouse's birthday in that
year. For distribution calendar years after the year of the
surviving spouse's death, the remaining life expectancy of the
surviving spouse is calculated using the age of the surviving
spouse as of the spouse's birthday in the calendar year of the
spouse's death, reduced by one for each subsequent calendar
year.
(3) If the Participant's surviving spouse is not the
Participant's sole designated beneficiary, the designated
beneficiary's remaining life expectancy is calculated using the
age of the beneficiary in the year following the year of the
Participant's death, reduced by one for each subsequent year
3
(b) No Designated Beneficiary. If the Participant dies on or after the
date distributions begin and there is no designated beneficiary as of
September 30 of the year after the year of the Participant's death,
the minimum amount that will be distributed for each distribution
calendar year after the year of the Participant's death is the
quotient obtained by dividing the Participant's account balance by the
Participant's remaining life expectancy calculated using the age of
the Participant in the year of death, reduced by one for each
subsequent year.
4.2. Death Before Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the Participant
dies before the date distributions begin and there is a designated
beneficiary, the minimum amount that will be distributed for each
distribution calendar year after the year of the Participant's death
is the quotient obtained by dividing the Participant's account balance
by the remaining life expectancy of the Participant's designated
beneficiary, determined as provided in section 4.1.
(b) No Designated Beneficiary. If the Participant dies before the date
distributions begin and there is no designated beneficiary as of
September 30 of the year following the year of the Participant's
death, distribution of the Participant's entire interest will be
completed by December 31 of the calendar year containing the fifth
anniversary of the Participant's death.
(c) Death of Surviving Spouse Before Distributions to Surviving Spouse
Are Required to Begin. If the Participant dies before the date
distributions begin, the Participant's surviving spouse is the
Participant's sole designated beneficiary, and the surviving spouse
dies before distributions are required to begin to the surviving
spouse under section 2.2(a), this section 4.2 will apply as if the
surviving spouse were the Participant.
SECTION 5. DEFINITIONS.
5.1. Designated beneficiary. The individual who is designated as the
beneficiary under section 2.08 of the Plan and is the designated
beneficiary under Code Section 401(a)(9) and section 1.401(a)(9)-l,
Q&A-4, of the Treasury regulations.
5.2. Distribution calendar year. A calendar year for which a minimum
distribution is required. For distributions beginning before the
Participant's death, the first distribution calendar year is the
calendar year immediately preceding the calendar year which contains the
Participant's required beginning date. For distributions beginning after
the Participant's death, the first distribution calendar year is the
calendar year in which distributions are required to begin under section
2.2. The required minimum distribution for the Participant's first
distribution calendar year will be made on or before the Participant's
required beginning date. The required minimum distribution for other
4
distribution calendar years, including the required minimum distribution
for the distribution calendar year in which the Participant's required
beginning date occurs, will be made on or before December 31 of that
distribution calendar year.
5.3. Life expectancy. Life expectancy as computed by use of the Single Life
Table in section 1.401(a)(9)-9 of the Treasury regulations.
5.4. Participant's account balance. The account balance as of the last
Valuation Date in the calendar year immediately preceding the
distribution calendar year (valuation calendar year) increased by the
amount of any contributions made and allocated or forfeitures allocated
to the account balance as of dates in the valuation calendar year after
the valuation date and decreased by distributions made in the valuation
calendar year after the valuation date. The account balance for the
valuation calendar year includes any amounts rolled over or transferred
to the Plan either in the valuation calendar year or in the distribution
calendar year if distributed or transferred in the valuation calendar
year.
SECOND: Section 2.44 of the Plan is hereby amended and replaced with the
following which shall read:
Section 2.44 "Rollover Contribution" shall mean any distribution as
provided for in Code Section 402(c)(4), or any other provision of
the Code which may permit rollovers to the Plan from time to time,
from an eligible retirement plan as that term is defined in Code
Section 402(c)(8).
