<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<C> <S>
(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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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</TABLE>
COMMISSION FILE NUMBER 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 TAFT STREET, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices) (Zip Code)
</TABLE>
(954) 987-6101
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act:
<TABLE>
<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (Name of Each Exchange On Which Registered)
(Title of Each Class)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED STOCK PURCHASE RIGHTS
(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, 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]
The aggregate market value of the voting and non-voting stock held by
nonaffiliates of the registrant as of December 31, 1998 was $259,000,000 based
on the closing price of Common Stock of $31 9/16 and Class A Common Stock of
$23 1/8 on December 31, 1998 as reported by the American Stock Exchange and
after subtracting from the number of shares outstanding on that date the number
of shares held by affiliates of the registrant.
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
<TABLE>
<S> <C>
COMMON STOCK, $.01 PAR VALUE 8,389,556 SHARES
CLASS A COMMON STOCK, $.01 PAR VALUE 4,136,106 SHARES
(Class) (Outstanding at December 31, 1998)
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1999 Annual Meeting of Shareholders
are incorporated by reference into Part III. See Item 14(a)(3) on page 48 for a
listing of exhibits.
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<PAGE> 2
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties, and assumptions about HEICO Corporation, including, among
other things:
- Our anticipated growth strategies and ability to integrate acquired
businesses;
- Our intention to introduce new products;
- Product pricing levels;
- Product specifications costs and requirements;
- Governmental and regulatory demands;
- Anticipated trends in our businesses, including trends in the markets for
jet engine parts, jet engine overhaul and ground support equipment;
- Economic conditions within and outside of the aerospace, aviation and
defense industries; and
- Our ability to continue to control costs and maintain quality.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in the prospectus might not occur.
PART I
ITEM 1. BUSINESS
THE COMPANY
HEICO Corporation ("HEICO" or the "Company") believes it is the world's
largest manufacturer of Federal Aviation Administration ("FAA") approved jet
engine replacement parts, other than the original equipment manufacturers
("OEMs") and their subcontractors. It is also a leading manufacturer of ground
support equipment ("GSE") to the airline and defense industries. Through our
Flight Support Group, we use proprietary technology to design, manufacture and
sell jet engine 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, our Flight Support Group repairs,
refurbishes and overhauls jet engine and aircraft components for domestic and
foreign commercial air carriers and aircraft repair companies. In fiscal 1998,
the Flight Support Group accounted for 73% of pro forma revenues. Through our
Ground Support Group, we manufacture various types of GSE, including electrical
power, air start, air conditioning and heating units, as well as some electronic
equipment for commercial airlines and military agencies. In fiscal 1998, the
Ground Support Group accounted for 27% of pro forma revenues. We currently sell
our products to every major U.S. airline, as well as a growing number of
airlines throughout the world.
We have continuously operated in the aerospace industry for 38 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 a number
of acquisitions. As a result of internal growth and acquisitions, our revenues
have grown from $19.2 million in fiscal 1994 to pro forma revenues of $112.4
million in fiscal 1998, a compound annual growth rate of 56%. During the same
period, net income increased from $1.9 million to pro forma net income of $12.1
million, a compound annual growth rate of 59%.
In October 1997, we formed a strategic alliance with Lufthansa Technik AG
("Lufthansa Technik"), the technical services subsidiary of Lufthansa German
Airlines AG. Lufthansa Technik is the world's largest independent provider of
engineering and maintenance services for aircraft and aircraft engines and
supports over 200 airlines, governments and other customers. As part of the
transaction, Lufthansa Technik acquired a 20% minority interest in our Flight
Support Group, investing $29 million to date and
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committing to invest an additional $9 million over the next two years. This
includes direct equity investments and the funding of specific research and
development projects. In connection with subsequent acquisitions by our Flight
Support Group, Lufthansa Technik invested additional amounts pursuant to its
option to maintain a 20% equity interest. This strategic alliance should enable
us to expand domestically and internationally by enhancing our ability to (i)
identify key jet engine replacement parts with significant profit potential by
utilizing Lufthansa Technik's extensive operating data on engine parts, (ii)
introduce those parts throughout the world in an efficient manner due to
Lufthansa Technik's testing and diagnostic resources, and (iii) broaden our
customer base by capitalizing on Lufthansa Technik's established relationships
and alliances within the airline industry.
The Canaan Group, an independent management consulting firm specializing in
the aviation and aerospace industries, estimated the 1998 worldwide annual sales
for jet engine repair, refurbishment and overhaul services to be approximately
$7.5 billion, of which approximately $4 billion represented annual sales of jet
engine replacement parts. While we currently supply less than 2% of the market
for jet engine new replacement parts, we have been adding new products at a
rapid rate. According to the Canaan Group, the jet engine replacement parts
market is expected to grow at approximately 5% over the next three years.
Historically, the three principal jet engine OEMs, Pratt & Whitney, General
Electric (including CFM International) and Rolls Royce, have been the sole
source for substantially all replacement parts. We believe that, based on our
competitive pricing, reputation for high quality, short lead time requirements,
strong relationships with domestic and foreign commercial air carriers and
airmotives (companies that overhaul aircraft), relationship with Lufthansa
Technik and successful track record of receiving Parts Manufacturer Approvals
("PMAs") from the FAA, we are uniquely positioned to continue to increase our
product lines and gain market share.
According to a 1996 study conducted by GSE TODAY, a leading ground support
industry publication, the 1995 annual sales of the worldwide commercial GSE
market were approximately $1.7 billion and that market was expected to grow at
approximately 7% annually over the next five years. We currently supply less
than 2% of this market. We believe that the GSE market is highly fragmented,
with a significant number of participants supplying only one or two types of
equipment. We believe that our growth in the GSE market will be driven by our
ability to differentiate our product offerings with more technologically
advanced and value-added products and services, as well as our ability to
acquire complementary businesses.
Jet engine maintenance is a highly regulated, ongoing process that
typically accounts for approximately 6% of an aircraft's operating costs. FAA
regulations require "cradle-to-grave" documentation of an engine's service life,
as well as the individual parts that comprise the engine. We utilize
sophisticated computer aided design technologies, advanced engineering,
proprietary design and manufacturing capabilities, and our established
credibility with the FAA to obtain PMAs from the FAA, allowing us to produce
parts which are the functional equivalent of those available from the OEM. We
believe that our sophisticated and proprietary design capabilities and
experience with the PMA process create a significant barrier to entry for
others.
We believe that there are several favorable industry trends in the aviation
industry that will contribute to the growth in the markets for jet engine
replacement parts and GSE products, including: (i) expected strong growth in
aircraft traffic and fleet size; (ii) an increase in the number of older
aircraft in service; (iii) increased FAA regulations and maintenance and safety
requirements that require repair or overhaul of engine and airframe components;
and (iv) consolidation of the service and supply chain in the aircraft industry
generally.
We believe that replacement jet engine products and services are less
susceptible than new aircraft purchases to economic cycles of the airline
industry because FAA regulations require the regular replacement of jet engine
parts, typically commencing four to seven years after an aircraft is first put
into service. Also, many airlines tend to replace parts more frequently than
required by the FAA to ensure optimal engine performance and the efficiency of
their aircraft. We believe that we are different from most aerospace and defense
suppliers because reductions in new aircraft orders should not adversely affect
our
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business. Our business mostly serves companies that operate existing aircraft,
not companies that build aircraft. Airline companies are increasingly cost
conscious, especially during economic down-cycles, which prompts them to seek
more cost effective alternatives to replacement parts manufactured by OEMs and
prompts them to overhaul accessory components and fuselage structures in greater
numbers in order to reduce operating costs. Most of the products sold by our
Ground Support Group are not sold specifically to furnish new commercial
aircraft, but are more frequently sold to replace existing older equipment, to
retrofit airport gates or to service other aerospace applications.
GROWTH STRATEGY
We intend to capitalize on our reputation for assured quality, proprietary
research and development and manufacturing capabilities, customer relationships,
alliance with Lufthansa Technik, as well as favorable industry trends to
continue to achieve profitable growth utilizing the following specific
strategies:
- Expand Jet Engine Replacement Parts Product Lines. We intend to broaden
our current jet engine replacement parts product lines through the
development and receipt of additional PMAs from the FAA. Since 1991, we
have added approximately 200 new PMA parts through internal development
and 160 through acquisitions. We currently supply over 700 parts for
Pratt & Whitney JT3D, JT8D, JT9D, PW2000 and PW4000 and CFM International
CFM56 engines. We intend to increase the number of jet engine parts we
offer on most of these engines as well as expand into new engine types.
We select the jet engine replacement parts to design and manufacture
through a process which analyzes industry information to determine which
jet engine replacement parts are expected to generate the greatest
profitability. Most jet engine replacement parts selected are complex,
high value-added and require specific technical expertise. As part of
this strategy, we have increased our research and development
expenditures from $300,000 in fiscal 1991 to approximately $4.4 million
in fiscal 1998. We believe that our sophisticated proprietary design
technologies, advanced engineering and manufacturing capabilities and our
established credibility with the FAA expedites the process of obtaining
PMAs.
- Expand Ground Support Equipment Product Lines. Since entering the GSE
industry in fiscal 1996, we have aggressively expanded our GSE lines with
new value-added and technologically advanced products. Over the past two
years, we have added 16 new GSE products. These offerings include a new
range of aircraft ground air-conditioning systems, an advanced electronic
power supply system replacing existing technology for use with the
International Space Station, a ground cooling system for the new F-22
Raptor fighter aircraft and a new commercial continuous-flow pneumatic
airstart system. In addition, our Ground Support Group continually
redesigns its existing product offerings to reflect changes in technology
and differentiate its products from those of its competitors. In November
1998, our Ground Support Group introduced a ground aircraft heating
system which has met with strong initial demand. In order to facilitate
these new product lines, our Ground Support Group has dramatically
improved its production capabilities by implementing a flow line-based
manufacturing protocol and adding a new state-of-the-art, 113,000 square
foot manufacturing facility in Palmetto, Florida.
- Expand Overhaul and Repair Business. Our Flight Support Group has also
pursued expansion of its FAA-authorized overhaul and repair business.
Northwings' revenues increased 48% from approximately $10 million in the
twelve months prior to its acquisition to $14.8 million in fiscal 1998.
This growth resulted from the addition of new repair and overhaul
services, as well as increased production capability and marketing
efforts. Northwings' historical customer base has been limited to small
passenger airlines and cargo airlines. We are seeking to expand
Northwings' customer base with these types of customers, as well as add
larger commercial airline customers. This strategy also applies to the
fuselage structures repair business acquired in October 1998.
- Pursue Acquisitions of Complementary Businesses. A key element of our
strategy involves growth through acquisitions in both the Flight and
Ground Support Group businesses. In connection with our acquisitions, we
seek to identify cost savings and production efficiencies, increase
research and
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development and marketing expenditures and improve customer service.
Historically, through application of this strategy, we have achieved
significant growth in revenues and product offerings while improving
overall profitability. Our Flight Support Group, in December 1998,
acquired Rogers-Dierks, Inc. ("Rogers-Dierks") and in July 1998 acquired
McClain International, Inc. ("McClain"), both of which are designers and
manufacturers of FAA PMA jet engine replacement parts. In September 1997,
we acquired Northwings Accessories Corp. ("Northwings"), an FAA authorized
overhaul and repair facility, and, in October 1998, Associated Composite,
Inc. ("Associated"), a Miami, Florida-based aircraft fuselage structure
repair and overhaul business, to complement our Flight Support Group.
- Expand Internationally. In fiscal 1998, approximately 23% of our
revenues were derived from sales outside of the United States. Our
strategy is to increase our international sales, both in the jet engine
replacement parts and ground support equipment businesses, utilizing our
relationship with Lufthansa Technik to identify new customers throughout
the world. We intend to leverage Lufthansa Technik's established industry
presence and participation in alliances, such as the Star Alliance which
is currently comprised of six major airlines, to broaden our
international exposure and develop relationships which, we believe, will
lead to increased sales of our products internationally.
FLIGHT SUPPORT GROUP
Our Flight Support Group designs, engineers, manufactures, repairs and/or
overhauls jet engine parts and components such as combustion chambers, gas flow
transition ducts and various other engine and air frame parts. We also
manufacture specialty aviation and defense components as a subcontractor. We
serve a broad spectrum of the aviation industry, including (i) commercial
airlines and air cargo couriers, (ii) OEMs, (iii) repair and overhaul
facilities, and (iv) the U.S. government.
Jet engine 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.
Aircraft engine 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 has been completely repaired and inspected by
a licensed repair facility (such as ours). An aircraft spare part is classified
repairable if it can be repaired by a licensed repair facility under applicable
regulations. A part may also be classified repairable if it can be 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 Replacement Parts. Our principal business is the
research and development, design, manufacture and sale of FAA-approved jet
engine replacement parts that are sold to domestic and foreign commercial air
carriers and aircraft repair and overhaul companies. Our principal competitor is
Pratt & Whitney, a division of United Technologies Corporation ("UTC"). The
Flight Support Group's
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factory-new jet engine replacement parts include combustion chambers and various
other jet engine replacement parts. A key element of our growth strategy is the
continued design and development of an increasing number of PMA replacement
parts in order to further penetrate our existing customer base and obtain new
customers. We select the jet engine replacement parts to design and manufacture
through a selection process which analyzes industry information to determine
which jet engine replacement parts are expected to generate the greatest
profitability. As part of Lufthansa Technik's investment in the Flight Support
Group, Lufthansa Technik will have the right to select 50% of the engine 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.
The following table sets forth (i) the lines of engines for which we
provide jet engine replacement parts and (ii) the approximate number of such
engines currently in service as estimated by us. Although we expect that our
strategic alliance with Lufthansa Technik will broaden our product lines, most
of our current PMA parts are for Pratt & Whitney engines, with a substantial
majority for the JT8D. See "Risk Factors -- Dependence on JT8D Aircraft Engine
Aftermarket."
<TABLE>
<CAPTION>
NUMBER
OEM LINES IN SERVICE PRINCIPAL ENGINE APPLICATION
- ---------------------------------- ------ ---------- ----------------------------------
<S> <C> <C> <C>
PRATT & WHITNEY JT8D 9,500 Boeing 727 and 737 (100 and 200
series)
McDonnell Douglas DC-9 and MD-80
JT9D 2,000 Boeing 747 (100, 200 and 300
series) and 767 (200 series)
Airbus A300 and A310
McDonnell Douglas DC-10
PW2000 700 Boeing 757
PW4000 1,600 Boeing 747-400, 767-300 and 777
Airbus A300, A310 and A330
McDonnell Douglas MD-11
CFM INTERNATIONAL (a joint venture CFM56 6,500 Boeing 737 (300, 400, 500, 700,
of General Electric and SNECMA) 800 and 900 series)
Airbus A320 and A340-200
GENERAL ELECTRIC CF6 Boeing 747 and 767
Airbus A300, A310 and A330
McDonnell Douglas MD-11
</TABLE>
Repair and Overhaul Services. We provide jet engine replacement parts
repair and overhaul services for the Pratt & Whitney JT8D, JT3D, JT9D, PW2000
and PW4000, General Electric CF6 and the CFM International CFM56 engines. Our
repair and overhaul operations require a high level of expertise, advanced
technology and sophisticated equipment. The repair and overhaul services offered
by us include the repair, refurbishment and overhaul of numerous accessories and
parts mounted on gas turbine engines, aircraft wings and frames or fuselages.
