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As filed with the Securities and Exchange Commission on January 28, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934 (fee required)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996 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 ____________
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 TAFT STREET, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices) (Zip Code)
(954) 987-6101
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act:
COMMON STOCK, PAR VALUE
$.01 PER SHARE AMERICAN STOCK EXCHANGE
(Title of Each Class) (Name of Each Exchange
On Which Registered)
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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of December 31, 1996 was $73,020,000 based on the closing price of
$26 3/8 on December 31, 1996 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:
COMMON STOCK, $.01 PAR VALUE 5,306,430 SHARES
(Class) (Outstanding at January 17, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1997 Annual Meeting of Shareholders are
incorporated by reference into Part III. See Item 14(a)(3) on page 40 for a
listing of exhibits.
Certain statements in this Report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: lower
commercial air travel, product pricing levels, general economic conditions and
competition on military programs.
PART I
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ITEM 1. BUSINESS
GENERAL
HEICO Corporation (the Company) is principally engaged in the design,
manufacture and sale of aerospace products and services through HEICO Aerospace
Corporation (HEICO Aerospace) and HEICO Aviation Products Corp. (HEICO
Aviation), both wholly-owned subsidiaries of the Company. References in this
Annual Report on Form 10-K to the "Company" include each of the Company's
subsidiaries unless otherwise required by the context.
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. ("USDL"). For further information regarding the sale of the
Company's Health Care operations, see Note 3 to the Consolidated Financial
Statements. With the sale of MediTek, the Company's operations are all within a
single business segment.
In September 1996, the Company, through HEICO Aviation, acquired all of
the outstanding stock of Trilectron Industries, Inc. (Trilectron). Trilectron is
primarily a manufacturer of ground power, air conditioning and air starting
equipment for civil and military aircraft. For further information regarding the
acquisition of Trilectron, see Note 2 to the Consolidated Financial Statements.
Upon the purchase of Trilectron, the Company's operations were divided
into the Flight Support Group and the Ground Support Group. For a description of
the general development of the Company's Flight Support Group and Ground Support
Group, see the narrative below.
The Company was organized in 1993 creating a new holding company known
as HEICO Corporation and renaming the former holding company (formerly known as
HEICO Corporation, organized in 1957) as HEICO Aerospace Corporation. The
reorganization, which was completed in 1993, did not result in any change in the
business of the Company, its consolidated assets or liabilities or the relative
interests of its shareholders.
MARKETS AND DISTRIBUTION - FLIGHT SUPPORT GROUP
The Flight Support Group is operated by HEICO Aerospace and is composed of Jet
Avion Corporation (Jet Avion), LPI Industries Corporation (LPI), and Aircraft
Technology, Inc. (Aircraft Technology), all of which are wholly-owned
subsidiaries.
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JET AVION CORPORATION - Jet Avion is primarily engaged in the development and
sale of certain replacement parts for commercial jet aircraft engines,
principally engine components for Pratt & Whitney JT8D engines, which are used
in Boeing 727 and 737 and McDonnell Douglas DC-9 and MD-80 commercial aircraft.
Since 1991, Jet Avion has expanded its program to obtain additional Federal
Aviation Administration ("FAA") approval to manufacture and sell other
replacement parts and has obtained FAA approvals on additional replacement parts
for: JT9D engines, which are used in Boeing 747 and 767, Airbus A300 and A310
and McDonnell Douglas DC-10 aircraft; PW2000 engines, which are utilized in
Boeing 757 aircraft; and PW4000 engines which are utilized in Boeing 747 and
767, Airbus A300, A310 and A330 and McDonnell Douglas MD-11 aircraft and certain
other commercial aircraft engines.
Jet Avion sells its jet engine replacement parts principally to domestic
and foreign commercial air carriers (passenger and cargo) and aircraft repair
(airmotive) companies through Jet Avion's sales force.
Jet Avion holds Parts Manufacturing Approvals (PMA) from the FAA for the
engine components which it sells. With PMA certification, Jet Avion may
manufacture and sell approved replacement parts as FAA certified. This approval
is obtained by submitting to the FAA a data package concerning replacement parts
intended to be manufactured by the Company, and, if the FAA finds such parts
qualify as original part replacements, PMA certification is then granted. For
information regarding pending litigation relating to certain of Jet Avion's
sales, see Item 3 to Part I of this Form 10-K.
LPI INDUSTRIES CORPORATION - LPI is engaged in the production of a variety of
component parts for the aerospace industry and manufactures a substantial
portion of Jet Avion's products. In addition, LPI manufactures and sells
component parts to original equipment manufacturers (OEMs) as a sub-contractor
and to U.S. military agencies as a replacement parts supplier. Orders are
obtained through LPI's sales force from outside customers (OEM and U.S. military
agencies) by competitive bidding and generally have contract terms from one to
three years. Currently, orders extending beyond one year are not significant.