THIRD: Subsection 10.06(d) of the Plan is hereby amended and replaced with
the following which shall read:
(d) Notwithstanding the above, effective for Plan Years beginning
after December 31, 2001, the value of a Participant's
nonforfeitable Account balance shall be determined without regard
to that portion of the Account balance that is attributable to
Rollover Contributions (and earnings allocable thereto) within
the meaning of Code Sections 402(c), 403(a)(4), 403(b)(8),
408(d)(3), and 457(e)(16). If the value of the Participant's
nonforfeitable account balance as so determined is $5,000 or
less, the Plan shall immediately distribute the Participant's
entire nonforfeitable Account balance.
FOURTH: Section 7.01 (a) of the Plan is hereby amended by adding the
following paragraph at the end thereof:
Notwithstanding the foregoing, the Committee may elect to determine
the permissible Actual Deferral Percentage for Highly Compensated
Employees for any Plan Year beginning on or after January 1, 1997 on
the basis of the Actual
5
Deferral Percentage of the Non-Highly Compensated Employees for the
current Plan Year rather than the preceding Plan Year, in accordance
with such regulations, notices or other guidance issued under Code
Section 401(k).
FIFTH: Section 7.02(a) of the Plan is hereby amended by adding the
following paragraph at the end thereof:
Notwithstanding the foregoing, the Committee may elect to determine
the permissible Actual Contribution Percentage for Highly
Compensated Employees for any Plan Year beginning on or after
January 1, 1997 on the basis of the Actual Contribution Percentage
of the Non-Highly Compensated Employees for the current Plan Year
rather than the preceding Plan Year, in accordance with such
regulations, notices or other guidance issued under Code Section
401(m).
SIXTH: Section 2.46 of the Plan is hereby amended and replaced with the
following which shall read:
Section 2.46 "Termination of Employment" or "Termination Date" shall
be the date on which the earliest of the following events occurs:
(a) a Participant's retirement, (b) a Participant's termination of
employment as a result of Total and Permanent Disability, (c) a
Participant's death, or (d) a Participant's termination of
employment for any other reason. Transfer of employment among
Affiliates will not be considered a termination of employment with
any Employer.
IN WITNESS WHEREOF, HEICO Corporation has caused this Amendment to be duly
executed and its seal to be hereunto affixed on the date indicated below.
ATTEST: HEICO CORPORATION
(Corporate Seal) By: /s/ Thomas S. Irwin
-----------------------
Name: Thomas S. Irwin
Title: Treasurer
Date: February 7, 2003
6
Exhibit 10.9
THIRD AMENDMENT TO THE
HEICO SAVINGS AND INVESTMENT PLAN
THIS THIRD AMENDMENT (the "Amendment"), made effective as of the 1st day
of October, 2003, to the HEICO Savings and Investment Plan (the "Plan"), by
HEICO Corporation, a Florida corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the Plan for the sole and exclusive
benefit of its eligible participants and their respective beneficiaries under
the terms and provisions of the Internal Revenue Code of 1986, as amended; and
WHEREAS, pursuant to Section 15.01 of the Plan, the Company has the
power to amend the Plan;
NOW, THEREFORE, the Plan shall be amended as follows:
1. Section 2.47 is hereby amended in its entirety to read as follows:
"2.47 "Total and Permanent Disability" or "Disability" shall
mean a physical or mental condition of a Participant resulting
from bodily injury, disease, or mental disorder which renders
such Participant incapable of continuing any gainful occupation
and which constitutes total disability under the federal Social
Security Acts."
2. Subsection 2.53(b) is hereby amended in its entirety to read as follows:
"(b) For all periods prior to January 1, 2004, the term
"Computation Period" for purpose of this Section 2.53 shall mean
the 12-month period commencing on the date an Employee is first
credited with an Hour of Service and each subsequent 12-month
period commencing on the anniversary of such date; provided,
however, that with respect to each Participant's Computation
Period that commences after January 1, 2003, then such
Computation Period shall end on December 31, 2003 (the "Short
Computation Period"). In the event that a Participant shall not
have worked at least 1,000 Hours of Service during the Short
Computation Period, that Participant shall be deemed to have
worked at least 1,000 Hours of Service for that Short
Computation Period for purposes of applying the vesting rules
under this Plan so long as that Participant continues to be
employed with the Employer as of December 31, 2003. For all
periods on or after January 1, 2004, the "Computation Period"
shall mean the Plan Year."