Engine accessories include fuel pumps, generators and fuel controls. Parts
include pneumatic valves, starters and actuators, turbo compressors and constant
speed drives, hydraulic pumps, valves and actuators, electro-mechanical
equipment and auxiliary power unit accessories.
We continually evaluate new engine lines, models and derivatives to
determine whether the potential demand for overhaul services justifies the
expenditures required for inventory and modifications to tooling and equipment.
We believe that our September 1997 acquisition of Northwings and October 1998
acquisition of Associated will provide us with a well-established platform for
additional growth in the repair and overhaul sector of the aviation industry.
Subcontracting for OEMs/Manufacture of Specialty Aircraft/Defense Related
Parts. We also derive revenue from the sale of specialty components as a
subcontractor for OEMs and the U.S. government.
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GROUND SUPPORT GROUP
We currently serve the commercial and military GSE markets through the
manufacture of electrical ground power units, air start units, and air
conditioning and heating units that are sold to both domestic and foreign
commercial and military customers. Our Ground Support Group also manufactures
specialty military electronics such as shipboard power supplies and power
converters. Because military and commercial aircraft vary so widely by size and
manufacturer, unique equipment is often required for each distinct air frame.
Military aircraft require particularly unique equipment arrangements that
necessitate custom manufacturing. Examples of our GSE products include a
sophisticated cooling system for the Air Force's new F-22 fighter aircraft and a
combination ground power and air conditioning unit for the F-16 aircraft.
MANUFACTURING AND QUALITY CONTROL
Our manufacturing operations involve a high level of technical expertise
and vertical integration, including computer numerical control ("CNC")
machining, complex sheet metal fabrication, vacuum heat treating, plasma
spraying and laser cutting. We also perform all of the design and engineering
for our products. Specific components of the process include:
- Research and Development. Our research and development department uses
state-of-the-art equipment such as a scanning electron microscope,
CAD/CAM/CAE workstations and finite element analysis and thermal testing
software to design and engineer components, as well as to ensure accurate
data transfer between our new product development and manufacturing
departments. Our engineers are recruited from OEMs and other aerospace
industry participants in a variety of disciplines, including
aerodynamics, heat transfer, manufacturing, materials and structures. See
"-- FAA Approvals and Product Design."
- Machining and Fabrication. Our CNC machining capabilities provide cost
advantages and dimensional repeatability with a variety of aerospace
materials. Our lathes are frequently equipped with touch probes to
perform critical in-process evaluations and automatically adjust
machining parameters. Fabrication capabilities include custom-designed
machines that automatically position and spot, fusion and flash weld,
mechanical and hydraulic presses, and wire, as well as conventional,
electrical discharge machining.
- Special Processes. We believe that our heat treatment, brazing, plasma
spraying and other in-house special process capabilities reduce lead
times and allow us to better control the quality of our products. For
example, our robotic systems can apply thermal barrier and heat resistant
coatings to parts ranging from 0.25 inches to 60 inches in dimension.
- Quality Control. We incur significant expenses to maintain the most
stringent quality control of our products and services. In addition to
domestic and foreign governmental regulations, OEMs, commercial airlines
and other customers require that we satisfy certain requirements relating
to the quality of our products and services. We perform testing and
certification procedures on all of the products that we design, engineer,
manufacture, repair and overhaul, and maintain detailed records to ensure
traceability of the production of and service on each aircraft component.
Management believes that the resources required to institute and maintain
our quality control procedures represents a barrier to entry for
competitors.
FAA APPROVALS AND PRODUCT DESIGN
Non-OEM manufacturers of jet engine replacement parts must receive a PMA
from the FAA. The PMA 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
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demonstrated their manufacturing capabilities and established 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 increased from
approximately $300,000 in 1991 to approximately $4.5 million in fiscal 1998.
Moreover, under our strategic alliance with Lufthansa Technik, Lufthansa Technik
agreed to fund $16 million for research and development projects relating to jet
engine replacement parts. We believe that our Flight Support Group's research
and development capabilities are a significant component of our historical
success and an integral part of our growth strategy.
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 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 product.
While we have developed proprietary techniques, software and manufacturing
expertise for the manufacture of jet 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.
SALES, MARKETING AND CUSTOMERS
Each of our operating divisions and subsidiaries 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 are
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 and
military units. 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. However, the net sales to our five largest customers accounted for
approximately 32% of total net sales during the year ended October 31, 1998.
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 us. As a result, such competitors
may be able to respond more quickly to customer requirements than us. 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.
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Any expansion of our existing products or services could expose us to new
competition. See "Risk Factors -- Competition."
Our jet engine replacement parts business competes primarily with Pratt &
Whitney and, to a much lesser extent, General Electric. The competition is
principally based on price and service inasmuch as our parts are interchangeable
with the parts produced by Pratt & Whitney. We believe that we supply over 50%
of the market for certain JT8D engine parts for which we hold a PMA from the
FAA, with Pratt & Whitney controlling the balance. With respect to other
aerospace products and services sold by the Flight Support Group, 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 us. Competition is based mainly on price, product performance,
service and technical capability.
Competition for the repair and overhaul of jet engine 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 us. 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 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 airmotive
market are quality, turnaround time, overall customer service and price.
Our Ground Support Group competes with several large and small domestic and
foreign competitors, some of which have greater financial resources than us. We
believe the market for our GSE is highly fragmented, with competition based
mainly on price, product performance and service.
RAW MATERIALS
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings and forgings, from various vendors.
We also purchase parts, including diesel and gas powered engines, compressors
and generators. 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 Flight Support operations had a backlog of unshipped orders as of
October 31, 1998 of $28.6 million as compared to $24.0 million as of October 31,
1997. This backlog includes $16.9 million representing forecasted shipments over
the next twelve months for some contracts of the Flight Support operations
pursuant to which customers provide estimated annual usage. Our Ground Support
operations had a backlog of $6.8 million as of October 31, 1998 and $12.5
million as of October 31, 1997. Substantially all of the backlog of orders as of
October 31, 1998 are expected to be delivered during fiscal 1999.
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
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
8
<PAGE> 10
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.
Because our jet engine replacement parts largely consist of older model
JT8D aircraft engines and engine parts, we are substantially impacted by the
FAA's noise regulations. The ability of aircraft operators to utilize such JT8D
aircraft engines in domestic flight operations is significantly influenced by
regulations promulgated by the FAA governing, among other things, noise emission
standards. Pursuant to the Aircraft Noise and Capacity Act, the FAA has required
all aircraft operating in the United States with a maximum weight of more than
75,000 pounds to meet Stage 2 noise restriction levels. The FAA has mandated
that all such Stage 2 aircraft (such as the non-hush-kitted Boeing 727-200s,
Boeing 737-200s and McDonnell Douglas DC-9-30/40/50s) must be phased out of
operation in the contiguous United States by December 31, 1999. This ban on
operation in the United States of non-hush-kitted Stage 2 aircraft applies to
both domestic and foreign aircraft operators. The European Union has adopted
similar restrictions for the operation of Stage 2 aircraft within member nations
of the European Union subject to a variety of exemptions. Various communities
surrounding the larger European cities also have adopted more stringent local
regulations which restrict the operation of non-hush-kitted aircraft in such
jurisdictions.
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.
We are principally subject to the requirements of the Clean Air Act of 1970
(the "CAA"), as amended in 1990; the Clean Water Act of 1977; the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"); the
Resource Conservation Recovery Act of 1976 (the "RCRA"); and the Hazardous and
Solid Waste Amendments of 1984. The following is a summary of the material
regulations that are applicable to us.
The CAA imposes significant requirements upon owners and operators of
facilities that discharge air pollutants into the environment. The CAA mandates
that facilities which emit air pollutants comply with certain operational
criteria and secure appropriate permits. Additionally, authorized states such as
Florida may implement various aspects of the CAA and develop their own
regulations for air pollution control. Our facilities presently hold air
emission permits and we intend to conduct an air emissions inventory and health
and safety audit of our facilities and, depending upon the results of such
assessments, may find it necessary to secure additional permits and/or to
install additional control technology, which could result in the initiation of
an enforcement action, the imposition of penalties and the possibility of
substantial capital expenditures.
CERCLA, as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), is designed to respond to the release of hazardous substances.
CERCLA's most notable objectives are to provide criteria and funding for the
cleanup of sites contaminated by hazardous substances and impose strict
liability on parties responsible for such contamination, namely owners and
operators of facilities or vessels from which such releases or threatened
releases occur, and persons who generated, transported, or arranged for the
transportation of hazardous substances to a facility from which such release or
threatened release occurs.
9
<PAGE> 11
RCRA and EPA's implementing regulations establish the basic framework for
federal regulation of hazardous waste. RCRA governs the generation,
transportation, treatment, storage and disposal of hazardous waste through a
comprehensive system of hazardous waste management techniques and requirements.
RCRA requires facilities such as ours that treat, store, or dispose of hazardous
waste to comply with enumerated operating standards. Many states, including
Florida, have created programs similar to RCRA for the purpose of issuing annual
operating permits and conducting routine inspections of such facilities to
ensure regulatory compliance. We believe that our facilities are in material
compliance with all currently applicable RCRA and similar state requirements,
hold all applicable permits required under RCRA, and are operating in material
compliance with the terms of all such permits.
In addition, Congress has enacted federal regulations governing the
underground storage of petroleum products and hazardous substances. The federal
underground storage tank ("UST") regulatory scheme mandates that EPA establish
requirements for leak detection, construction standards for new USTs, reporting
of releases, corrective actions, on-site practices and record-keeping, closure
standards, and financial responsibility. Some states, including Florida, have
promulgated their own performance criteria for new USTs, including requirements
for spill and overfill protection, UST location, as well as primary and
secondary containment. We believe that our facilities are in material compliance
with the federal and state UST regulatory requirements and performance criteria.
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 ("OSHA") mandates general requirements for safe workplaces
for all employees. 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, up to $350 million (combined single
limit and in the annual aggregate); (ii) personal property, inventory and
business income at our facilities with blanket coverage up to $134 million;
(iii) general liability coverage up to $2 million ($1 million limit for each
claim); (iv) employee benefit liability up to $1 million for each claim and in
the aggregate; (v) international liability and automobile liability of up to $1
million; (vi) umbrella liability coverage up to $20 million for each occurrence
and in the aggregate; and (vii) various other activities or items subject to
certain limits and deductibles. We believe that these coverages are adequate to
insure against the various liability risks of our business.
EMPLOYEES
As of December 31, 1998, we, and our subsidiaries, had 660 full-time
employees, of which 496 were in the Flight Support Group, 154 were in the Ground
Support Group, and 10 were corporate. None of our employees is represented by a
union. We believe that our employee relations are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no operations located outside the United States. See Note
14 to the Consolidated Financial Statements for additional information regarding
the Company's export sales.
10
<PAGE> 12
ITEM 2. PROPERTIES
We own or lease the following facilities:
<TABLE>
<CAPTION>
SQUARE OWNED/LEASE
LOCATION DESCRIPTION FOOTAGE EXPIRATION
- --------------------------- --------------------------- ------- --------------
<S> <C> <C> <C>
Hollywood, Florida Flight Support Group 140,000 Owned
manufacturing facility and
corporate headquarters
Palmetto, Florida Ground Support Group 113,000 Owned
manufacturing facility and
office
Atlanta, Georgia Flight Support Group 38,400(1) Owned
engineering and
manufacturing facility
Miami, Florida Overhaul and repair 56,000 Owned
facility(2)
Miami, Florida Overhaul and repair 9,000 May 1999
facility(3)
Miami, Florida Overhaul and repair 18,000 Month-to-month
facility(3)
Miami, Florida Administrative offices 2,300 December 1999
Anacortes, Washington Flight support 9,000 June 2003
manufacturing facility
</TABLE>
- ---------------
(1) After completion of current expansion expected by May 1999.
(2) We have purchased this facility to replace our existing repair and overhaul
facilities in Miami, Florida, and are in the process of renovations.
Occupancy is expected by May 1999.
(3) We expect to move out of this facility in May 1999 and into the facility
referenced in footnote (2) above.
For additional information with respect to our leases, see Note 5 of Notes
to our Consolidated Financial Statements.
We believe that our current capacity, coupled with our plans for facilities
expansion, is sufficient to handle our anticipated needs for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
In November 1989, the Flight Support Group was named a defendant in a
complaint filed by UTC alleging infringement of a patent, misappropriation of
trade secrets and unfair competition relating to some jet engine parts and
coatings sold by the Flight Support Group in competition with Pratt & Whitney, a
division of UTC, and sought damages of approximately $30 million. A summary
judgment motion filed on our behalf was granted, and all allegations against us
were dismissed. UTC may challenge these rulings in further court proceedings. A
counter-claim filed by us is still pending. The ultimate outcome of this
litigation is not certain at this time and no provision for litigation costs
and/or gain or loss, if any, has been made in the consolidated financial
statements. The legal costs, management efforts and other resources that have
been and continue to be incurred by us are substantial. There can be no
assurance that the lawsuit will not have a material adverse effect on our
business, results of operations and financial condition.
In May 1998, we were served with a lawsuit by Travelers Casualty & Surety
Co., f/k/a The Aetna Casualty and Surety Co. ("Travelers"). The complaint seeks
reimbursement of legal fees and costs totaling in excess of $15 million paid by
Travelers in defending us in the aforementioned litigation with
11
<PAGE> 13
UTC. In addition, Travelers seeks a declaratory judgment that we did not and do
not have insurance coverage under certain insurance policies with Travelers and,
accordingly, that Travelers did not have and does not have a duty to defend or
indemnify us under such policies. Also named as defendants in Travelers' lawsuit
are UTC and one of the law firms representing us in the UTC litigation.
We intend to vigorously defend Travelers' claim and believe that we have
significant counterclaims for damages. After taking into consideration legal
counsel's evaluation of Travelers' claim, management is of the opinion that the
outcome of the Travelers litigation will not have a significant adverse effect
on our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
There were no matters submitted to a vote of securities holders during the
fourth quarter of fiscal 1998.
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:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION(S) SINCE
---- --- ----------- --------
<S> <C> <C> <C>
Laurans A. Mendelson 60 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 52 Executive Vice President and Chief Financial
Officer
Eric A. Mendelson 33 Vice President and Director, President of HEICO 1992
Aerospace Holdings Corp.
Victor H. Mendelson 31 Vice President, General Counsel and Director, 1996
President of HEICO Aviation Products Corp.
James L. Reum 67 Executive Vice President and Chief Operating
Officer of HEICO Aerospace Holdings Corp.
</TABLE>
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, President of the Company since September 1991
and served as President of MediTek Health Corporation from May 1994 until its
sale in July 1996. He has been Chairman of the Board of Ambassador Square, Inc.
(a Miami, Florida real estate development and management company) since 1980 and
President of that company since 1988. He has been Chairman of Columbia Ventures,
Inc. (a private investment company) since 1985 and President of that company
since 1988. In 1997, Mr. Mendelson served on the board of governors of the AIA.