AIRCRAFT TECHNOLOGY, INC. - Aircraft Technology is engaged primarily in the
overhaul and repair of certain of JT8D and JT3D jet engine components and
markets its services principally through Jet Avion's sales force.
ATI Heat Treat, a subsidiary of Aircraft Technology, provides commercial
heat treating and brazing services. In January 1997, the Company discontinued
offering such services to outside customers and sold the related assets. The
amount of revenues and earnings derived from outside customers for such services
and the proceeds from the sale of the related assets were not significant.
MARKETS AND DISTRIBUTION - GROUND SUPPORT GROUP
The Ground Support Group is operated by HEICO Aviation and is composed
principally of Trilectron.
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Trilectron is primarily engaged in the design, manufacturer and sale of
aircraft ground support equipment used to fulfill power, jet starting and
air-conditioning requirements for commercial and military aircraft. Trilectron
also manufactures and sells military electronics.
Customers of Trilectron are primarily domestic and foreign commercial
air carriers (passenger and cargo), contracted ground support service providers
and military agencies (United States and foreign). Orders are obtained by
Trilectron's sales force or by independent sales representatives and generally
have contract terms from one to three years. Currently, orders extending beyond
one year are not significant.
PRINCIPAL PRODUCTS AND CUSTOMERS
Sales of the Flight Support Group accounted for 93% of the Company's total
consolidated sales from continuing operations in fiscal 1996, and all of the
Company's sales from continuing operations in fiscal 1995 and 1994. On a
proforma basis, assuming Trilectron had been acquired as of the beginning of
fiscal 1996, the Flight Support Group's sales would have accounted for 67% of
consolidated fiscal 1996 sales from continuing operations.
Sales of products and services related to JT8D engines accounted for
approximately 75% of the Company's sales from continuing operations in fiscal
1996.
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.
Military sales were 3% of the Company's consolidated sales from continuing
operations in fiscal 1996.
COMPETITION
With respect to sales of jet engine replacement parts by the Flight Support
Group, the Company competes mainly with Pratt & Whitney, a division of United
Technologies Corporation. The competition is principally based on price and
service inasmuch as the Company's parts are interchangeable with the parts
produced by Pratt & Whitney. The Company believes that it supplies a substantial
portion of the market for certain JT8D engine components for which it holds 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, the
Company competes with a large number of machining, fabrication and repair
companies, some of which have greater financial resources than the Company.
Competition is based mainly on price, product performance, service and technical
capability.
The Company's Ground Support Group competes with several large and small
domestic and foreign competitors, some of which have greater financial resources
than the Company. The Company believes the market for its ground support
equipment is highly fragmented, with competition based mainly on price, product
performance and service.
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BACKLOG
The Company's backlog of unshipped orders as of October 31, 1996 was $25 million
as compared to $23 million as of October 31, 1995 and $14 million as of October
31, 1994. The backlog includes $11 million related to the newly acquired Ground
Support Group's operations. The backlog also includes $9 million representing
forecasted shipments over the next 12 months for certain contracts of the Flight
Support Group pursuant to which customers provide estimated annual usage.
Substantially all of the backlog of orders as of October 31, 1996 are expected
to be delivered during fiscal 1997. For additional information regarding the
Company's backlog, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Backlogs."
RESEARCH, DEVELOPMENT AND PRODUCT IMPROVEMENT ACTIVITIES
The Company has expanded the engineering capabilities of its Flight Support
Group to manufacture and distribute additional jet engine components as
discussed above. In fiscal 1996, 1995 and 1994, the cost of such activities
amounted to approximately $2,400,000, $1,800,000 and $1,200,000, respectively.
In addition, the Company intends to increase the development of new products
within its Ground Support Group in order to expand the existing product line.
PATENTS, TRADEMARKS, ETC.
As discussed under "Markets and distribution" above, the Company's PMAs from the
FAA are material to the Company's operations. The Company does not have any
patents, trademarks or licenses that the loss of which would materially
adversely affect the Company.
RAW MATERIALS
The principal materials used in the manufacture of the Company's Flight Support
Group's products are high temperature alloy sheet metal and castings and
forgings. The principal materials used in the manufacture of the Company's
Ground Support Group's products are numerous raw materials, parts and
components, including diesel and gas powered engines, compressors, and
generators. The materials used by the Company's operations are generally
available from a number of sources and in sufficient quantities to meet current
requirements subject to normal lead times.
EMPLOYEES
At the end of fiscal 1996, the Company and its subsidiaries employed
approximately 370 persons, of which approximately 240 were employed within the
Flight Support Group and approximately 120 were employed within the Ground
Support Group.
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ENVIRONMENTAL REGULATION
Compliance with federal, state and local provisions relating to the protection
of the environment has not had and is not expected to have a material effect
upon the capital expenditures, earnings or competitive position of the Company.