3. Subsection 4.03(a) is hereby amended in its entirety to read as follows:
"(a) Employer Matching Contributions. Each Employer shall
contribute Employer Matching Contributions as provided for in
this Section 4.03(a). Employer Matching Contributions shall
accrue on a payroll by payroll basis although shall be
contributed to the Plan at the end of each calendar quarter on
behalf of any Participant for whom an Employer makes Elective
Deferral Contributions for the payroll periods during that
calendar quarter. A Participant's Employer Matching
Contributions is a percentage of his Elective Deferral
Contributions, as fixed by the Board of Directors from time to
time at its sole discretion. The Employer Matching Contribution
percentage may vary (i) among Participants employed by different
Employers; or (ii) with the Participant's rate of deferral, but
must be uniform for Participants with equal rates of Elective
Deferral Contributions and may not increase as the rate of
Elective Deferral Contribution increases."
4. Subsection 4.03(c) is hereby amended in its entirety to read as follows:
"(c) Eligibility to Receive Equity Builder Contributions. Equity
Builder Contributions, if any, shall be allocated to the
Employer Accounts of Participants who are credited with 1,000
Hours of Service during the Plan Year with an Employer and is
employed on the last day of such Plan Year."
5. Subsection 4.08(a) is hereby amended in its entirety to read as follows:
"(a) As of each December 31st, any amounts which became
Forfeitures since the last December 31st shall be made available
to (i) reinstate previously forfeited Account balances of
Participants, if any, in accordance with Section 8.03, (ii) pay
administrative expenses of the Plan, and/or (iii) reduce
Employer Matching Contributions and/or Equity Builder
Contributions that Employers would otherwise make on behalf of
their current Participants that
2
Plan Year, or Participants in the next Plan Year and each
succeeding Plan Year."
6. Subsection 11.03(a) is hereby amended in its entirety to read as
follows:
"(a) The interest rate on all loans shall be commercially
reasonable at the time the Committee approves the loan. All
loans shall be evidenced by a note and shall be adequately
secured as to principal and interest. No more than 50% of the
Participant's vested portion of his Accounts valued immediately
after the origination of each loan shall serve as security for
his outstanding loan, provided, however, that the terms of any
loan may be adjusted at any time, in the sole and absolute
discretion of the Committee to ensure that there is adequate
security for the loan. No loan may have a term in excess of five
years, except for a loan obtained to acquire a principal
residence which may not have a term in excess of fifteen years."
7. Section 12.09 is hereby amended in its entirety to read as follows:
"12.09 Common Stock Cash Dividends
(a) Cash Dividends Paid on or after November 1, 2002
(1) Notwithstanding any other
provision of Article 12 to the
contrary, each Participant may
elect to:
(i) receive a distribution in
cash equal to the value of
any cash dividends paid by
the Company on or after
November 1, 2002 and
received by the Trust with
respect to shares of Common
Stock allocated to his
Employer Accounts at the
close of business on the
ex-dividend date
established for the payment
of such cash dividends; or
(ii) reinvest in the Company
Stock Fund any cash
dividends paid by the
Company on or after
November 1, 2002 and
received by the Trust with
respect to shares of Common
Stock allocated to his
Employer Accounts at the
close of business on the
ex-dividend date
established for the payment
of such cash dividends.
3
(2) Any distribution pursuant to
Section 12.09(a)(1)(i) shall be
made as soon as is
administratively feasible
following the receipt of the
cash dividends by the Trust, but
in no event later than 90 days
after the close of the Plan Year
in which such cash dividends
were paid by the Company.
(3) If a Participant fails to make
an election pursuant to Section
12.09(a)(1)(i), he shall be
deemed to have made an election
pursuant to Section 12.09
(a)(1)(ii).
(b) Dividends Paid From November 1, 2001 to October
31, 2002
A Participant may make an election, as provided
for in Section 12.09(a)(1), with respect to any
cash dividends paid by the Company to the Trust
during the Company's tax year ending October 31,
2002.
(c) Elections
The Committee shall specify the manner in which
Participants will be required to make their
elections subject to the following conditions:
(1) The Committee shall provide no
less than annually each
Participant an opportunity to
make an election.