Mr. Mendelson is a Certified Public Accountant. Mr. Mendelson is a member of the
Board of Trustees of Columbia University and the Board of Trustees of Mount
Sinai Medical Center in Miami Beach, Florida.
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.
Eric A. Mendelson has served as Vice President of the Company since 1992,
and has been President of HEICO Aerospace Holdings Corp. ("HEICO Aerospace"), a
subsidiary of HEICO, since is 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. He received his AB degree
12
<PAGE> 14
from Columbia College and his MBA from the Columbia University Graduate School
of Business. Eric Mendelson is the son of Laurans Mendelson and the brother of
Victor Mendelson.
Victor H. Mendelson has served as Vice President of the Company since 1996,
as President of HEICO Aviation Products Corp. since September 1996 and as
General Counsel of the Company since 1993. He served as Executive Vice President
of MediTek Health Corporation 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 Mendelson
International Corporation (a private investment company which is a shareholder
of HEICO). Mr. Mendelson received his AB degree from Columbia College and his JD
from The University of Miami School of Law. He is a Trustee of St. Thomas
University, Miami, Florida. Victor Mendelson is the son of Laurans Mendelson and
the brother of Eric Mendelson.
James L. Reum has served as Executive Vice President of HEICO Aerospace
since April 1993 and Chief Operating Officer of HEICO Aerospace since May 1995.
He also served as President of LPI Industries Corporation from 1991 to 1998 and
President of Jet Avion Corporation since March 1996. From January 1990 to August
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.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's Directors, Executive Officers and 10% shareholders to file initial
reports of ownership and changes in ownership of Common Stock with the
Securities and Exchange Commission and the American Stock Exchange. Directors,
Executive Officers and 10% shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file. Based on the review of such reports
furnished to the Company, the Company believes that during 1998, the Company's
Directors, Executive Officers and 10% shareholders complied with all Section
16(a) filing requirements applicable to them.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Commencing April 24, 1998, the Class A Common Stock began trading on the
American Stock Exchange ("AMEX") under the symbol "HEI.A." The Common Stock is
traded on AMEX under the symbol "HEI." The following table sets forth, for the
periods indicated, the high and low sales prices for the Class A Common Stock
and the Common Stock as reported on AMEX, as well as the amount of cash
dividends paid per share during such periods. Lufthansa Technik, as a 20%
shareholder of our Flight Support Group, will be entitled to 20% of any
dividends paid by our Flight Support Group.
In December 1996, the Company declared a 10% stock dividend and, in
November 1997, declared a three-for-two stock split. In April 1998, the Company
distributed a 50% stock dividend paid in shares of Class A Common Stock. The
quarterly sales prices and cash dividend amounts have been retroactively
adjusted for the stock split and stock dividends.
13
<PAGE> 15
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW PER SHARE
------ ------ --------------
<S> <C> <C> <C>
FISCAL 1998:
Third Quarter (commencing April 24, 1998)................. $29.75 $21.25 $.025
Fourth Quarter............................................ 23.75 12.13 --
</TABLE>
On January 13, 1999, there were 1,143 holders of record of the Class A
Common Stock.
COMMON STOCK
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW PER SHARE
------ ------ --------------
<S> <C> <C> <C>
FISCAL 1997:
First Quarter............................................. $11.72 $ 6.88 $ .022
Second Quarter............................................ 12.00 9.89 --
Third Quarter............................................. 11.22 9.33 .022
Fourth Quarter............................................ 17.56 10.56 --
FISCAL 1998:
First Quarter............................................. $19.25 $13.78 $ .025
Second Quarter............................................ 33.50 19.20 --
Third Quarter............................................. 33.75 23.06 .025
Fourth Quarter............................................ 25.63 15.94 --
</TABLE>
On January 13, 1999, there were 1,231 holders of record of the Common
Stock.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................................. $ 19,212 $ 25,613 $ 34,565 $ 63,674 $ 95,351
-------- -------- -------- -------- --------
Gross profit.......................................... 5,835 8,116 12,169 20,629 36,104
Selling, general and administrative expenses.......... 5,495 6,405 7,657 11,515 17,140
-------- -------- -------- -------- --------
Operating income...................................... 340 1,711 4,512 9,114 18,964
Interest expense...................................... 59 169 185 477 984
Income:
From continuing operations before cumulative effect
of change in accounting principle................. $ 640 $ 1,437 $ 3,665 $ 7,019 $ 10,509
From discontinued operations(1)..................... 830 1,258 963 -- --
From gain on sale of discontinued operations........ -- -- 5,264 -- --
From cumulative effect on prior years of change in
accounting principle.............................. 381 -- -- -- --
-------- -------- -------- -------- --------
Net income............................................ $ 1,851 $ 2,695 $ 9,892 $ 7,019 $ 10,509
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding:(2)
Basic........................................... 11,209 11,307 11,680 12,040 12,499
Diluted......................................... 11,351 11,930 13,282 14,418 15,541
PER SHARE DATA:(2)
Income from continuing operations before cumulative
effect of change in accounting principle:
Basic........................................... $ .06 $ .13 $ .31 $ .58 $ .84
Diluted......................................... .06 .12 .28 .49 .68
Net income:
Basic............................................... .17 .24 .84 .58 .84
Diluted............................................. .16 .23 .75 .49 .68
Cash dividends(2)..................................... .030 .032 .038 .045 .050
BALANCE SHEET DATA (AT YEAR END):
Working capital....................................... $ 12,691 $ 14,755 $ 25,248 $ 45,131 $ 40,587
Total assets.......................................... 39,020 47,401 61,836 88,639 133,061
Total debt (including current portion)................ 5,456 7,870 6,516 10,800 30,520
Minority interest in consolidated subsidiary.......... -- -- -- 3,273 14,892
Shareholders' equity.................................. 27,061 30,146 41,488 59,446 67,607
</TABLE>
- ---------------
(1) Represents income from the discontinued health care operations that were
sold in fiscal 1996.
(2) Information has been adjusted to reflect three-for-two stock splits
distributed in April 1996 and December 1997, 10% stock dividends paid in
July 1995, February 1996, July 1996 and January 1997 and the 50% stock
dividend, in shares of Class A Common Stock, paid in April 1998.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our Flight Support Group, which currently accounts for approximately 73% of
our pro forma revenues, consists of the following seven operating subsidiaries:
<TABLE>
<CAPTION>
NAME
- ---- DESCRIPTION OF PRINCIPAL OPERATIONS
<S> <C>
Jet Avion Corporation........................ Design and manufacture of FAA-approved jet engine
replacement parts
LPI Industries Corporation................... Original equipment manufacturer subcontractor
Aircraft Technology, Inc..................... Repair and overhaul of jet engine combustion chambers
and related parts
Northwings Accessories Corp.................. Repair and overhaul of jet engine and airframe
components and accessories
McClain International, Inc................... Design, manufacture and overhaul of FAA-approved jet
engine replacement parts
Associated Composite, Inc.................... Repair and overhaul of aircraft fuselage structures
Rogers-Dierks, Inc........................... Design and manufacture of FAA-approved jet engine
replacement parts
</TABLE>
Our Ground Support Group, which currently accounts for approximately 27% of
our pro forma revenues, consists of the following operating subsidiary:
<TABLE>
<CAPTION>
NAME
- ---- DESCRIPTION OF PRINCIPAL OPERATIONS
<S> <C>
Trilectron Industries, Inc................... Design and manufacture of ground support equipment
</TABLE>
Our results of operations during the current and prior fiscal years have
been affected by a number of significant transactions. As a result of the
significant impact of these transactions, we do not believe that our results of
operations are necessarily comparable on a period-to-period basis. This
discussion of our financial condition and results of operations should be read
in conjunction with our Consolidated Financial Statements and Notes thereto
included or incorporated by reference herein. For further information regarding
the acquisitions discussed below, see Note 2 to our Consolidated Financial
Statements. These acquisitions have been accounted for using the purchase method
of accounting and are included in the Company's results of operations from the
date of acquisition.
As of December 4, 1998, through our Flight Support Group, we acquired
Rogers-Dierks for approximately $14.1 million in cash and approximately $1.1
million in deferred payments over the next two years, with additional
consideration of up to approximately $7.3 million payable in cash or shares of
our Class A Common Stock.
On October 19, 1998, through our Flight Support Group, we acquired
Associated for approximately $1.3 million in cash.
On July 31, 1998, we completed the acquisition of McClain for approximately
$41.0 million in cash. The Company also acquired McClain's headquarters facility
for an additional $2.5 million.
On October 30, 1997, we entered into a strategic alliance with Lufthansa
Technik, whereby Lufthansa Technik agreed to invest approximately $26.0 million
in our Flight Support Group, including $10.0 million paid at closing pursuant to
a stock purchase agreement and approximately $16.0 million to be paid to our
Flight Support Group over three years pursuant to a research and development
cooperation agreement, which will partially fund accelerated development of
additional FAA-approved replacement parts for jet engines. As part of the
strategic alliance, we sold 20% of the Flight Support Group. In connection with
subsequent acquisitions, Lufthansa Technik invested an additional $11.9 million
to purchase its proportional 20% interest in the acquisitions. The funds
received pursuant to the research and development cooperation agreement reduce
research and development expenses in the period such expenses are
16
<PAGE> 18
incurred. In addition, Lufthansa Technik and our Flight Support Group have
agreed to cooperate regarding technical services and marketing support for jet
engine parts on a worldwide basis. For further information regarding the
strategic alliance and sale of the 20% minority interest, see Note 2 to the
Company's Consolidated Financial Statements.
Effective September 1, 1997, the Company acquired Northwings. In
consideration of this acquisition, the Company paid approximately $6.7 million
in cash and 232,360 shares of the Company's Common Stock, having an aggregate
fair value of approximately $3.5 million.
Effective September 1, 1996, the Company acquired Trilectron Industries,
Inc. ("Trilectron") for $6.6 million in cash and the assumption of debt
aggregating $2.3 million.
In July 1996, the Company sold its wholly-owned healthcare subsidiary,
MediTek Health Corporation ("MediTek") to U.S. Diagnostic Inc. The Company
received $13.8 million in cash and a $10.0 million, 6 1/2% convertible
promissory note. The sale of MediTek resulted in a fiscal 1996 gain of $5.3
million, net of taxes. In September 1997, the Company sold the convertible note
to an unrelated party for the stated par value of $10.0 million plus accrued
interest. For further information regarding the sale of MediTek, see Note 13 to
the Company's Consolidated Financial Statements.
The Company paid 10% stock dividends in July 1995, February 1996, July
1996, and January 1997. In addition, the Company distributed 3-for-2 stock
splits in April 1996 and December 1997. In April 1998, the Company paid a 50%
stock dividend in shares of Class A Common Stock. All net income per share,
dividends per share and common stock outstanding information has been adjusted
for all years presented in this Prospectus to give effect to the stock dividends
and stock splits.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth net sales by
product and the percentage of net sales represented by the respective items in
the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net sales
Flight Support............................................ $32,240 $41,522 $65,412
Ground Support............................................ 2,325 22,152 29,939
------- ------- -------
$34,565 $63,674 $95,351
======= ======= =======
Net sales................................................... 100.0% 100.0% 100.0%
Gross profit................................................ 35.2% 32.4% 37.9%
Selling, general and administrative expenses................ 22.1% 18.1% 18.0%
Operating income............................................ 13.1% 14.3% 19.9%
Interest expense............................................ 0.5% 0.8% 1.0%
Interest and other income................................... 3.0% 2.7% 2.2%
Income tax expense.......................................... 5.0% 5.2% 7.3%
Minority interest........................................... --% --% 2.8%
Income from continuing operations........................... 10.6% 11.0% 11.0%
</TABLE>
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Net Sales
Net sales in fiscal 1998 totaled $95.4 million, up 50% when compared to
fiscal 1997 net sales of $63.7 million.
The increase in fiscal 1998 sales reflects an increase of $23.9 million (a
58% increase) to $65.4 million from the Company's Flight Support products (which
include repair and overhaul services). This increase includes incremental sales
of Northwings (twelve months in fiscal 1998 versus two months in
17
<PAGE> 19
fiscal 1997) and McClain aggregating $15.7 million, with the balance reflecting
increased sales volumes of jet engine replacement parts to the Company's
commercial airline industry customers. The net sales increase also reflects an
increase of $7.8 million (a 35% increase) to $29.9 million in revenues from the
Company's Ground Support products principally due to higher demand for the
Company's Ground Support products as well as sales of new products.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 37.9% in fiscal 1998 as
compared to 32.4% in fiscal 1997. This increase reflects improvements in gross
margins in both the Flight Support and Ground Support operations. The
improvement in gross profit margins in the Flight Support Group reflects an
increase resulting from the reimbursement of research and development costs from
Lufthansa Technik and higher gross profit margins for Northwings. Fiscal 1998
and 1997 cost of sales amounts include approximately $900,000 and $3.1 million,
respectively, of new product research and development expenses. The expenses for
fiscal 1998 are net of $3.5 million received from Lufthansa Technik. The
improved gross margins in the Ground Support operations resulted principally
from manufacturing cost efficiencies and increased sales of products with higher
profit margins.
Selling, general and administrative ("SG&A") expenses were $17.1 million in
fiscal 1998 and $11.5 million in fiscal 1997. As a percentage of net sales, SG&A
expenses remained comparable at 18.0% in fiscal 1998 and 18.1% in fiscal 1997,
despite higher corporate expenses and the inclusion of a full year of
Northwings' SG&A expenses, reflecting continuing efforts to control costs while
increasing revenues. As a result of the acquisitions of McClain, Associated and
Rogers-Dierks, SG&A expenses will include additional goodwill amortization of
approximately $1.8 million annually.
Operating Income
Operating income increased $9.9 million to $19.0 million (a 108% increase)
in fiscal 1998 from $9.1 million in fiscal 1997. The improvement in operating
income was due primarily to increases in sales and gross margins of the Flight
Support Group and Ground Support operations discussed above as well as the
acquisitions of Northwings and McClain.
Interest Expense
Interest expense increased $507,000 to $984,000 from fiscal 1997 to fiscal
1998. The increase was principally due to increased outstanding debt balances
during the period related to borrowings on the Company's $120 million credit
facility, used principally to finance the Company's acquisitions.
Interest and Other Income
Interest and other income increased $340,000 to $2.1 million from fiscal
1997 to fiscal 1998 due principally to the investment of cash received from the
sale of a 20% interest in the Flight Support Group to Lufthansa Technik in
October 1997.
Income Tax Expense
The Company's effective tax rate increased 2.3 percentage points to 34.5%
in fiscal 1998 from 32.2% in fiscal 1997 due to a decrease in benefits from
export sales and a reduction in tax-free investments. For a detailed analysis of
the provisions for income taxes, see Note 6 to the Consolidated Financial
Statements.
Minority Interest
Minority interest in fiscal 1998 represents the aforementioned 20% minority
interest held by Lufthansa Technik.
18
<PAGE> 20
Income from Continuing Operations
The Company's income from continuing operations totaled $10.5 million, or
$.68 per share (diluted), in fiscal 1998, improving 50% (39% per diluted share)
from income from continuing operations of $7.0 million, or $.49 per share
(diluted), in fiscal 1997.