SEASONALITY
The Company believes that its business activities are not seasonal.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no operations located outside of the United States. See Note 13
to the Consolidated Financial Statements for additional information regarding
the Company's export sales.
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ITEM 2. PROPERTIES
The Company's headquarters is located at 3000 Taft Street, Hollywood, Florida
and occupies approximately 5,000 square feet of office space at this location.
HEICO Aerospace and its subsidiaries occupy the remainder of this 140,000 square
foot facility, which is owned by HEICO Aerospace.
Trilectron is located at 12297 U.S. Highway 41 North, Palmetto, Florida
and occupies a 35,000 square foot facility under a lease expiring in 1998.
Trilectron currently intends to build a new facility aggregating approximately
75,000 square feet in 1997 on other property owned by Trilectron and located in
Palmetto, Florida.
The Company and its subsidiaries have adequate capacity to handle their
anticipated needs for the foreseeable future. The real property owned by the
Company, exclusive of the unimproved property owned by Trilectron, is subject to
mortgages. See Note 5 to the Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS
In November 1989, HEICO Aerospace and Jet Avion were named defendants in a
complaint filed by United Technologies Corporation (United) in the United States
District court for the Southern District of Florida. The complaint, as amended
in fiscal 1995, alleges 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 United.
United seeks approximately $10 million in damages for the patent infringement
and approximately $30 million in damages for the misappropriation of trade
secrets and the unfair competition claims. The aggregate damages referred to in
the preceding sentence do not exceed approximately $30 million because a portion
of the misappropriation and unfair competition damages duplicate the $10 million
patent infringement damages. The complaint also seeks, among other things,
pre-judgment interest and treble damages.
In July and November 1995, the Company filed its answers to United's
complaint denying the allegations. In addition, the Company filed counterclaims
against United 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. United filed its answer denying certain
counterclaims and moved to dismiss other counterclaims. A number of motions are
currently pending and no trial date has been set.
Based on currently known facts, the Company's legal counsel has advised
that it believes that the Company should be able to successfully defend the
patent infringement claims alleged in United's complaint. With respect to the
misappropriation and unfair competition claims, legal counsel to the Company has
advised that it believes the likelihood that United will be able to prove a case
regarding such claims within the statute of limitations is remote. Further, the
Company intends to vigorously pursue its counterclaims against United. 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 accompanying 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.
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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 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers are elected by the Board of Directors at the first
meeting following the annual meeting of shareholders and serve at the discretion
of the Board. The names and ages of, and offices held by, the executive officers
of the Company are as follows:
NAME AGE OFFICE
---- --- ------
Laurans A. Mendelson 58 Chairman of the Board,
President and Chief Executive
Officer of the Company
Thomas S. Irwin 50 Executive Vice President and
Chief Financial Officer of the
Company
Eric A. Mendelson 31 Director, Vice President of the
Company; President of HEICO
Aerospace Corporation
Victor H. Mendelson 29 Director, Vice President and
General Counsel of the Company;
President of HEICO Aviation
Products Corp.
James L. Reum 65 Executive Vice President and
Chief Operating Officer of
HEICO Aerospace Corporation
Mr. Laurans Mendelson has served as Chairman of the Board of the Company since
December 1990 and as Co-Chairman of the Board of the Company from January 1990
until 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 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.
Mr. Mendelson is a Certified Public Accountant.
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Mr. Irwin has served as Executive Vice President 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.
Mr. Eric Mendelson has served on the Company's Board of Directors since July
1992. He has served as a Vice President of the Company since March 1992 and
President of HEICO Aerospace Corporation since April 1993. He served as Director
of Planning and Operations of the Company and Executive Vice President of Jet
Avion Corporation from 1990 to March 1992. Eric Mendelson is the son of Laurans
Mendelson.
Mr. Victor Mendelson has served on the Company's Board of Directors since July
1996. He has served 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 beginning in 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. He is a member of the American Bar Association
and The Florida Bar. Victor Mendelson is the son of Laurans Mendelson.
Mr. James 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 has served as President of LPI Industries Corporation since August 1991 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 1996, the Company's Directors,
Executive Officers and 10% shareholders complied with all Section 16(a) filing
requirements applicable to them except that Messrs. Laurans Mendelson, Thomas
Irwin, Eric Mendelson, Victor Mendelson and one former Executive Officer each
filed one late report relating to shares of Common Stock allocated to each of
these Executive Officers' participant accounts by the Company's 401-K Plan. The
reports were delayed because the information necessary to complete the filings
was not provided to the Plan participants until after the Section 16(a) required
filing date.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange under the
Symbol "HEI". The following table sets forth the quarterly high and low sales
prices for the common stock on the American Stock Exchange and the amounts of
cash dividends paid per share during the last two fiscal years. In July 1995,
February 1996 and July 1996 the Company paid 10% stock dividends in addition to
its semi-annual cash dividends. The Company also distributed a three-for-two
stock split in April 1996. In December 1996, the Company declared a fourth 10%
stock dividend in addition to a semi-annual cash dividend of $.05 per share,
both payable January 17, 1997 to shareholders of record January 8, 1997. The
quarterly sales prices and cash dividend amounts set forth below have been
retroactively adjusted for the stock split and stock dividends, including the
stock dividend paid in January 1997.