(2) A Participant's election shall
take effect immediately
following receipt by the
Committee and shall remain in
effect until an election to the
contrary is filed by such
Participant.
(3) A Participant's election shall
become irrevocable the latter of
(i) that date on which the cash
dividends attributable to such
election are paid to the Trust,
or (ii) the date established by
the Committee for revoking such
an election.
4
(4) The rules established by the
Committee for making an election
shall be applied in a uniform
and nondiscriminatory manner.
(d) Vesting
Notwithstanding anything in the Plan to the
contrary, a Participant shall become fully
vested in all cash dividends received by the
Trust for which an election pursuant to Section
12.09(a)(1) is offered.
8. In all other respects, the Plan shall remain unchanged by the Amendment.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed the day and year first above written.
HEICO Corporation, a Florida corporation
By: /s/ Thomas S. Irwin
------------------------------------
Name: Thomas S. Irwin
Title: Treasurer
5
Exhibit 14
HEICO CORPORATION
CODE OF ETHICS FOR SENIOR FINANCIAL AND OTHER
OFFICERS
(Team members who are required to complete this questionnaire will be notified
annually)
Senior Financial and other Principal Officers related to financial matters
(Officers) hold an important and elevated role in corporate governance. As part
of the HEICO leadership team, Officers are vested with both the responsibility
and authority to protect, balance, and preserve the interests of all of the
Company's stakeholders, including shareholders, customers, Team Members and
suppliers. Officers fulfill this responsibility by prescribing and enforcing the
policies and procedures employed in the operation of the Company's financial
organization, and by demonstrating the following:
I. Honest and Ethical Conduct
Officers will exhibit and promote the highest standards
of honest and ethical conduct through the establishment and
operation of policies and procedures that:
. Encourage and reward professional integrity in
all aspects of the financial organization, by
eliminating inhibitions and barriers to
responsible behavior, such as coercion, fear of
reprisal, or alienation from the financial
organization or the Company itself.
. Prohibit and eliminate the appearance or
occurrence of conflicts between what is in the
best interest of the Company and what could
result in material personal gain for a member of
the financial organization, including financial
and other Officers.
. Provide a mechanism for members of the finance
organization to inform senior management of
deviations in practice from policies and
procedures governing honest and ethical
behavior.
. Demonstrate their personal support for such
policies and procedures through periodic
communication reinforcing these ethical
standards throughout the finance organization.
II. Financial Records and Periodic Reports
Officers will establish and manage the Company's
transaction and reporting systems and procedures to ensure that:
. Business transactions are properly authorized
and completely and accurately recorded on the
Company's books and records in accordance with
accounting principles generally accepted in the
United States (GAAP) and established company
financial policy.
. The retention or proper disposal of Company
records shall be in accordance with established
Company financial policies and applicable legal
and regulatory requirements.
. Periodic financial communications and reports
(both internal and external) will be delivered
in a manner that facilitates the highest degree
of clarity of content and meaning so that
readers and users will quickly and accurately
determine their significance and consequence.
. Before certifying the accuracy of financial
information reported to the Company's Corporate
Accounting Office, reasonable diligence will be
taken to ensure that all internal financial
reporting requirements have been met and any
diversions from normal transactions will be
discussed and reviewed with the Corporate
Controller or Chief Financial Officer before
finalizing financial reports.
III. Compliance with Applicable Laws, Rules and Regulations
Officers will establish and maintain mechanisms to:
. Educate members of the finance organization
about any federal, state or local statute,
regulation or administrative procedure that
affects the operation of the finance
organization and the Company generally.
. Monitor the compliance of the finance
organization with any applicable federal, state
or local statute, regulation or administrative
rule.
. Identify, report and correct in a swift and
certain manner, any detected deviations from
applicable federal, state or local statute or
regulation.
IV. Prompt internal reporting of violation of the code
Violations of this Code of Ethics should be promptly
reported to either of the Chief Financial Officer, the Company's
Legal Counsel, the Compliance Officer or anonymously through the
Company's toll-free hotline number. Such violations will be
promptly investigated and results could result in termination of
employment.
In my role as an Officer of ________________________(subsidiary or company
name), I certify that I adhere to and advocate the above principles and
responsibilities governing my professional and ethical conduct.