The improvement in income from continuing operations in fiscal 1998 over
fiscal 1997 is primarily attributable to the increased sales volumes and
improved profit margins within operating entities discussed above as well as the
acquisitions of Northwings and McClain, offset by the minority interest in
earnings of the Flight Support Group.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net Sales
Net sales in fiscal 1997 totaled $63.7 million, up 84% when compared to
fiscal 1996 net sales of $34.6 million.
The increase in fiscal 1997 sales reflects an increase of $9.3 million (a
29% increase) to $41.5 million in revenues from the Company's Flight Support
products, including $2.2 million in revenues representing Northwings' sales for
the two months since its acquisition; and an increase of $19.8 million to $22.1
million in revenues from the Company's Ground Support products (twelve months of
Trilectron's sales for fiscal 1997 compared to two months in fiscal 1996).
The increases in sales of Flight Support products in fiscal 1997, exclusive
of sales of Northwings, were principally due to increased sales volumes of jet
engine replacement parts to the Company's commercial airline industry customers.
Gross Profit and Operating Expenses
The Company's gross profit margins averaged 32.4% in fiscal 1997 as
compared to 35.2% in fiscal 1996. These margins reflect the inclusion of Ground
Support operations beginning in the fourth quarter of fiscal 1996, which
generally carry lower profit margins than those of the Company's Flight Support
operations, partially offset by improvement in gross margins in the Company's
Flight Support operations. The improvement in gross profit margins in the Flight
Support Group reflects volume increases in sales of higher gross profit margin
products and manufacturing cost efficiencies.
SG&A expenses were $11.5 million in fiscal 1997 and $7.7 million in fiscal
1996. As a percentage of net sales, SG&A expenses declined from 22.1% in fiscal
1996 to 18.1% in fiscal 1997, reflecting continuing efforts to control costs
while increasing revenues. The $3.9 million increase from fiscal 1996 to fiscal
1997 is due principally to increased selling expenses of the Flight Support
Group and a full year of SG&A expenses of Trilectron since acquisition.
Operating Income
Operating income increased to $9.1 million (a 102% increase) in fiscal 1997
from $4.5 million in fiscal 1996. The improvement in operating income was due
primarily to the increases in sales and gross margins of the Flight Support
Group and Trilectron discussed above.
Interest Expense
Interest expense increased $292,000 to $447,000 from fiscal 1996 to fiscal
1997. The increase was principally due to increases in long-term debt related to
equipment financing and industrial development revenue bonds.
19
<PAGE> 21
Interest and Other Income
Interest and other income in fiscal 1997 increased $664,000 to $1,722,000
over fiscal 1996 due principally to interest income on the convertible note
received from the sale of MediTek, as well as the interest income received on
the unexpended proceeds of industrial development revenue bonds.
Income Tax Expense
The Company's effective tax rate of 32.2% in fiscal 1997 was comparable
with the 31.9% rate in fiscal 1996. For a detailed analysis of the provisions
for income taxes, see Note 6 to the Consolidated Financial Statements.
Income from Continuing Operations
The Company's income from continuing operations totaled $7.0 million, or
$.49 per share (diluted), in fiscal 1997, improving 92% (75% per diluted share)
from income from continuing operations of $3.7 million, or $.28 per share
(diluted), in fiscal 1996.
The improvement in income from continuing operations in fiscal 1997 over
fiscal 1996 is primarily attributable to the increased sales volumes and
improved profit margins within operating entities discussed above.
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 income from continuing operations 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 operating activities and
financing activities, including borrowings under long-term credit agreements and
the issuance of industrial development revenue bonds. In addition, in fiscal
1997 and 1996, the Company generated cash from the sale of its health care
operations.
Principal uses of cash by the Company will include payments of interest and
principal on debt, capital expenditures, increases in working capital and
acquisitions.
The Company believes that operating cash flow and available borrowings
under the Company's revolving credit facility will be sufficient to fund cash
requirements for the foreseeable future.
Operating Activities
The Company's cash flow from operations aggregated $12.9 million over the
last three years, including an $9.5 million in fiscal 1998 principally
reflecting an increase in net income of $3.5 million and an increase in trade
payables and other current liabilities associated with higher levels of
operations and deferred reimbursement of research and development costs from
Lufthansa Technik aggregating $4.7 million. Net cash provided by operations of
$1.7 million in fiscal 1997 was comparable to net cash provided by operations in
fiscal 1996.
Investing Activities
The principal cash used in investing activities the past three years was
the cash used in the acquisition of businesses totaling $58.9 million, including
$45.6 million in fiscal 1998 to acquire McClain and Associated, $6.7 million in
fiscal 1997 to acquire Northwings and $6.6 million in fiscal 1996 to acquire
Trilectron. Purchases of property, plant and equipment totaled $12.9 million,
including $6.2 million in fiscal 1998 principally purchased by the Ground
Support Group to expand into a new manufacturing
20
<PAGE> 22
facility and improve its product development and manufacturing capabilities. The
Company also purchased short-term investments of $3.9 million in fiscal 1998.
During the past three fiscal years, the Company's principal cash proceeds from
investing activities were $13.5 million in fiscal 1996 and $10.0 million in
fiscal 1997 from the sale of the health care operations.
Financing Activities
The Company's principal financing activities during the same three-year
period included proceeds of long-term debt of $32.1 million including $25.0
million from a new $120 million revolving credit facility in fiscal 1998
primarily to fund business acquisitions and $5.7 million in reimbursements for
qualified expenditures related to the Series 1997 industrial development revenue
bonds. In addition, the Company received $18.7 million from Lufthansa Technik
including $9.7 million in fiscal 1997 from the sale of a 20% minority interest
in the Flight Support Group and $9.0 million in fiscal 1998 representing
additional minority interest investments in businesses acquired by the Company.
The Company also received $3.6 million from the exercise of stock options during
the three-year period. The Company used an aggregate of $9.7 million for
payments on short-term debt, long-term debt and capital leases, including $5.0
million in fiscal 1998 to reduce the outstanding balance under the revolving
credit facility. In addition, the Company used $2.0 million in fiscal 1998 to
repurchase common stock.
In July 1998, the Company entered into a $120 million revolving credit
facility with a bank syndicate, which contains both revolving credit and term
loan features. The credit facility may be used for working capital and general
corporate needs of the Company and to finance acquisitions (generally not in
excess of $25.0 million for any single acquisition nor in excess of an aggregate
of $25.0 million for acquisitions during any four fiscal quarter period without
the requisite approval of the bank syndicate). Advances under the credit
facility accrue interest, at the Company's option, at a premium (based on the
Company's ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization) over the LIBOR rate or the higher of the prime
lending rate and the Federal Funds Rate. The Company is required to maintain
certain financial covenants, including minimum net worth, limitations on capital
expenditures (excluding expenditures for the acquisition of businesses) and
limitations on additional indebtedness. The credit facility matures in July 2001
unless extended by the bank syndicate. The Company also has available unexpended
industrial development revenue bond proceeds of $2.3 million available for
future qualified expenditures. See Note 4 to the Consolidated Financial
Statements for further information regarding credit facilities.
IMPACT OF THE YEAR 2000
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
We developed a compliance assurance process to address this concern. A
project team has performed a detailed assessment of all internal computer
systems and, as discussed below, is developing and implementing plans to correct
the problems. We expect these projects to be successfully completed during 1999.
Year 2000 problems could affect our research and development, production,
distribution, financial, administrative and communication operations. Systems
critical to our business which have been identified as non-Year 2000 compliant
are either being replaced or corrected through programming modifications. In
addition, the project team is looking at Year 2000 readiness from other aspects
of our business, including customer order-taking, manufacturing, raw materials
supply and plant process equipment. Our goal is to have our remediated and
replaced systems operational by June 1999 to allow time for testing and
verification. In addition to our in-house efforts, we have asked vendors, major
customers, service suppliers, communications providers and banks whose systems
failures potentially could have a significant impact on our operations to verify
their Year 2000 readiness.
21
<PAGE> 23
As part of our compliance process we are developing a contingency plan for
those areas that are critical to the Company's business. These plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999, and will operate independently of our external providers' Year 2000
compliance. The major drive for contingency planning will be in the first half
of 1999, with the expectation that our business groups will have plans in place
by June 1999. Based on our current plans and efforts to date, we do not
anticipate that Year 2000 problems will have a material effect on our results of
operations or financial condition.
External and internal costs specifically associated with modifying internal
use software for Year 2000 compliance are expensed as incurred. To date, we have
spent less than $100,000 on this project. Costs to be incurred in the remainder
of 1999 to fix Year 2000 problems are estimated at less than $100,000. Such
costs do not include normal system upgrades and replacements. We do not expect
the costs relating to Year 2000 remediation to have a material effect on our
results of operations or financial condition.
The above expectations are subject to uncertainties. For example, if we are
unsuccessful in identifying or fixing all Year 2000 problems in our critical
operations, or if we are affected by the inability of suppliers or major
customers to continue operations due to such a problem, our results of
operations or financial condition could be materially impacted.
The total costs that we incur in connection with the Year 2000 problems
will be influenced by our ability to successfully identify Year 2000 systems'
flaws, the nature and amount of programming required to fix the affected
programs, the related labor and/or consulting costs for such remediation, and
the ability of third parties with whom we have business relationships to
successfully address their own Year 2000 concerns. These and other unforeseen
factors could have a material adverse effect on our results of operations or
financial conditions.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Adoption of this statement will
not impact the Company's consolidated financial position, results of operations
or cash flows, and any effect will be limited to the form and content of its
disclosures. The Company intends to adopt the provisions of this statement in
fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies report
selected information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, with earlier application permitted. Adoption of this statement will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. The Company intends to adopt the provisions of this statement in
fiscal 1999.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the
disclosure requirements of SFAS 87, 88 and 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS 132 is effective for fiscal years beginning after
December 15, 1997. Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. The Company
intends to adopt the provisions of this statement in fiscal 1999.
22
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEICO CORPORATION AND
SUBSIDIARIES
HEICO CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 24
Consolidated Balance Sheets at October 31, 1998 and 1997.... 25
Consolidated Statements of Operations for the years ended
October 31, 1998, 1997 and 1996........................... 27
Consolidated Statements of Shareholders' Equity for the
years ended October 31, 1998, 1997 and 1996............... 28
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996........................... 29
Notes to Consolidated Financial Statements.................. 30
</TABLE>
23
<PAGE> 25
HEICO CORPORATION AND SUBSIDIARIES
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, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended October 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
December 30, 1998
24
<PAGE> 26
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,609,000 $24,199,000
Short-term investments.................................... 2,051,000 --
Accounts receivable, net.................................. 19,422,000 12,560,000
Inventories............................................... 24,327,000 18,359,000
Prepaid expenses and other current assets................. 1,768,000 1,500,000
Deferred income taxes..................................... 2,010,000 1,098,000
------------ -----------
Total current assets.............................. 58,187,000 57,716,000
Property, plant and equipment, net.......................... 14,795,000 8,543,000
Intangible assets, net...................................... 53,964,000 13,258,000
Unexpended bond proceeds.................................... 2,252,000 5,437,000
Deferred income taxes....................................... 495,000 394,000
Other assets................................................ 3,368,000 2,828,000
------------ -----------
Total assets...................................... $133,061,000 $88,176,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 377,000 $ 342,000
Trade accounts payable.................................... 6,158,000 4,180,000
Accrued expenses and other current liabilities............ 10,401,000 6,680,000
Income taxes payable...................................... 664,000 1,383,000
------------ -----------
Total current liabilities......................... 17,600,000 12,585,000
Long-term debt, net of current maturities................... 30,143,000 10,458,000
Other non-current liabilities............................... 2,819,000 2,414,000
------------ -----------
Total liabilities................................. 50,562,000 25,457,000
------------ -----------
Minority interest in consolidated subsidiary................ 14,892,000 3,273,000
------------ -----------
Commitments and contingencies (Notes 2, 5 and 15)
Shareholders' equity:
Preferred stock, par value $.01 per share;
Authorized -- 10,000,000 shares issuable in series,
200,000 designated as Series A Junior Participating
Preferred Stock, none issued........................... -- --
Common stock, $.01 par value; Authorized -- 30,000,000
shares; Issued and Outstanding 8,323,036 shares in 1998
and 8,283,493 in 1997.................................. 83,000 83,000
Class A Common stock, $.01 par value;
Authorized -- 30,000,000 shares; Issued and Outstanding
4,140,404 shares in 1998............................... 41,000 --
Capital in excess of par value............................ 34,474,000 35,533,000
Unrealized loss on investments............................ (1,142,000) --
Retained earnings......................................... 36,649,000 26,772,000
------------ -----------
70,105,000 62,388,000
Less: Note receivable from employee savings and investment
plan................................................... (2,498,000) (2,942,000)
------------ -----------
Total shareholders' equity........................ 67,607,000 59,446,000
------------ -----------
Total liabilities and shareholders' equity........ $133,061,000 $88,176,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 28
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $95,351,000 $63,674,000 $34,565,000
----------- ----------- -----------
Operating costs and expenses:
Cost of sales......................................... 59,247,000 43,045,000 22,396,000
Selling, general and administrative expenses.......... 17,140,000 11,515,000 7,657,000
----------- ----------- -----------
Total operating costs and expenses.......... 76,387,000 54,560,000 30,053,000
----------- ----------- -----------
Operating income...................................... 18,964,000 9,114,000 4,512,000
Interest expense...................................... (984,000) (477,000) (185,000)
Interest and other income............................. 2,062,000 1,722,000 1,058,000
----------- ----------- -----------
Income from continuing operations before income taxes
and minority interest............................... 20,042,000 10,359,000 5,385,000
Income tax expense.................................... 6,914,000 3,340,000 1,720,000
----------- ----------- -----------
Income from continuing operations before minority
interest............................................ 13,128,000 7,019,000 3,665,000
Minority interest..................................... 2,619,000 -- --
----------- ----------- -----------
Income from continuing operations..................... 10,509,000 7,019,000 3,665,000
Discontinued operations (Note 13):
Income from discontinued health care operations, net
of applicable income taxes of $717,000.............. -- -- 963,000
Gain on sale of health care operations, net of
applicable income taxes of $1,719,000............... -- -- 5,264,000
----------- ----------- -----------
Net income............................................ $10,509,000 $ 7,019,000 $ 9,892,000
=========== =========== ===========
Basic income per share:
From continuing operations.......................... $ .84 $ .58 $ .31
From discontinued health care operations............ -- -- .08
From gain on sale of health care operations......... -- -- .45
----------- ----------- -----------
Net income per share................................ $ .84 $ .58 $ .84
=========== =========== ===========
Diluted income per share:
From continuing operations.......................... $ .68 $ .49 $ .28