1996 1995
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FISCAL DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE HIGH LOW PER SHARE
----------------------------------- ----------------------------
First 9.52 9.02 $.041 4.84 4.10 $.034
Second 13.29 8.75 -- 6.83 4.78 --
Third 24.07 11.98 $.045 8.52 6.43 $.037
Fourth 17.73 14.09 -- 9.89 7.45 --
The Company had approximately 1,300 shareholders of record as of December 31,
1996.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
(in thousands of dollars, except per share data)
OPERATING DATA(5)
Net sales $ 34,565 $ 25,613 $ 19,212 $ 19,856 $ 19,852
========== ========== ========== ========== ==========
Gross profit from sales $ 12,169 $ 8,116 $ 5,835 $ 5,119 $ 5,993
========== ========== ========== ========== ==========
Selling, general and
administrative expenses $ 7,657 $ 6,405 $ 5,495 $ 4,850 $ 4,750
========== ========== ========== ========== ==========
Insurance recovery of
litigation costs $ --- $ --- $ --- $ (190) $ (350)
========== ========== ========== ========== ==========
Non-recurring charge $ --- $ --- $ --- $ --- $ 1,900(1)
========== ========== ========== ========== ==========
Interest expense $ 185 $ 169 $ 59 $ 205 $ 183
========== ========== ========== ========== ==========
Net income:
From continuing operations
before cumulative effect
of change in accounting
principle $ 3,665 $ 1,437 $ 640 $ 728 $ 332
From discontinued operations(2) 963 1,258 830 256(3) (912)
From gain on sale of dis-
continued operations 5,264 --- --- --- ---
From cumulative effect on prior years
of change in accounting principle --- --- 381 --- ---
---------- ---------- ---------- ---------- ---------
Net income (loss) $ 9,892 $ 2,695 $ 1,851 $ 984 $ (580)
========== ========== ========== ========== ==========
Weighted average number of common
and common equivalent shares (4) 5,903,151 5,302,370 5,044,963 5,190,196 4,971,480
========== ========== ========== ========== ==========
Net income (loss) per share:
From continuing operations before
cumulative effect of change
in accounting principle (4) $ .62 $ .27 $ .13 $ .14 $ .07
From discontinued operations .17 .24 .16 .05 (.19)
From gain on sale of
discontinued operations .89 --- --- --- ---
From cumulative effect of change
in accounting principle (4) --- --- .08 --- ---
---------- ---------- ---------- ---------- ----------
Net income (loss) per share (4) $ 1.68 $ .51 $ .37 $ .19 $ (.12)
========== ========== ========== ========== ==========
Cash dividends per share (4) $ .086 $ .072 $ .068 $ .068 $ .068
========== ========== ========== ========== ==========
BALANCE SHEET DATA
Working capital $ 25,248 $ 14,755 $ 12,691 $ 12,517 $ 14,633
========== ========== ========== ========== ==========
Net property, plant and equipment $ 5,845 $ 9,296 $ 8,608 $ 7,734 $ 8,478
========== ========== ========== ========== ==========
Total assets $ 61,836 $ 47,401 $ 39,020 $ 33,738 $ 46,425
========== ========== ========== ========== ==========
Long-term debt $ 6,022 $ 7,076 $ 4,402 $ 2,864 $ 3,092
========== ========== ========== ========== ==========
Shareholders' equity $ 41,488 $ 30,146 $ 27,061 $ 25,513 $ 25,556
========== ========== ========== ========== ==========
(1)Represents a non-recurring charge for the restructuring of the aerospace
products and services segment.
(2)Represents income (loss) from the discontinued health care operations that
were sold in fiscal 1996.
(3)Includes a $194,000 loss from the discontinued health care operations and a
$450,000 reversal of a portion of reserves for costs related to the
laboratory products segment disposed of in 1990, which were determined not to
be required.
(4)Information has been adjusted to reflect a three-for-two stock split
distributed in April 1996 and 10% stock dividends paid in July 1995, February
1996, July 1996 and January 1997.
(5)The Operating Data has been restated to show the results of the Company's
health care operations as discontinued operations for all periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW OF CONTINUING OPERATIONS
Net sales in fiscal 1996 totaled $34,565,000, up 35% when compared to fiscal
1995 net sales of $25,613,000 and up 80% when compared to fiscal 1994 net sales
of $19,212,000.