Signed _________________________________________________
Officer Name ___________________________________________
Subsidiary _____________________________________Date______________________
Exhibit 21
SUBSIDIARIES OF HEICO CORPORATION
NAME STATE OF INCORPORATION
- ---- ----------------------
HEICO Aerospace Holdings Corp. Florida
HEICO Aerospace Corporation Florida
Jet Avion Corporation Florida
LPI Industries Corporation Florida
Aircraft Technology, Inc. Florida
Northwings Accessories Corp. Florida
HNW Building Corp. Florida
McClain International, Inc. Georgia
McClain Property Corp. Florida
Rogers-Dierks, Inc. Florida
Turbine Kinetics, Inc. Florida
Air Radio & Instruments Corp. Florida
Thermal Structures, Inc. California
TSI Quality Honeycomb Holdings Corp. (Inactive) California
Future Aviation, Inc. Florida
Avitech Engineering Corp., formerly Florida
known as Avitech Acquisition Corp.
ATK Acquisition Corp. Florida
Parts Advantage, LLC Delaware
Aviation Facilities, Inc., formerly Florida
known as AFI Acquisition Corp.
HEICO Aerospace Parts Corp., formerly Florida
known as Flight Specialties Acquisition Corp.
Jetseal, Inc. Delaware
HEICO Aerospace C&A Corp. Florida
HT Parts, LLC Delaware
AD HEICO Acquisition Corp. Florida
Aero Design, Inc. Tennessee
Battery Shop, LLC Tennessee
Niacc Technology, Inc. formerly
known as Niacc Acquisition Corp. Florida
HEICO Electronic Technologies Corp. Florida
Radiant Power Corp. Florida
Leader Tech, Inc. Florida
Santa Barbara Infrared, Inc. California
101 Lummis Road Corp (Inactive) Florida
Analog Modules, Inc. Florida
Inertial Airline Services, Inc. Ohio
Sierra Microwave Technology, LLC Delaware
HEICO International Corporation U.S. Virgin Islands
HEICO East Corporation Florida
Direct subsidiaries of the Company include HEICO Aerospace Holdings
Corp., HEICO Electronic Technologies Corp., HEICO International Corporation, and
HEICO East Corporation, which are all wholly-owned, except for HEICO Aerospace
Holdings Corp., which is 80% owned. All of the subsidiaries of HEICO Aerospace
Holdings Corp. are wholly-owned except Parts Advantage, LLC, which is 84% owned,
Aviation Facilities, Inc., which is 80% owned, and HT Parts, LLC, which is 50%
owned. All of the subsidiaries of HEICO Electronic Technologies Corp. are
wholly-owned except Sierra Microwave Technology, LLC, which was acquired in
December 2003 and is 80% owned.
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-4945, 33-62156, 333-8063, 333-19667, 333-26059, 333-81789 and 333-108471 of
HEICO Corporation on Forms S-8 of our report dated January 9, 2004, appearing in
this Annual Report on Form 10-K of HEICO Corporation for the year ended October
31, 2003.
DELOITTE & TOUCHE LLP
Fort Lauderdale, Florida
January 9, 2004
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Laurans A. Mendelson, Chief Executive Officer of HEICO Corporation, certify
that:
(1) I have reviewed this annual report on Form 10-K of HEICO
Corporation;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
(4) The Registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control
over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal control over financial
reporting.
Date: January 12, 2004 /S/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Thomas S. Irwin, Chief Financial Officer of HEICO Corporation, certify that:
(1) I have reviewed this annual report on Form 10-K of HEICO
Corporation;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
(4) The Registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control
over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal control over financial
reporting.
Date: January 12, 2004 /S/ THOMAS S. IRWIN
------------------------
Thomas S. Irwin
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HEICO Corporation (the "Company") on
Form 10-K for the period ended October 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report") I, Laurans A. Mendelson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: January 12, 2004 /S/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HEICO Corporation (the "Company") on
Form 10-K for the period ended October 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report") I, Thomas S. Irwin, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: January 12, 2004 /S/ THOMAS S. IRWIN
-----------------------
Thomas S. Irwin
Chief Financial Officer