From discontinued health care operations............ -- -- .07
From gain on sale of health care operations......... -- -- .40
----------- ----------- -----------
Net income per share................................ $ .68 $ .49 $ .75
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic.......................................... 12,499,079 12,040,359 11,679,584
=========== =========== ===========
Diluted........................................ 15,540,620 14,418,308 13,282,089
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CLASS A CAPITAL IN UNREALIZED
COMMON COMMON EXCESS OF LOSS ON RETAINED NOTE
STOCK STOCK PAR VALUE INVESTMENTS EARNINGS RECEIVABLE TOTAL
------- ------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1995........... $28,000 -- $ 8,371,000 -- $25,439,000 $(3,692,000) $30,146,000
Exercise of stock options............ 2,000 -- 1,562,000 -- -- -- 1,564,000
Payment on note receivable from
employee savings and investment
plan............................... -- -- -- -- -- 353,000 353,000
Cash dividends ($.038 per share)..... -- -- -- -- (475,000) -- (475,000)
Three-for-two Common Stock split
distri-buted April 24, 1996........ 14,000 -- (14,000) -- -- -- --
10% Common Stock dividend paid July
26, 1996........................... 4,000 -- 10,827,000 -- (10,831,000) -- --
10% Common Stock dividend paid
January 17, 1997................... 5,000 -- 10,127,000 -- (10,132,000) -- --
Other................................ -- -- 8,000 -- -- -- 8,000
Net income for the year.............. -- -- -- -- 9,892,000 -- 9,892,000
------- ------- ----------- ----------- ----------- ----------- -----------
Balances, October 31, 1996........... 53,000 -- 30,881,000 -- 13,893,000 (3,339,000) 41,488,000
Exercise of stock options............ 1,000 -- 1,117,000 -- -- -- 1,118,000
Payment on note receivable from
employee savings and investment
plan............................... -- -- -- -- -- 397,000 397,000
Cash dividends ($.045 per share)..... -- -- -- -- (548,000) -- (548,000)
Stock issued in acquisition.......... 2,000 -- 3,542,000 -- -- -- 3,544,000
Excess of purchase price over book
value on sale of minority
interest........................... -- -- -- -- 6,427,000 -- 6,427,000
Three-for-two Common Stock split
distri-buted December 16, 1997..... 27,000 -- (27,000) -- -- -- --
Other................................ -- -- 20,000 -- (19,000) -- 1,000
Net income for the year.............. -- -- -- -- 7,019,000 -- 7,019,000
------- ------- ----------- ----------- ----------- ----------- -----------
Balances, October 31, 1997........... 83,000 -- 35,533,000 -- 26,772,000 (2,942,000) 59,446,000
Distribution of one share of Class A
Common Stock for each two shares of
Common Stock made April 23, 1998... -- 42,000 (42,000) -- -- -- --
Repurchase of stock (58,300 shares of
Common Stock and 75,400 shares of
Class A Common Stock).............. (1,000) (1,000) (2,036,000) -- -- -- (2,038,000)
Unrealized loss on investments....... -- -- -- (1,142,000) -- -- (1,142,000)
Exercise of stock options (115,270
shares of Common Stock and 38,675
shares of Class A Common Stock).... 1,000 -- 956,000 -- -- -- 957,000
Payment on note receivable from
employee savings and investment
plan............................... -- -- -- -- -- 444,000 444,000
Cash dividends ($.05 per share)...... -- -- -- -- (643,000) -- (643,000)
Other................................ -- -- 63,000 -- 11,000 -- 74,000
Net income for the year.............. -- -- -- -- 10,509,000 -- 10,509,000
------- ------- ----------- ----------- ----------- ----------- -----------
Balances, October 31, 1998........... $83,000 $41,000 $34,474,000 $(1,142,000) $36,649,000 $(2,498,000) $67,607,000
======= ======= =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 30
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $10,509,000 $ 7,019,000 $ 9,892,000
Adjustments to reconcile net income to cash provided by
operating activities:
Gain from sale of health care operations.................. -- -- (5,264,000)
Depreciation and amortization............................. 2,761,000 1,624,000 2,107,000
Deferred income taxes..................................... (342,000) (486,000) (1,048,000)
Deferred financing costs.................................. (1,039,000) (144,000) (159,000)
Minority interest in consolidated subsidiary.............. 2,619,000 -- --
Change in assets and liabilities:
(Increase) decrease in accounts receivable.............. (3,822,000) (2,713,000) 166,000
(Increase) in inventories............................... (4,642,000) (2,912,000) (3,283,000)
(Increase) decrease in prepaid expenses and other
current assets........................................ (182,000) (605,000) 111,000
(Increase) in unexpended bond proceeds.................. (229,000) (222,000) --
Increase (decrease) in trade payables, accrued expenses
and other current liabilities......................... 4,653,000 (215,000) (14,000)
(Decrease) increase in income taxes payable............. (961,000) 118,000 (983,000)
Increase in other non-current liabilities............... -- 266,000 251,000
Other................................................... 214,000 (14,000) (84,000)
----------- ----------- -----------
Net cash provided by operating activities................... 9,539,000 1,716,000 1,692,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions:
Purchases of businesses, net of cash acquired............. (45,627,000) (6,737,000) (6,555,000)
Contingent note payments of discontinued health care
operations.............................................. -- -- (1,106,000)
Proceeds from sale of health care operations, net of cash
sold of $304,000.......................................... -- -- 13,524,000
(Purchase) sale of short-term investments................... (3,864,000) -- 2,939,000
Purchases of property, plant and equipment.................. (6,171,000) (3,551,000) (3,227,000)
Payment received from employee savings and investment plan
note receivable........................................... 444,000 397,000 353,000
Sale of note receivable..................................... -- 10,000,000 --
Other....................................................... (171,000) (268,000) (371,000)
----------- ----------- -----------
Net cash (used in) provided by investing activities......... (55,389,000) (159,000) 5,557,000
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt:
Proceeds from revolving credit facility................... 25,000,000 -- --
Bond reimbursement proceeds............................... 3,384,000 1,427,000 851,000
Other..................................................... 95,000 845,000 492,000
Proceeds from the exercise of stock options................. 957,000 1,118,000 1,525,000
Repurchases of common stock................................. (2,038,000) -- --
Principal payments on long-term debt........................ (5,493,000) (926,000) (3,289,000)
Cash dividends paid......................................... (643,000) (548,000) (475,000)
Proceeds from sale of minority interest, net of expenses.... -- 9,700,000 --
Additional minority interest investments.................... 9,000,000 -- --
Other....................................................... (2,000) 1,000 8,000
----------- ----------- -----------
Net cash provided by (used in) financing activities......... 30,260,000 11,617,000 (888,000)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........ (15,590,000) 13,174,000 6,361,000
Cash and cash equivalents at beginning of year.............. 24,199,000 11,025,000 4,664,000
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 8,609,000 $24,199,000 $11,025,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 31
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HEICO Corporation (the Company), through its principal subsidiaries HEICO
Aerospace Holdings Corp. (HEICO Aerospace) and HEICO Aviation Products Corp.
(HEICO Aviation) and their subsidiaries, is engaged in the design, manufacture
and sale of aerospace products and services throughout the United States and
abroad. HEICO Aerospace's subsidiaries include HEICO Aerospace Corporation, Jet
Avion Corporation (Jet Avion), LPI Industries Corporation (LPI), Aircraft
Technology, Inc. (Aircraft Technology), Northwings Accessories Corporation
(Northwings), McClain International, Inc. (McClain) (Note 2), Associated
Composite, Inc. (ACI) (Note 2) and Rogers-Dierks, Inc. acquired December 1998
(Note 2). HEICO Aviation's subsidiary is Trilectron Industries, Inc.
(Trilectron). The Company's customer base is primarily the commercial airline
industry. As of October 31, 1998, the Company's principal operations are located
in Atlanta, Georgia and Hollywood, Miami and Palmetto, Florida.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned except for HEICO Aerospace,
of which a 20% interest was sold to Lufthansa Technik AG (Lufthansa) in October
1997 (see Note 2). All significant intercompany balances and transactions are
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 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.
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:
<TABLE>
<S> <C>
Buildings and components.................................... 7 to 55 years
Building and leasehold improvements......................... 3 to 15 years
Machinery and equipment..................................... 3 to 20 years
</TABLE>
30
<PAGE> 32
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
INTANGIBLE ASSETS
Intangible assets include the excess of cost over the fair value of net
assets acquired and deferred charges which are amortized on the straight-line
method over their legal or estimated useful lives, whichever is shorter, as
follows:
<TABLE>
<S> <C>
Excess of cost over the fair market value of net assets
acquired.................................................. 20 to 40 years
Deferred charges............................................ 3 to 20 years
</TABLE>
The Company reviews the carrying value of the excess of cost over the fair
value of net assets acquired (goodwill) for impairment whenever events or
changes in circumstances indicate that it may not be recoverable. An impairment
would be recognized in operating results, based upon the difference between each
consolidated entities' respective present value of future cash flows and the
carrying value of the goodwill, if a permanent diminution in value were to
occur.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
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.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis, primarily upon shipment of
products and the rendering of services. Certain contracts of Trilectron are
long-term contracts and the related net costs and estimated earnings in excess
of billings, if any, are included in accounts receivable on a percentage of
completion basis.
INCOME TAXES
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from such
items recognized for income tax purposes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
NET INCOME PER SHARE
Basic net income per share is calculated on the basis of the weighted
average number of shares outstanding during the period, excluding dilution.
Diluted net income per share is computed on the basis of the weighted average
number of shares outstanding during the period plus common share equivalents
arising from the assumed exercise of stock options, if dilutive. The dilutive
impact of common share
31
<PAGE> 33
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents is determined by applying the treasury stock method. Per share
information for fiscal 1997 and 1996 have been restated in accordance with
Statement of Financial Accounting Standard No. 128, "Earnings Per Share."
STOCK BASED COMPENSATION
Effective November 1, 1996, the Company adopted SFAS No. 123, "Stock Based
Compensation." This statement requires the Company to choose between two
different methods of accounting for stock options. The statement defines a
fair-value-based method of accounting for stock options but allows an entity to
continue to measure compensation cost for stock options using the intrinsic
value method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue using the accounting methods prescribed by APB No. 25 and to
provide in Note 10 the pro forma disclosures required by SFAS No. 123.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Adoption of this statement will
not impact the Company's consolidated financial position, results of operations
or cash flows, and any effect will be limited to the form and content of its
disclosures. The Company intends to adopt the provisions of this statement in
fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies report
selected information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, with earlier application permitted. Adoption of this statement will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. The Company intends to adopt the provisions of this statement in
fiscal 1999.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the
disclosure requirements of SFAS 87, 88 and 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS 132 is effective for fiscal years beginning after
December 15, 1997. Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. The Company
intends to adopt the provisions of this statement in fiscal 1999.
2. STRATEGIC ALLIANCE AND ACQUISITIONS
STRATEGIC ALLIANCE AND SALE OF MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
In October 1997, the Company entered into a strategic alliance with
Lufthansa, the technical services subsidiary of Lufthansa German Airlines,
whereby Lufthansa agreed to invest approximately $26 million in HEICO Aerospace,
including $10 million paid at closing pursuant to a stock purchase agreement and
approximately $16 million to be paid to HEICO Aerospace over three years
pursuant to a research and development cooperation agreement, which will
partially fund accelerated development of additional
32
<PAGE> 34
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Federal Aviation Administration (FAA)-approved replacement parts for jet
engines. The funds received as a result of the research and development
cooperation agreement reduce research and development expenses in the period
such expenses are incurred. In addition, Lufthansa and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support for jet
engine parts on a worldwide basis.
As part of the strategic alliance, the Company sold 20% of HEICO Aerospace
(200 shares) with an approximate book value of $3,273,000 to Lufthansa for $10
million. The Company's accounting policy is to treat the sale of a subsidiary's
stock as an equity transaction, recording the difference between the purchase
price, net of transaction costs incurred, and book value of the subsidiary, to
the subsidiary's retained earnings. As a result of this sale, $6,427,000 was
recorded as an increase to the retained earnings of the Company in the
consolidated financial statements.
In connection with subsequent acquisitions by HEICO Aerospace, Lufthansa
invested additional amounts pursuant to its option to maintain a 20% equity
interest as described below.
ACQUISITIONS
In September 1996, the Company, through a subsidiary, acquired effective as
of September 1, 1996 all of the outstanding stock of Trilectron for $6.6 million
in cash and the assumption of debt aggregating $2.3 million. Trilectron is a
leading manufacturer of ground support equipment for civil and military aircraft
and a designer and manufacturer of certain military electronics.
The acquisition of Trilectron has been accounted using the purchase method
of accounting and the purchase price has been assigned to the net assets
acquired based on the fair value of such assets and liabilities at the date of
acquisition. The excess of the purchase price over the fair value of the
identifiable net assets acquired amounted to $2,838,000, which is being
amortized over 20 years using the straight line method. The results of
operations of Trilectron are included in the Consolidated Statements of
Operations from September 1, 1996.
Pursuant to a Stock Purchase Agreement, the Company, through a subsidiary,
acquired effective as of September 1, 1997 all of the outstanding stock of
Northwings. In consideration of this acquisition, the Company paid approximately
$6.7 million in cash and 232,360 shares of the Company's common stock, having an
aggregate fair value of approximately $3.5 million. Northwings is an
FAA-authorized overhaul and repair facility servicing aircraft engine components
and airframe accessories.
The acquisition of Northwings has been accounted for using the purchase
method of accounting and the purchase price has been assigned to the net assets
acquired based on the fair value of such assets and liabilities at the date of
acquisition. The excess of the purchase price over the fair value of the
identifiable net assets acquired amounted to $8,395,000, which is being
amortized over 20 years using the straight line method. The results of
operations of Northwings are included in the Consolidated Statements of
Operations from September 1, 1997.
On July 31, 1998, the Company, through a subsidiary, acquired all of the
outstanding capital stock of McClain, located in Atlanta, GA. In consideration
of this acquisition, the Company paid approximately $41 million in cash. The
Company also purchased from one of McClain's selling shareholders, McClain's
headquarters and manufacturing facility for $2.5 million in cash. The purchase
price will be adjusted based on the final determination of the actual net worth
of McClain as of July 31, 1998. McClain designs, manufactures and overhauls
FAA-approved aircraft jet engine replacement components.
The source of the purchase price was $10 million from available funds, $9
million from an additional minority interest investment by Lufthansa and $25
million from proceeds of a $120 million revolving credit facility (see Note 4).
33
<PAGE> 35
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of McClain has been accounted for using the purchase method
of accounting. The purchase price has been assigned to the net assets acquired
based on the fair value of such assets and liabilities at the date of
acquisition. The excess of purchase price over the fair value of the
identifiable net assets acquired amounted to $37.7 million, which is being
amortized over 30 years using the straight line method. Results of operations of
McClain are included in the Company's results effective August 1, 1998.
On October 19, 1998, the Company, through a subsidiary, acquired all of the
outstanding capital stock of ACI for $1.3 million in cash. The purchase price
will be adjusted based on the final determination of the actual net worth of ACI
as of October 19, 1998. ACI is an FAA-licensed repair and overhaul company. The
source of the purchase price was from available funds. The acquisition has been
accounted for using the purchase method of accounting. The purchase price has
been assigned to the net assets acquired based on the fair value of such assets
and liabilities at the date of acquisition. The excess of the purchase price
over the fair value of the identifiable net assets acquired was insignificant.