The Company's net income from continuing operations totaled $3,665,000,
or $.62 per share, in fiscal 1996, improving 155% from net income from
continuing operations of $1,437,000, or $.27 per share, in fiscal 1995 and
improving 473% from net income of $640,000 (before the impact of an accounting
change), or $.13 per share, in fiscal 1994.
The Company paid 10% stock dividends in July 1995, February 1996 and
July 1996 and declared a fourth 10% stock dividend in December 1996, which is
payable in January 1997. In addition, the Company distributed a 3-for-2 stock
split in April 1996. All net income per share, dividends per share and common
stock outstanding information has been adjusted for all years presented to give
effect to the stock dividends and stock split, including the stock dividend
payable in January 1997.
In September 1996, the Company acquired all of the outstanding stock of
Trilectron, a manufacturer of ground power, air conditioning and air starting
equipment for civil and military aircraft, as well as a designer and
manufacturer of certain military electronics, for approximately $7 million in
cash and the assumption of debt aggregating $2.3 million. The acquisition of
Trilectron has been accounted using the purchase method of accounting and the
results of operations of Trilectron are included in the consolidated statements
of operations from September 1, 1996. For further information regarding the
acquisition of Trilectron, see Note 2 to the Consolidated Financial Statements.
The increase in fiscal 1996 sales over fiscal 1995 sales reflects a
$6,627,000, or 26% increase in revenues from the Company's Flight Support
products (HEICO Aerospace) and $2,325,000 in revenues from the Company's Ground
Support products, representing Trilectron's sales for the two months since its
acquisition. The $6,401,000 increase in fiscal 1995 sales over fiscal 1994 sales
is all attributable to HEICO Aerospace.
The increases in HEICO Aerospace's sales in fiscal 1996 and fiscal 1995
are principally due to increased sales volumes of jet engine replacement parts
to the Company's commercial airline industry customers.
The net income improvement in fiscal 1996 and fiscal 1995 is primarily
attributable to the increased sales volume of HEICO Aerospace and improved
profit margins as further discussed below.
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SALE OF HEALTH CARE OPERATIONS
In July 1996, the Company consummated the profitable sale of all of the
outstanding capital stock of MediTek, representing the Company's health care
services segment, to U.S. Diagnostic, Inc. ("USDL"). In consideration for the
sale, 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, which is convertible, at
the option of the Company, into 1,081,081 shares of USDL common stock.
The sale of MediTek resulted in a gain in fiscal 1996 of $5,264,000, or
$.89 per share, net of expenses and applicable income taxes. MediTek's results
of operations for the eight months ended June 30, 1996, fiscal 1995 and fiscal
1994 have been reported separately as discontinued operations in the
Consolidated Statement of Operations. For further information regarding the
Health Care operations, see Note 3 to the Consolidated Financial Statements.
RESULTS OF CONTINUING OPERATIONS
BACKLOGS
The Company's backlog of unshipped orders as of October 31, 1996 was $25 million
as compared to $23 million as of October 31, 1995 and $14 million as of October
31, 1994. The backlog includes $11 million related to the newly acquired
operations at Trilectron. The backlog also includes $9 million representing
forecasted shipments over the next 12 months for certain contracts of HEICO
Aerospace's operations pursuant to which customers provide estimated annual
usage. The decrease in HEICO Aerospace's current backlog from that of October
31, 1995 is principally due to expiration of certain customer contracts which
have been replaced by orders pursuant to shorter term purchase orders.
Substantially all of the backlog of orders as of October 31, 1996 are expected
to be delivered during fiscal 1997.
GROSS MARGINS AND OPERATING EXPENSES
The Company's gross profit margins averaged 35.2% in fiscal 1996 as compared to
31.7% in fiscal 1995 and 30.4% in fiscal 1994. The improvement reflects higher
margins in HEICO Aerospace primarily attributable to volume increases in sales
of higher margin products and manufacturing cost efficiencies.
Selling, general and administrative (SG&A) expenses were $7,657,000 in
fiscal 1996, $6,405,000 in fiscal 1995 and $5,495,000 in 1994. As a percentage
of net sales, SG&A expenses declined from 28.6% in fiscal 1994 to 25.0% in
fiscal 1995 and declined further to 22.2% in fiscal 1996, reflecting continuing
efforts to control costs while increasing revenues. The $1,252,000 increase from
fiscal 1995 to fiscal 1996 is due principally to increased HEICO Aerospace
selling expenses and SG&A expenses of Trilectron since its acquisition. The
$910,000 increase in SG&A expenses from fiscal 1994 to fiscal 1995 is due
principally to an increase in general corporate expenses and an increase in
HEICO Aerospace's sales efforts.
-14-
INCOME FROM OPERATIONS
Income from operations increased $2,801,000 to $4,512,000 in fiscal 1996 and
increased $1,371,000 to $1,711,000 in fiscal 1995. These improvements in
operating income are due primarily to the increases in sales and gross margins
of HEICO Aerospace discussed above.
INTEREST EXPENSE
Interest expense remained level in fiscal 1996 after increasing by $110,000 from
fiscal 1994 to fiscal 1995. The increase was due primarily to increases in
long-term debt associated with equipment financing.
INTEREST AND OTHER INCOME
Interest and other income in fiscal 1996 increased $392,000 over fiscal 1995 due
principally to interest income on the convertible note and cash received from
the sale of MediTek.
Fiscal 1995 interest and other income increased by $212,000 over fiscal
1994 due primarily to an increase in cash balances available for investment and
profits from the sale of certain excess equipment of HEICO Aerospace.
INCOME TAX EXPENSE
The Company's effective tax rate in fiscal 1996 declined from that of fiscal
1995 due principally to the tax benefits from tax-free investment income and
lower state taxes.
The Company's effective income tax rate in fiscal 1994 was less than the
statutory rate primarily due to tax benefits on export sales and the reversal of
excess tax provisions upon completion of tax audits.
For a detailed analysis of the provisions for income taxes and a
discussion of new income tax accounting standards adopted in fiscal 1994, see
Notes 1 and 7 to the Consolidated Financial Statements.
NET INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Fiscal 1996 income from continuing operations before cumulative effect of change
in accounting principle totaled $3,665,000 and increased $2,228,000, or 155%,
over that of fiscal 1995, which increased $797,000, or 125%, over that of fiscal
1994. Both increases were due principally to the aforementioned improvements in
fiscal 1996 and 1995 income from operations.
INFLATION
The Company has generally experienced increases in its costs of labor, materials
and services consistent with overall rates of inflation. The impact of such
increases on the Company's net income from continuing operations has been
generally minimized by efforts to lower costs through manufacturing efficiencies
and cost reductions.
-15-
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations aggregated $12.5 million over the last
three years, including $7.1 million in fiscal 1995. Net cash provided by
operations in fiscal 1996 declined as compared to fiscal 1995 primarily as a
result of planned increases in inventories to meet customer delivery
requirements.
The Company's current ratio remained strong at 3 to 1 as of October 31,
1996 and working capital increased by $11 million in fiscal 1996, including a $6
million increase in cash and cash equivalents.
During the past three years, the Company's principal cash proceeds from
investing activities was the $14 million from the sale of MediTek. The principal
cash used in investing activities the past three years were the acquisition of
Trilectron for $7 million, acquisitions by MediTek prior to its sale aggregating
$6 million and purchases of property, plant and equipment aggregating $5
million, including $3 million purchased by HEICO Aerospace primarily to expand
and improve its product development and manufacturing capabilities.
The Company's principal financing activities during the same three-year
period included the use of an aggregate of $6 million for scheduled payments on
short-term debt, long-term debt and capital leases. In addition, the Company
received $3 million from the issuance of long-term debt and $2 million from the
exercise of stock options.
The Company has available credit facilities aggregating $7 million and
unexpended industrial development revenue bond proceeds of $2.6 million
available for future qualified expenditures. See Note 5 to the Consolidated
Financial Statements for further information regarding credit facilities.
In addition, the Company has the right to demand prepayment of the $10
million convertible note received in the sale of MediTek until such time as the
common stock into which the note is convertible has been registered. See Note 3
to the Consolidated Financial Statements for further information regarding the
convertible note.
Funds necessary for future capital expenditures, debt payments, and
working capital requirements are expected to be derived from current cash
resources and internally generated funds.
-16-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
Current assets:
Cash and cash equivalents.................... $11,025,000 $ 4,664,000
Short-term investments....................... -- 2,939,000
Accounts receivable, net..................... 7,879,000 6,709,000
Inventories.................................. 15,277,000 5,359,000
Prepaid expenses and other current assets.... 874,000 1,373,000
Deferred income taxes........................ 2,058,000 1,593,000
----------- -----------
Total current assets................... 37,113,000 22,637,000
Note receivable................................ 10,000,000 --
Property, plant and equipment, net............. 5,845,000 9,296,000
Intangible assets, net......................... 4,756,000 12,445,000
Investments in and advances to
unconsolidated partnerships.................. -- 2,094,000
Unexpended bond proceeds....................... 2,649,000 --
Other assets................................... 1,473,000 929,000
----------- -----------
Total assets........................... $61,836,000 $47,401,000
=========== ===========
See notes to consolidated financial statements.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
----------- -----------
Current liabilities:
Current maturities of long-term debt and capital
leases......................................... $ 494,000 $ 794,000
Trade accounts payable........................... 4,803,000 1,499,000
Accrued expenses and other current liabilities... 5,903,000 5,046,000
Income taxes payable............................. 665,000 543,000
----------- -----------
Total current liabilities.................. 11,865,000 7,882,000
Long-term debt and capital leases, net of
current maturities............................... 6,022,000 7,076,000
Deferred income taxes.............................. 1,137,000 1,720,000
Other non-current liabilities...................... 1,324,000 470,000
----------- -----------
Total liabilities.......................... 20,348,000 17,148,000
----------- -----------
Minority interests................................. -- 107,000
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share;
Authorized - 10,000,000 shares issuable
in series, 50,000 designated as Series A
Junior Participating Preferred Stock,
none issued.................................... -- --
Common stock, $.01 par value; Authorized -
20,000,000 shares; Issued - 5,275,551 shares
in 1996 and 5,075,283 in 1995 (as restated -
Note 4)........................................ 53,000 28,000
Capital in excess of par value................... 30,881,000 8,371,000
Retained earnings................................ 13,893,000 25,439,000
----------- -----------
44,827,000 33,838,000
Less: Note receivable from employee savings and
investment plan ......................... (3,339,000) (3,692,000)
----------- -----------
Total shareholders' equity................. 41,488,000 30,146,000
----------- -----------
Total liabilities and shareholders' equity. $61,836,000 $47,401,000
=========== ===========
See notes to consolidated financial statements.