Results of operations for ACI are included in the Company's results effective
October 20, 1998.
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. The allocation of the costs of acquisitions of McClain
and ACI is preliminary while the Company obtains final information regarding the
fair values of all assets acquired; however, management believes that any
adjustments to the amounts allocated will not have a material effect on the
Company's financial position or results of operations.
Effective December 4, 1998, the Company, through a subsidiary, acquired
substantially all of the assets of Rogers-Dierks. In consideration of this
acquisition, the Company paid $14.1 million in cash at the closing, and
committed to pay $1.1 million in deferred payments over the next two years. The
source of the purchase price was proceeds from the Company's $120 million
revolving credit facility. Subject to meeting certain earnings objectives, the
former shareholders' of Rogers-Dierks could receive additional consideration of
up to $7.3 million payable in cash or shares of the Company's Class A Common
Stock. The purchase price will be adjusted based on the final determination of
the actual net worth of the net assets acquired as of December 4, 1998. This
acquisition is being accounted for using the purchase method of accounting and
the results of operations of Rogers-Dierks will be included in the Company's
results effective December 4, 1998.
Rogers-Dierks formerly designed and manufactured FAA-approved, factory-new
jet engine replacement parts for sale to commercial airlines. The Company
intends to continue to use the acquired assets for the same purposes as formerly
used by Rogers-Dierks.
Subsequent to the closing of the transaction, Lufthansa made an additional
investment of $3 million in HEICO Aerospace representing 20% of the initial cash
consideration.
The following table presents unaudited pro forma consolidated operating
results as if the Company's sale of a 20% minority interest in HEICO Aerospace
to Lufthansa and its acquisitions of Northwings, McClain and Rogers-Dierks had
been consummated as of November 1, 1996. The pro forma impact of ACI is not
significant. The unaudited pro forma results include adjustments to historical
amounts including additional amortization of the excess of costs over the fair
value of net assets acquired, increased interest on borrowings to finance the
acquisitions, discontinuance of certain compensation previously paid by the
acquired companies to their shareholders, reduced investment income on available
funds used to finance the acquisitions, and the incremental minority interest of
Lufthansa in the net income of the acquired companies. The unaudited pro forma
consolidated operating results for fiscal 1997 do not include any income
received from the aforementioned research and development cooperation agreement
with Lufthansa or the gain on the sale of the 20% minority interest referenced
above. The pro forma consolidated operating results do not purport to present
actual operating results had the acquisition been made at the beginning of
fiscal 1997, or the results which may occur in the future.
34
<PAGE> 36
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net sales................................................... $112,421,000 $89,805,000
============ ===========
Income before minority interest............................. $ 15,576,000 $10,788,000
============ ===========
Minority interest........................................... $ (3,438,000) $(2,944,000)
============ ===========
Net income.................................................. $ 12,138,000 $ 7,844,000
============ ===========
Net income per share:
Basic..................................................... $ 0.97 $ 0.64
============ ===========
Diluted................................................... $ 0.78 $ 0.53
============ ===========
</TABLE>
3. SHORT-TERM INVESTMENTS
Short-term investments consist of equity securities with an aggregate cost
of $3,864,000 as of October 31, 1998. These investments are classified as
available-for-sale and stated at a fair value of $2,051,000 as of October 31,
1998. The gross unrealized losses were $1,813,000 as of October 31, 1998. There
were no short-term investments during the year ended October 31, 1997.
Unrealized gains and losses, net of deferred taxes, are reflected as an
adjustment to shareholders' equity. Gross realized gains on sales of securities
classified as available-for-sale, using the average cost method, were $288,000
for fiscal 1998. There were no realized losses during these periods.
4. CREDIT FACILITIES AND LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Borrowings under revolving credit facility.................. $20,000,000 $ --
Industrial Development Revenue Bonds -- Series 1997A........ 3,000,000 3,000,000
Industrial Development Revenue Bonds -- Series 1997C and
1997B..................................................... 995,000 1,000,000
Industrial Development Revenue Bonds -- Series 1996......... 3,500,000 3,500,000
Industrial Development Revenue Refunding Bonds -- Series
1988...................................................... 1,980,000 1,980,000
Equipment loans............................................. 1,045,000 1,320,000
----------- -----------
30,520,000 10,800,000
Less current maturities..................................... (377,000) (342,000)
----------- -----------
$30,143,000 $10,458,000
=========== ===========
</TABLE>
The amount of long-term debt maturing in each of the next five years is
$377,000 in fiscal 1999, $328,000 in fiscal 2000, $1,476,000 in fiscal 2001,
$5,114,000 in fiscal 2002, $5,000,000 in 2003 and $18,225,000 thereafter. The
amount of long-term debt maturing in each of the next five years assumes the
outstanding borrowings under the revolving credit facility of $20,000,000 will
be converted to term loans in July 2001 and amortized over a four year period in
accordance with the terms of the facility.
REVOLVING CREDIT FACILITY
In July 1998, the Company entered into a $120 million revolving credit
facility (Credit Facility) with a bank syndicate replacing its $7 million credit
facility. Funds are available for funding acquisitions, working capital and
general corporate requirements on a revolving basis through July 2001. The
Credit Facility may be extended by mutual consent through July 2003. The Company
has the option to convert outstanding advances to term loans amortizing over a
five year period, with a maximum Credit Facility
35
<PAGE> 37
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
term of seven years. Outstanding borrowings bear interest at the Company's
choice of prime rate or London Interbank Offering Rates (LIBOR) plus applicable
margins. The applicable margins range from .00% to .50% for prime rate
borrowings and from .75% to 2.00% for LIBOR based borrowings depending on the
leverage ratio of the Company. A fee of .20% to .40% is charged on the amount of
the unused commitment depending on the leverage ratio of the Company. The Credit
Facility is secured by all the assets, excluding real estate, of the Company and
its subsidiaries and contains covenants which, among other things, requires the
maintenance of certain working capital, leverage and debt service ratios as well
as minimum net worth requirements. At October 31, 1998, the Company had a total
of $20 million borrowed under the Credit Facility at an interest rate of 6.38%,
which was borrowed to partially fund the acquisition of McClain (Note 2).
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds represent bonds issued by Manatee
County, Florida in 1997 (the 1997 bonds), and bonds issued by Broward County,
Florida in 1996 (the 1996 bonds) and in 1988 (the 1988 bonds).
The Series 1997A and 1997B bonds were issued in March 1997 in the amounts
of $3,000,000 and $1,000,000, respectively, for the purpose of constructing and
purchasing equipment for a new facility in Palmetto, Florida. In November 1997,
the Series 1997B bonds were refinanced by the issuance of Series 1997C bonds. As
of October 31, 1998 and 1997, the Company had been reimbursed $3,384,000 and
$80,000 for such expenditures, and the balance of the unexpended bond proceeds
of $785,000 and $4,044,000, respectively, including investment earnings, was
held by the trustee and is available for future qualified expenditures. The
Series 1997A and 1997C bonds bear interest at variable rates calculated weekly
(3.25% at October 31, 1998). The 1997A and 1997C bonds are due March 2017 and
are secured by a letter of credit expiring in March 2004 and a mortgage on the
related properties pledged as collateral. The letter of credit requires annual
sinking fund payments of $200,000 beginning in March 1998.
The 1996 bonds are due October 2011 and bear interest at a variable rate
calculated weekly (3.20% at October 31, 1998). The 1996 bonds are secured by a
letter of credit expiring in October 2001 and a mortgage on the related
properties pledged as collateral. The letter of credit requires annual sinking
fund payments beginning October 2000 in the amount of $187,500. As of October
31, 1998 and 1997, the balance of the unexpended bond proceeds of $1,467,000 and
$1,393,000, respectively, including investment earnings, was held by the trustee
and is available for future qualified expenditures.
The 1988 bonds are due April 2008 and bear interest at a variable rate
calculated weekly (3.05% at October 31, 1998). The 1988 bonds are secured by a
letter of credit expiring in February 1999, a bond sinking fund ($8,250 payable
monthly) and a mortgage on the related properties pledged as collateral.
EQUIPMENT LOAN FACILITY
In March 1994, a bank committed to advance up to $2,000,000 through
December 1998, as amended, for the purpose of purchasing equipment to be used in
the Company's operations. Each term loan is limited to 80% of the purchase price
of the related equipment and is repayable up to a maximum of 60 months with
interest at a rate equal to prime rate (as defined). The term loans are secured
by collateral representing the related purchased equipment. Equipment loans
beared interest at rates ranging from 8.25% to 8.75% as of October 31, 1998.
5. 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
36
<PAGE> 38
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
initial lease term either 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
noncancelable terms in excess of one year are as follows:
<TABLE>
<S> <C>
Year ending October 31,
1999........................................................ $ 521,000
2000........................................................ 451,000
2001........................................................ 327,000
2002........................................................ 208,000
2003........................................................ 161,000
After 2003.................................................. 107,000
----------
Total minimum lease commitments............................. $1,775,000
==========
</TABLE>
Total rent expense charged to continuing operations for operating leases in
fiscal 1998, fiscal 1997 and fiscal 1996 amounted to $319,000, $240,000 and
$166,000, respectively. Included in the fiscal 1998 and 1997 rent expense was
approximately $73,000 and $12,000, respectively, paid to a related party for the
month-to-month lease of the Northwings facility.
6. INCOME TAXES
The provision for income taxes on income from continuing operations for
each of the three years ended October 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal......................................... $6,687,000 $3,468,000 $ 4,084,000
State........................................... 569,000 358,000 459,000
---------- ---------- -----------
7,256,000 3,826,000 4,543,000
Deferred.......................................... (342,000) (486,000) (387,000)
---------- ---------- -----------
Total income tax expense.......................... 6,914,000 3,340,000 4,156,000
Less income taxes for discontinued health care
operations...................................... -- -- (2,436,000)
---------- ---------- -----------
Income taxes on income from continuing
operations...................................... $6,914,000 $3,340,000 $ 1,720,000
========== ========== ===========
</TABLE>
A deferred tax benefit of $671,000, relating to gross unrealized losses on
available-for-sale equity securities, was recorded as an adjustment to
shareholders' equity in fiscal 1998.
37
<PAGE> 39
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the federal statutory tax rate to the
Company's effective rate for continuing operations:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 35.0% 34.0% 34.0%
State taxes, less applicable federal income tax reduction... 2.1 1.9 2.3
Tax benefits on export sales................................ (2.1) (3.6) (5.1)
Tax benefits from tax free investments...................... (.2) (1.0) (1.1)
Nondeductible amortization of intangible assets............. .8 .5 .3
Other, net.................................................. (1.1) .4 1.5
---- ---- ----
Effective tax rate................................ 34.5% 32.2% 31.9%
==== ==== ====
</TABLE>
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 as of October 31, 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Inventory.......................................... $ 486,000 $ 571,000 $ 600,000
Bad debt allowances................................ 119,000 124,000 62,000
Deferred compensation liability.................... 586,000 445,000 148,000
Vacation accruals.................................. 222,000 121,000 147,000
Customer rebates and credits....................... 511,000 169,000 860,000
Retirement plan liability.......................... 183,000 156,000 --
Warranty accruals.................................. 243,000 256,000 94,000
Unrealized loss on short-term investments.......... 671,000 -- --
Other.............................................. -- 113,000 147,000
---------- ---------- ----------
Total deferred tax assets................ 3,021,000 1,955,000 2,058,000
---------- ---------- ----------
Deferred tax liabilities:
Accelerated depreciation........................... 259,000 436,000 927,000
Intangible asset amortization...................... 176,000 22,000 345,000
Retirement plan liability.......................... -- -- (127,000)
Other.............................................. 81,000 5,000 (8,000)
---------- ---------- ----------
Total deferred tax liabilities........... 516,000 463,000 1,137,000
---------- ---------- ----------
Net deferred tax asset................... $2,505,000 $1,492,000 $ 921,000
========== ========== ==========
</TABLE>
7. STOCK DIVIDENDS AND SPLITS
In December 1996, June 1996 and December 1995, the Company's Board of
Directors declared 10% stock dividends that were paid in January 1997, July 1996
and February 1996, respectively. In March 1996 and November 1997, the Company's
Board of Directors declared three-for-two stock splits that were distributed in
April 1996 and December 1997, respectively. In March 1998, the Company's Board
of Directors declared a stock distribution payable of one share of
newly-authorized Class A Common Stock to each shareholder of Common Stock for
each two shares of Common Stock held. The Class A Common Stock distribution was
made on April 23, 1998 to shareholders of record on April 9, 1998. The 10% stock
dividends were valued based on the closing market prices of the Company's stock
as of the respective
38
<PAGE> 40
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
declaration dates. All income per share, dividend per share, stock options and
common shares outstanding information has been retroactively restated to reflect
these stock dividends and splits.
8. PREFERRED STOCK PURCHASE RIGHTS PLAN
In November 1993, pursuant to a plan adopted by the Board of Directors on
such date, the Board declared a distribution of one Preferred Stock Purchase
Right (the Rights) for each outstanding share of common stock of the Company.
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 30% or more of the
outstanding common stock. Absent either of the aforementioned events
transpiring, the Rights will expire at the close of business on November 2,
2003.
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 30% or more of the outstanding common stock.
9. 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.
10. STOCK OPTIONS
The Company currently has two stock option plans, the 1993 Stock Option
Plan (1993 Plan) and the Non-Qualified Stock Option Plan (NQSOP). In March 1998,
March 1997 and March 1996, shareholders of the Company approved increases in the
number of shares issuable pursuant to the 1993 Plan by 586,865, 596,421 and
565,151, respectively. In September 1996, the Board of Directors reserved
157,905 shares for the issuance of non-qualified stock options in conjunction
with the purchase of Trilectron. Under the terms of the plans, a total of
2,807,122 Common and 1,589,748 Class A Common shares of the Company's stock are
reserved for issuance to directors, officers and key employees as of October 31,
1998. Options issued under the 1993 Plan may be designated incentive stock
options (ISO) or non-qualified stock options (NQSO). 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 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 to directors,
officers and employees 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 date of grant.
All stock option share and price per share information has been
retroactively restated for stock dividends and splits.
39
<PAGE> 41
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning all of the stock option transactions for the three
years ended October 31, 1998 is as follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
SHARES --------------------------
AVAILABLE PRICE
FOR OPTION SHARES PER SHARE
---------- --------- --------------
<S> <C> <C> <C>
Outstanding, October 31, 1995.................. 255,884 3,177,371 $1.46 - $ 3.98
Additional shares approved for 1993
Stock Option Plan............................ 565,151 -- --
Shares approved for grant in the Trilectron
acquisition.................................. 157,905 -- --
Granted........................................ (739,806) 739,806 4.03 - 7.39
Cancelled...................................... 42,637 (66,178) 2.05 - 5.09
Exercised...................................... -- (454,942) 1.95 - 3.98
-------- --------- --------------
Outstanding, October 31, 1996.................. 281,771 3,396,057 1.46 - 7.39
Additional shares approved for 1993
Stock Option Plan............................ 596,421 -- --
Granted........................................ (814,500) 814,500 6.22 - 12.36
Cancelled...................................... 5,208 (87,991) 2.65 - 10.89
Exercised...................................... -- (208,377) 1.95 - 7.39
-------- --------- --------------
Outstanding, October 31, 1997.................. 68,900 3,914,189 1.46 - 12.36
Additional shares approved for 1993
Stock Option Plan............................ 586,865 -- --
Granted........................................ (429,002) 429,002 9.92 - 30.63
Cancelled...................................... 2,382 (21,521) 9.83 - 16.33
Exercised...................................... -- (153,945) 1.95 - 16.33
-------- --------- --------------
Outstanding, October 31, 1998.................. 229,145 4,167,725 $1.46 - $30.63
======== ========= ==============
</TABLE>
Summary of shares available for option and shares under option by class of
common stock is as follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
SHARES --------------------------
AVAILABLE PRICE
FOR OPTION SHARES PER SHARE
---------- --------- --------------
<S> <C> <C> <C>
Common Stock................................... 41,190 2,765,932 $1.46 - $30.63
Class A Common Stock........................... 187,955 1,401,793 1.46 - 29.17
------- ---------
229,145 4,167,725
======= =========
</TABLE>
Information concerning stock options outstanding and exercisable by class
of common stock as of October 31, 1998 is as follows:
COMMON STOCK
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.46 - $ 3.33 1,423,362 $ 2.23 3.5 1,407,013 $2.23
3.34 - 7.33 502,895 4.47 5.8 405,425 4.41
7.34 - 12.36 566,925 9.96 8.4 303,754 9.87
12.37 - 30.63 272,750 30.16 9.6 0 0.00
--------- ------ --- --------- -----
2,765,932 $ 6.98 5.5 2,116,192 $3.74
========= ====== === ========= =====
</TABLE>
40
<PAGE> 42
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.46 - $ 3.33 711,533 $ 2.23 3.3 703,348 $2.23
3.34 - 7.33 251,592 4.47 5.6 202,846 4.41
7.34 - 12.36 283,541 9.96 8.4 151,997 9.87
12.37 - 29.17 155,127 27.30 9.6 25,000 27.50
--------- ------ --- --------- -----
1,401,793 $ 6.97 5.4 1,083,191 $4.29
========= ====== === ========= =====
</TABLE>
Information concerning stock options outstanding and exercisable as of
October 31, 1997, all of which related to Common Stock, is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.46 - $ 3.33 2,299,653 $ 2.25 3.9 2,248,029 $2.25
3.34 - 7.33 755,486 4.47 6.3 546,770 4.39
7.34 - 12.36 859,050 9.97 9.4 355,072 9.87
--------- ------ --- --------- -----
3,914,189 $ 4.37 5.6 3,149,871 $3.48
========= ====== === ========= =====
</TABLE>
Information concerning stock options outstanding and exercisable as of
October 31, 1996, all of which related to Common Stock, is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.46 - $ 3.33 2,384,756 $ 2.26 4.8 2,294,191 $2.25
3.34 - 5.33 850,921 4.45 6.6 589,124 4.40
5.34 - 7.39 160,380 7.39 3.9 -- --
--------- ------ --- --------- -----
3,396,057 $ 3.05 5.2 2,883,315 $2.69
========= ====== === ========= =====
</TABLE>
If there were a change in control of the Company, options for an additional
968,342 shares would become immediately exercisable.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, compensation expense has
been recorded in the accompanying consolidated financial statements for those
options granted below the fair market value of the stock on the date of grant.
Had the fair value of all grants under these plans been recognized as
compensation expense over the vesting period of the grants, consistent with SFAS
No. 123, the Company's net income would have been $8,913,000 ($.71 and $.57
basic and diluted net income per share, respectively) for fiscal 1998,
$4,805,000 ($.40 and $.33 basic and diluted net income per share, respectively)
for fiscal 1997 and $9,020,000 ($.77 and $.68 basic and diluted net income per
share, respectively) for fiscal 1996.
The estimated weighted average fair value of options granted was $22.85 per
share for Common Stock and $20.55 per share for Class A Common Stock in fiscal
1998, $7.73 per share in fiscal 1997 and $3.90 per share in fiscal 1996.
41
<PAGE> 43
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----- -----
CLASS A
COMMON COMMON
STOCK STOCK
------ -------
<S> <C> <C> <C> <C>
Volatility.................................... 59.69% 58.55% 66.21% 77.19%
Risk free interest rate (weighted average).... 4.94% 5.44% 6.35% 5.84%
Dividend yield (weighted average)............. .0017% .0019% .67% 1.29%
Expected life (years)......................... 10 10 10 10
</TABLE>
11. 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 10% of their annual compensation, as defined, and the
Company will contribute specified percentages ranging from 25% to 50% of
employee contributions up to 3% of annual pay in Company stock or cash, as
determined by the Company. 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.
In September 1992, the Company sold 988,267 shares of the Company's 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 is payable in nine equal
annual installments, inclusive of principal and interest at the rate of 8% per
annum, of $655,000 each and a final installment of $640,000 and is prepayable in
full or in part without penalty at any time. Prior to September 1992, the
Company sold an aggregate of 678,643 shares of its Common Stock to the Plan in
exchange for two notes receivable, which have been fully satisfied.
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 from continuing operations for fiscal 1998, 1997 and
1996 totaled $452,000, $498,000 and $364,000, respectively, net of interest
income earned on the note received from the Plan of $182,000 in fiscal 1998,
$267,000 in fiscal 1997 and $272,000 in fiscal 1996.
In 1991, the Company established a Directors Retirement Plan covering its
then current directors. The net assets of this plan as of October 31, 1998 and
1997 are not material to the financial position of the Company. During fiscal
1998, 1997 and 1996, $80,000, $76,000 and $82,000 respectively, was expensed for
this plan.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
1998...................................... $19,783,000 $22,673,000 $24,062,000 $28,833,000
1997...................................... 14,267,000 13,552,000 16,716,000 19,139,000
1996...................................... 6,978,000 7,942,000 8,059,000 11,586,000
Gross profit:
1998...................................... $ 7,304,000 $ 8,156,000 $ 8,808,000 $11,836,000
1997...................................... 4,741,000 4,536,000 4,869,000 6,483,000
1996...................................... 2,322,000 2,716,000 2,897,000 4,234,000
</TABLE>
42
<PAGE> 44
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income from continuing operations:
1998...................................... $ 2,282,000 $ 2,451,000 $ 2,613,000 $ 3,163,000
1997...................................... 1,594,000 1,640,000 1,712,000 2,073,000
1996...................................... 578,000 647,000 1,053,000 1,387,000
Net income:
1998...................................... $ 2,282,000 $ 2,451,000 $ 2,613,000 $ 3,163,000
1997...................................... 1,594,000 1,640,000 1,712,000 2,073,000
1996...................................... 870,000 1,082,000 6,553,000 1,387,000
Income per share from continuing operations:
Basic
1998................................... $ .18 $ .20 $ .21 $ .25
1997................................... .13 .14 .14 .17
1996................................... .05 .06 .09 .12
Diluted
1998................................... $ .15 $ .16 $ .17 $ .21
1997................................... .11 .11 .12 .14
1996................................... .05 .05 .08 .10
Net income per share:
Basic
1998................................... $ .18 $ .20 $ .21 $ .25
1997................................... .13 .14 .14 .17
1996................................... .08 .09 .56 .12
Diluted
1998................................... $ .15 $ .16 $ .17 $ .21
1997................................... .11 .11 .12 .14
1996................................... .07 .08 .48 .10
</TABLE>
Due to changes in the average number of common shares outstanding, net
income per share for the full fiscal year does not equal the sum of the four
individual quarters.
13. SALE OF HEALTH CARE OPERATIONS
In July 1996, the Company consummated the sale of all of the outstanding
capital stock of its wholly-owned subsidiary MediTek Health Corporation
(MediTek), representing the Company's health care services segment, to U.S.
Diagnostic Inc. In consideration for the sale of MediTek, the Company received
$13,828,000 in cash and a five-year, 6 1/2% promissory note in the principal
amount of $10,000,000. This note was sold to an unrelated party in September
1997 for the par value of the note of $10,000,000 plus accrued interest.
The sale of MediTek resulted in a gain in fiscal 1996 of $5,264,000, net of
expenses and applicable income taxes. The income taxes on the gain are less than
the normal Federal statutory rate principally due to the utilization of a $4.6
million capital loss carryforward partially offset by state income taxes.
MediTek's results of operations, net of taxes, for fiscal 1996 have been
reported separately as discontinued operations in the Consolidated Statements of
Operations. No amounts related to the discontinued operations remained in the
October 31, 1996 Consolidated Balance Sheet.
43
<PAGE> 45
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The condensed statements of operations related to the discontinued health
care services segment during fiscal 1996 are presented below:
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
JUNE 30,
1996
--------------
<S> <C>
Net revenues................................................ $11,382,000
===========
Income before income taxes.................................. $ 1,680,000
Income tax expense.......................................... 717,000
-----------
Net income........................................ $ 963,000
===========
</TABLE>
The effective tax rate used in calculating income tax expense related to
discontinued operations exceeds the normal Federal statutory tax rate due
principally to state income taxes.
14. OTHER CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS
AND STATEMENTS OF CASH FLOWS INFORMATION
Accounts receivable are composed of the following:
<TABLE>
<CAPTION>
BALANCE AT OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable......................................... $19,681,000 $12,922,000
Less allowance for doubtful accounts........................ (259,000) (362,000)
----------- -----------
Accounts receivable, net.......................... $19,422,000 $12,560,000
=========== ===========
</TABLE>
Revenue amounts set forth in the accompanying Consolidated Statements of
Operations do not include any material amounts in excess of billings related to
long-term contracts.
Inventories are composed of the following:
<TABLE>
<CAPTION>
BALANCE AT OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Finished products........................................... $ 9,306,000 $ 4,329,000
Work in process............................................. 5,213,000 7,359,000
Materials, parts, assemblies and supplies................... 9,808,000 6,671,000
----------- -----------
Total inventories................................. $24,327,000 $18,359,000
=========== ===========
</TABLE>
Inventories related to long-term contracts were not significant as of
October 31, 1998 and October 31, 1997.
Property, plant and equipment are composed of the following:
<TABLE>
<CAPTION>
BALANCE AT OCTOBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land...................................................... $ 707,000 $ 525,000
Buildings and improvements................................ 7,477,000 6,578,000
Machinery and equipment................................... 17,581,000 15,753,000
Construction in progress.................................. 5,058,000 507,000
------------ ------------
30,823,000 23,363,000
Less accumulated depreciation............................. (16,028,000) (14,820,000)
------------ ------------
Property, plant and equipment, net.............. $ 14,795,000 $ 8,543,000
============ ============
</TABLE>
44
<PAGE> 46
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible assets are composed of the following:
<TABLE>
<CAPTION>
BALANCE AT OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Excess of cost over the fair value of net assets acquired... $54,247,000 $13,539,000
Deferred charges............................................ 1,691,000 905,000
----------- -----------
55,938,000 14,444,000
Less accumulated amortization............................... (1,974,000) (1,186,000)
----------- -----------
Intangible assets, net...................................... $53,964,000 $13,258,000
=========== ===========
</TABLE>
Accrued expenses and other current liabilities are composed of the
following:
<TABLE>
<CAPTION>
BALANCE AT OCTOBER 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Accrued employee compensation............................... $ 3,515,000 $2,757,000
Accrued customer rebates and credits........................ 2,434,000 1,553,000
Estimated McClain purchase price adjustment................. 1,000,000 --
Deferred reimbursement of research and development costs.... 990,000 --
Other....................................................... 2,462,000 2,370,000
----------- ----------
Total accrued expenses and other current
liabilities..................................... $10,401,000 $6,680,000
=========== ==========
</TABLE>
SALES
Export sales were $21,874,000 in fiscal 1998, $18,662,000 in fiscal 1997
and $9,806,000 in fiscal 1996. Fiscal 1997 export sales include $7,912,000 to
Europe. No one customer accounted for sales of 10% or more of consolidated sales
during the last three fiscal years.
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal 1998, 1997, and 1996 cost of sales amounts include approximately
$900,000, $3,100,000 and $2,400,000, respectively, of new product research and
development expenses. The expenses for fiscal 1998 are net of $3,500,000
received from Lufthansa and spent by the Company in fiscal 1998 pursuant to a
research and development cooperation agreement entered into October 1997.
Amounts received from Lufthansa and not used as of October 31, 1998 totalled
$990,000 and are recorded as deferred income on the balance sheet.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ARE AS FOLLOWS:
Cash paid for interest was $996,000, $477,000 and $264,000 in fiscal 1998,
1997 and 1996, respectively. Cash paid for income taxes was $6,753,000,
$3,438,000 and $4,421,000 in fiscal 1998, 1997 and 1996, respectively.
45
<PAGE> 47
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-cash investing and financing activities related to the acquisitions and
contingent note payments during fiscal 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Fair value of assets acquired:
Intangible assets............................... $40,468,000 $8,395,000 $3,944,000
Inventories..................................... 1,327,000 669,000 6,635,000
Accounts receivable............................. 3,040,000 2,032,000 3,051,000
Property, plant and equipment................... 1,985,000 421,000 104,000
Other assets.................................... 95,000 24,000 41,000
Cash paid, including contingent note payments..... (45,911,000) (6,737,000) (7,661,000)
Fair value of common stock issued................. -- (3,544,000) --
----------- ---------- ----------
Liabilities assumed............................... $ 1,004,000 $1,260,000 $6,114,000
=========== ========== ==========
</TABLE>
Non-cash investing and financing activities related to purchases by the
discontinued health care operations of property, plant and equipment financed by
capital leases during fiscal 1996 amounted to $1,343,000. There were no
significant capital lease financing activities during fiscal 1998 and 1997.
Additionally, retained earnings was charged $20,963,000 in fiscal 1996 as a
result of the 10% stock dividends described in Note 7 above.
15. PENDING LITIGATION
In November 1989, HEICO Aerospace Corporation and Jet Avion were named
defendants in a complaint filed by United Technologies Corporation (UTC) in the
United States District Court for the Southern District of Florida. As of January
27, 1998, all counts of UTC's complaint that were not previously withdrawn by
UTC have been dismissed by the court. The complaint, as amended in fiscal 1995,
alleged infringement of a patent, misappropriation of trade secrets and unfair
competition relating to certain jet engine parts and coatings sold by Jet Avion
in competition with Pratt & Whitney, a division of UTC. UTC sought approximately
$8 million in damages for the patent infringement and approximately $30 million
in damages for the misappropriation of trade secrets and unfair competition
claims. The aggregate damages referred to in the preceding sentence did not
exceed approximately $30 million because a portion of the misappropriation and
unfair competition damages duplicate the patent infringement damages. UTC also
sought, among other things, pre-judgment interest and treble damages.
In July and November 1995, the Company filed its answers to UTC's complaint
denying the allegations. In addition, the Company filed counterclaims against
UTC for, among other things, malicious prosecution, trade disparagement,
tortious interference, unfair competition and antitrust violations. The Company
is seeking treble, compensatory and punitive damages in amounts to be determined
at trial. UTC filed an answer denying the counterclaims. A number of motions
remain pending and no trial date is currently set.