-18-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Net sales.......................... $ 34,565,000 $ 25,613,000 $ 19,212,000
------------ ------------ ------------
Operating costs and expenses:
Cost of sales (Note 13)............ 22,396,000 17,497,000 13,377,000
Selling, general and
administrative expenses.......... 7,657,000 6,405,000 5,495,000
------------ ------------ ------------
Total operating costs and
expenses......................... 30,053,000 23,902,000 18,872,000
------------ ------------ ------------
Income from operations............. 4,512,000 1,711,000 340,000
Interest expense................... (185,000) (169,000) (59,000)
Interest and other income.......... 1,058,000 666,000 454,000
------------ ------------ ------------
Income from continuing
operations before income taxes
and cumulative effect of change
in accounting principle.......... 5,385,000 2,208,000 735,000
Income tax expense................. 1,720,000 771,000 95,000
------------ ------------ ------------
Net income from continuing
operations before cumulative
effect of change in accounting
principle........................ 3,665,000 1,437,000 640,000
Discontinued operations (Note 3):
Net income from discontinued health
care operations, net of applicable
income taxes of $717,000, $894,000
and $618,000 in fiscal 1996, 1995
and 1994, respectively........... 963,000 1,258,000 830,000
Gain on sale of health care
operations, net of applicable
income taxes of $1,719,000....... 5,264,000 -- --
Cumulative effect on prior years of
change in accounting principle... -- -- 381,000
------------ ------------ ------------
Net income......................... $ 9,892,000 $ 2,695,000 $ 1,851,000
============ ============ ============
Net income per share:
From continuing operations before
cumulative effect of change in
accounting principle............. $ 0.62 $ 0.27 $ 0.13
From discontinued health care
operations....................... 0.17 0.24 0.16
From gain on sale of health
care operations.................. 0.89 -- --
From cumulative effect of change
in accounting principle.......... -- -- $ 0.08
------------ ------------ ------------
Net income per share............... $ 1.68 $ 0.51 $ 0.37
============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding...................... 5,903,151 5,302,370 5,044,963
============ ============ ============
See notes to consolidated financial statements.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
CAPITAL IN
COMMON EXCESS OF RETAINED NOTE
STOCK PAR VALUE EARNINGS RECEIVABLE TOTAL
-------- ------------ ------------ ----------- ------------
Balances, October 31, 1993 ....................... $ 23,000 $ -0- $ 29,721,000 $(4,231,000) $ 25,513,000
Exercise of stock options (2,200
shares) ........................................ -- 22,000 -- -- 22,000
Payment on note receivable from employee
savings and investment plan .................... -- -- -- 253,000 253,000
Repurchases and retirements of 16,300
shares of common stock ......................... -- -- (238,000) -- (238,000)
Cash dividends ($.068 per share) ................. -- -- (340,000) -- (340,000)
Net income for the year .......................... -- -- 1,851,000 -- 1,851,000
-------- ------------ ------------ ----------- ------------
Balances, October 31, 1994 ....................... 23,000 22,000 30,994,000 (3,978,000) 27,061,000
Exercise of stock options (59,095
shares) ........................................ 1,000 589,000 -- -- 590,000
Payment on note receivable from employee
savings and investment plan .................... -- -- -- 286,000 286,000
Repurchases and retirements of 13,000
shares of common stock ......................... -- (117,000) -- -- (117,000)
Cash dividends ($.072 per share) ................. -- -- (369,000) -- (369,000)
10% common stock dividend paid July 28,
1995 (229,349 shares) .......................... 2,000 3,240,000 (3,242,000) -- --
10% common stock dividend paid
February 8, 1996 (254,209 shares) .............. 2,000 4,637,000 (4,639,000) -- --
Net income for the year .......................... -- -- 2,695,000 -- 2,695,000
-------- ------------ ------------ ----------- ------------
Balances, October 31, 1995 ....................... 28,000 8,371,000 25,439,000 (3,692,000) 30,146,000
Exercise of stock options (124,972
shares) ........................................ 2,000 1,562,000 -- -- 1,564,000
Payment on note receivable from employee
savings and investment plan .................... -- -- -- 353,000 353,000
Cash dividends ($.086 per share) ................. -- -- (475,000) -- (475,000)
Three for two common stock split distri-
buted April 24, 1996 (1,442,546 shares) ....... 14,000 (14,000) -- -- --
10% common stock dividend paid July 26,
1996 (432,644 shares) .......................... 4,000 10,827,000 (10,831,000) -- --
10% common stock dividend payable
January 17, 1997 (479,595 shares) .............. 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
======== ============ ============ =========== ============
See notes to consolidated financial statements.