In August 1997, a Motion for Summary Judgment filed by the Company on a
portion of the lawsuit was granted by the United States District Court Judge.
The Summary Judgment dismissed UTC's claims for misappropriation of trade
secrets and unfair competition, finding that Florida's statute of limitations
bars such claims. In September 1997, UTC served a Motion for Reconsideration of
the Court's Motion for Summary Judgment. In October 1997, UTC's Motion for
Reconsideration was denied.
On January 28, 1998, a Motion for Summary Judgment filed by the Company on
the sole remaining count in UTC's complaint (for patent infringement) was
granted by the United States District Court Judge. The Summary Judgment
dismissed UTC's remaining claim, finding that HEICO Aerospace Corporation and
Jet Avion did not infringe UTC's patent.
46
<PAGE> 48
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of these rulings, the only claims currently pending are the
Company's counterclaims against UTC. UTC may challenge these rulings in further
court proceedings. The Company intends to vigorously pursue its counterclaims.
The ultimate outcome of this litigation is not certain at this time and no
provision for gain or loss, if any, has been made in the consolidated financial
statements.
In May 1998, the Company and its HEICO Aerospace Corporation and Jet Avion
Corporation subsidiaries were served with a lawsuit by Travelers Casualty &
Surety Co., f/k/a The Travelers Casualty and Surety Co. (Travelers). The
complaint seeks reimbursement of legal fees and costs totaling in excess of $15
million paid by Travelers in defending the Company in the above referenced
litigation with UTC. In addition, Travelers seeks a declaratory judgement that
the Company did not and does not have insurance coverage under certain insurance
policies with Travelers and accordingly, that Travelers did not have and does
not have a duty to defend or indemnify the Company under such policies. Also
named as defendants in Travelers' lawsuit are UTC and one of the law firms
representing the Company in the UTC litigation.
The Company intends to vigorously defend Travelers' claim and believes that
it has significant counterclaims for damages. After taking into consideration
legal counsel's evaluation of Travelers' claim, management is of the opinion
that the outcome of the Travelers litigation will not have a significant adverse
effect on the Company's consolidated financial statements.
The Company is involved in various other legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that the outcome of
these other matters will not have a significant effect on the Company's
consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company is 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 1998.
Information concerning the executive officers of the Company is set forth
at Part I hereof under the caption "Executive Officers of the Registrant."
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 1998.
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 1998.
47
<PAGE> 49
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 1998.
PART IV
ITEM 14. 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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 24
Consolidated Balance Sheets at October 31, 1998 and 1997.... 25
Consolidated Statements of Operations for the years ended
October 31, 1998, 1997 and 1996........................... 27
Consolidated Statements of Shareholders' Equity for the
years ended October 31, 1998, 1997 and 1996............... 28
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996........................... 29
Notes to Consolidated Financial Statements.................. 30
</TABLE>
(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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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 June 20, 1996, by and among
HEICO Corporation, MediTek Health Corporation and U.S.
Diagnostic Inc. is incorporated by reference to Exhibit 2 to
the Form 8-K dated July 11, 1996.*
2.3 -- Stock Purchase Agreement, dated as of September 16, 1996, by
and between HEICO Corporation and Sigmund Borax is
incorporated by reference to Exhibit 2 to the Form 8-K dated
September 16, 1996.*
2.4 -- Stock Purchase Agreement dated July 25, 1997, among HEICO
Corporation, N.A.C. Acquisition Corporation, Northwings
Accessories Corporation, Ramon Portela and Otto Newman
(without schedules) is incorporated by reference to Exhibit
2 to Form 8-K dated September 16, 1997.*
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.*
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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 -- 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 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.*
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 -- Loan Agreement, dated February 28, 1994, between HEICO
Corporation and SunBank/South Florida, N.A. is incorporated
by reference to Exhibit 10.3 to the Form 10-K for the year
ended October 31, 1994.*
10.5 -- The First Amendment, dated October 13, 1994, to Loan
Agreement dated February 28, 1994 between HEICO Corporation
and SunBank/South Florida, N.A. is incorporated by reference
to Exhibit 10.4 to the Form 10-K for the year ended October
31, 1994.*
10.6 -- Second Amendment, dated March 1, 1995, to the Loan Agreement
dated February 28, 1994 between HEICO Corporation and
SunBank/South Florida, N.A. is incorporated by reference to
Exhibit 10.6 to the Form 10-K for the year ended October 31,
1995.*
10.7 -- Third Amendment, dated September 16, 1997, to Loan Agreement
dated February 28, 1994 between HEICO Corporation and
SunTrust Bank, South Florida, National Association is
incorporated by reference to Exhibit 10.7 to the Form 10-K/A
for the year ended October 31, 1997.*
10.8 -- Fourth Amendment, dated December 1, 1997, to Loan Agreement
dated February 28, 1994 between HEICO Corporation and
SunTrust Bank, South Florida, National Association is
incorporated by reference to Exhibit 10.8 to Form 10-K/A for
the year ended October 31, 1997.*
10.9 -- Loan Agreement, dated March 31, 1994, between HEICO
Corporation and Eagle National Bank of Miami is incorporated
by reference to Exhibit 10.5 to the Form 10-K for the year
ended October 31, 1994.*
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.10 -- The First Amendment, dated May 31, 1994, to Loan Agreement
dated March 31, 1994 between HEICO Corporation and Eagle
National Bank of Miami is incorporated by reference to
Exhibit 10.6 to the Form 10-K for the year ended October 31,
1994.*
10.11 -- The Second Amendment, dated August 9, 1995, to the Loan
Agreement dated March 31, 1994 between HEICO Corporation and
Eagle National Bank of Miami is incorporated by reference to
Exhibit 10.9 to the Form 10-K for the year ended October 31,
1995.*
10.12 -- Second Loan Modification Agreement, dated February 27, 1997,
between HEICO Corporation and Eagle National Bank of Miami
is incorporated by reference to Exhibit 10.3 to the Form
10-Q for the three months ended April 30, 1997.*
10.13 -- Third Loan Modification Agreement, dated February 6, 1998,
between HEICO Corporation and Eagle National Bank of Miami
is incorporated by reference to Exhibit 10.1 to the Form
10-Q for the three months ended January 31, 1998.*
10.14 -- Loan Agreement, dated October 1, 1996, between HEICO
Aerospace Corporation and Broward County, Florida is
incorporated by reference to Exhibit 10.10 to the Form 10-K
for the year ended October 31, 1996.*
10.15 -- SunTrust Bank Reimbursement Agreement, dated October 1,
1996, between HEICO Aerospace Corporation and SunTrust Bank,
South Florida, N.A. is incorporated by reference to Exhibit
10.11 to the Form 10-K for the year ended October 31, 1996.*
10.16 -- HEICO Savings and Investment Plan and Trust, as amended and
restated effective January 2, 1987 is incorporated by
reference to Exhibit 10.2 to the Form 10-K for the year
ended October 31, 1987.*
10.17 -- HEICO Savings and Investment Plan, as amended and restated
December 19, 1994, is incorporated by reference to Exhibit
10.11 to the Form 10-K for the year ended October 31, 1994.*
10.18 -- HEICO Corporation 1993 Stock Option Plan, as amended, is
incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-3 (Registration No.
333-48439) filed on March 23, 1998.*
10.19 -- HEICO Corporation Combined Stock Option Plan, dated March
15, 1988, is incorporated by reference to Exhibit 10.3 to
the Form 10-K for the year ended October 31, 1989.*
10.20 -- 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.*
10.21 -- 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.*
10.22 -- 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.*
10.23 -- Employment and Non-compete Agreement, dated as of September
16, 1996, by and between HEICO Corporation and Sigmund Borax
is incorporated by reference to Exhibit 10.1 to the Form 8-K
dated September 16, 1996.*
10.24 -- Employment and Non-compete Agreement, dated as of September
16, 1996, by and between HEICO Corporation and Charles Kott
is incorporated by reference to Exhibit 10.2 to the Form 8-K
dated September 16, 1996.*
10.25 -- Loan Agreement, dated as of March 1, 1997, between
Trilectron Industries, Inc. and Manatee County, Florida is
incorporated by reference to Exhibit 10.1 to the Form 10-Q
for the three months ended April 30, 1997.*
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.26 -- Letter of Credit and Reimbursement Agreement, dated as of
March 1, 1997, between Trilectron Industries, Inc., and
First Union National Bank of Florida (excluding referenced
exhibits) is incorporated by reference to Exhibit 10.2 to
the Form 10-Q for the three months ended April 30, 1997.*
10.27 -- Registration Rights Agreement, dated September 15, 1997, by
and between HEICO Corporation and Ramon Portela is
incorporated by reference to Exhibit 10.1 to Form 8-K dated
September 16, 1997.*
10.28 -- Employment and Non-compete Agreement dated September 16,
1997, by and between Northwings Accessories Corporation and
Ramon Portela is incorporated by reference to Exhibit 10.2
to Form 8-K dated September 16, 1997.*
10.29 -- Amendment to Registration and Sale Rights Agreement, dated
as of December 24, 1996, by and among U.S. Diagnostic Inc.
and HEICO Corporation is incorporated by reference to
Exhibit 10.22 to Form 10-K for the year ended October 31,
1996.*
10.30 -- Assignment of Promissory Note by and between HEICO
Corporation and Forum Capital Markets L.P. is incorporated
by reference to Exhibit 10.3 to Form 8-K dated September 16,
1997.*
10.31 -- Amendment to 6 1/2% Convertible Note, dated as of December
24, 1996, by and among U.S. Diagnostic Inc. and HEICO
Corporation is incorporated by reference to Exhibit 10.21 to
Form 10-K for the year ended October 31, 1996.*
10.32 -- Second Amendment to the 6 1/2% Convertible Note, dated
September 10, 1997, by and among U.S. Diagnostic Inc., and
HEICO Corporation is incorporated by reference to Exhibit
10.4 to Form 8-K dated September 16, 1997.*
10.33 -- 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.*
10.34 -- 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.*
10.35 -- Stock Purchase Agreement dated as of June 9, 1998 among
HEICO Aerospace Holdings Corp., McClain International, Inc.,
Randolph S. McClain, Janet M. Wallace and Paul R. Schwinne
(without schedules) is incorporated by reference to Exhibit
2 to Form 8-K dated August 4, 1998.*
10.36 -- Agreement for the Sale and Purchase of Real Property, by and
among Randolph S. McClain and HEICO Aerospace Holdings
Corp., is incorporated by reference to Exhibit 10.1 to Form
8-K dated August 4, 1998.*
10.37 -- 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.*
10.38 -- Asset Purchase Agreement, dated as of December 4, 1998,
among RDI Acquisition Corp., HEICO Aerospace Holdings Corp.,
HEICO Corporation, Rogers-Dierks, Inc., William Rogers and
John Dierks (without schedules and exhibits) is incorporated
by reference to Exhibit 2.1 to Form 8-K dated December 22,
1998.*
21 -- Subsidiaries of the Company.**
23.1 -- Consent of Deloitte & Touche LLP.**
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
27 -- Financial Data Schedule.**
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K dated August 4, 1998 relating to the acquisition of
all of the outstanding stock of McClain International, Inc. was filed by the
Company during the fourth quarter of fiscal 1998. In addition, a report on Form
8-K dated December 8, 1998 was filed relating to the acquisition of
substantially all of the assets of Rogers-Dierks, Inc. See Item 1. "Business."
(c) Exhibits
See Item 14(a)(3).
(d) Separate Financial Statements Required
Not applicable.
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
By: /s/ THOMAS S. IRWIN
------------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: January 15, 1999
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.
<TABLE>
<C> <S> <C>
/s/ LAURANS A. MENDELSON Chairman, President, Chief January 15, 1999
- ----------------------------------------------------- Executive Officer and
Laurans A. Mendelson Director (Principal
Executive Officer)
Director
- -----------------------------------------------------
Jacob T. Carwile
/s/ SAMUEL L. HIGGINBOTTOM Director January 15, 1999
- -----------------------------------------------------
Samuel L. Higginbottom
Director
- -----------------------------------------------------
Paul F. Manieri
/s/ ERIC A. MENDELSON Director January 15, 1999
- -----------------------------------------------------
Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director January 15, 1999
- -----------------------------------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR. Director January 15, 1999
- -----------------------------------------------------
Albert Morrison, Jr.
Director
- -----------------------------------------------------
Alan Schriesheim
Director
- -----------------------------------------------------
Guy C. Shafer
</TABLE>
53
<PAGE> 1
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT 21
HEICO CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF COMPANY
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
HEICO Aerospace Holdings Corp............................... Florida
HEICO Aerospace Corporation............................... Florida
Jet Avion Corporation.................................. Florida
LPI Industries Corporation............................. Florida
Aircraft Technology, Inc. ............................. Florida
ATI Heat Treat Corporation............................. Florida
Jet Avion Heat Treat Corporation (Inactive)............ Florida
N.A.C. Acquisition Corporation............................ Florida
Northwings Accessories Corporation..................... Florida
McClain International, Inc. .............................. Georgia
McClain Property Corp. ................................... Florida
HNW Building Corp. ....................................... Florida
Associated Composite, Inc. ............................... Florida
Rogers-Dierks, Inc. ...................................... Florida
HEICO Aviation Products Corp. .............................. Florida
Trilectron Industries, Inc................................ New York
HEICO International Corporation............................. U.S. Virgin Islands
HEICO East Corporation...................................... Florida
HEICO-NEWCO, Inc. (Inactive)................................ Florida
HEICO Engineering Corp. (Inactive)........................ Florida
HEICO -- Jet Corp. (Inactive)............................. Florida
HEICO Bearings Corp. (Inactive)............................. Florida
</TABLE>
Subsidiaries of the Company, all of which are directly or indirectly
wholly-owned (except for HEICO Aerospace Holdings Corp. and its subsidiaries,
which are 80%-owned), are referenced in the Company's consolidated financial
statements.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-4945, 33-62156, 333-8063, 333-19667 and 333-26059 of HEICO Corporation on
Forms S-8 of our report dated December 30, 1998 appearing in this Annual Report
on Form 10-K of HEICO Corporation for the year ended October 31, 1998.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEICO CORPORATION FOR THE YEAR ENDED OCTOBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 8,609,000
<SECURITIES> 2,051,000
<RECEIVABLES> 19,681,000
<ALLOWANCES> (259,000)
<INVENTORY> 24,327,000
<CURRENT-ASSETS> 58,187,000
<PP&E> 30,823,000
<DEPRECIATION> (16,028,000)
<TOTAL-ASSETS> 133,061,000
<CURRENT-LIABILITIES> 17,600,000
<BONDS> 30,143,000
0
0
<COMMON> 124,000
<OTHER-SE> 67,483,000
<TOTAL-LIABILITY-AND-EQUITY> 133,061,000
<SALES> 95,351,000
<TOTAL-REVENUES> 95,351,000
<CGS> 59,247,000
<TOTAL-COSTS> 59,247,000
<OTHER-EXPENSES> 17,140,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 984,000
<INCOME-PRETAX> 20,042,000
<INCOME-TAX> 6,914,000
<INCOME-CONTINUING> 10,509,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,509,000
<EPS-PRIMARY> .84
<EPS-DILUTED> .68
</TABLE>