-20-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income ............................................ $ 9,892,000 $ 2,695,000 $ 1,851,000
Adjustments to reconcile net income to
cash provided by operating activities:
Gain from sale of health care operations ............ (5,264,000) -- --
Depreciation and amortization ....................... 2,107,000 2,638,000 2,000,000
Deferred income taxes ............................... (1,048,000) (245,000) 171,000
Deferred financing costs ............................ (159,000) (56,000) (255,000)
(Income) loss from unconsolidated partnerships ...... (393,000) 590,000 724,000
Minority interest in consolidated partnerships ...... 313,000 144,000 34,000
Cumulative effect of change in accounting
principle ......................................... -- -- (381,000)
Change in assets and liabilities:
Decrease (increase) in accounts receivable ........ 166,000 (967,000) (717,000)
(Increase) in inventories ......................... (3,283,000) (98,000) (588,000)
Decrease (increase) in prepaid expenses and
other current assets ............................ 111,000 (147,000) (190,000)
(Decrease) increase in trade payables, accrued
expenses and other current liabilities .......... (14,000) 2,111,000 1,014,000
(Decrease) increase in income taxes payable
and deferred income taxes ....................... (983,000) 488,000 10,000
Increase in other non-current liabilities ......... 251,000 67,000 --
Other ............................................. (4,000) (97,000) --
------------ ------------ ------------
Net cash provided by operating activities ............. 1,692,000 7,123,000 3,673,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of health care operations,
net of cash sold of $304,000 ........................ 13,524,000 -- --
Sale (purchase) of short-term investments ............. 2,939,000 (2,939,000) --
Acquisitions:
Purchases of businesses, net of cash acquired ....... (6,555,000) (154,000) (1,518,000)
Contingent note payments ............................ (1,106,000) (1,945,000) (1,560,000)
Purchases of property, plant and equipment ............ (3,227,000) (800,000) (1,165,000)
Payments for deferred organization costs .............. (387,000) (358,000) (120,000)
Payment received from employee savings and
investment plan note receivable ..................... 353,000 286,000 253,000
Proceeds from the sale of property, plant
and equipment ....................................... 17,000 324,000 21,000
Distributions from (advances to) unconsolidated
partnerships ........................................ 60,000 (480,000) (114,000)
Distributions to minority interests ................... (216,000) (71,000) --
Other ................................................. 155,000 87,000 (189,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities .......................................... 5,557,000 (6,050,000) (4,392,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt .......... 1,343,000 201,000 1,418,000
Proceeds from the exercise of stock options ........... 1,525,000 570,000 22,000
Repurchases of common stock ........................... -- (117,000) (238,000)
Principle payments on short-term debt, long-term
debt and capital leases ............................. (3,289,000) (1,715,000) (594,000)
Cash dividends paid ................................... (475,000) (369,000) (340,000)
Other ................................................. 8,000 (9,000) --
------------ ------------ ------------
Net cash (used in) provided by financing
activities .......................................... (888,000) (1,439,000) 268,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ......................................... 6,361,000 (366,000) (451,000)
Cash and cash equivalents at beginning of year ........ 4,664,000 5,030,000 5,481,000
------------ ------------ ------------
Cash and cash equivalents at end of year .............. $ 11,025,000 $ 4,664,000 $ 5,030,000
============ ============ ============
See notes to consolidated financial statements.
-21-
HEICO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended October 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HEICO Corporation (the Company), through its subsidiaries, HEICO Aerospace
Corporation (HEICO Aerospace), including its subsidiaries, Jet Avion Corporation
(Jet Avion), LPI Industries Corporation (LPI), and Aircraft Technology, Inc.
(Aircraft Technology), and HEICO Aviation Products Corp. (HEICO Aviation) and
its subsidiary, Trilectron Industries, Inc. (Trilectron), is engaged in the
design, manufacture and sale of aerospace products and services throughout the
United States and abroad. Its customer base is primarily the commercial airline
industry. As of October 31, 1996, the Company's principal operations are located
in Hollywood 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. 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.
SHORT-TERM INVESTMENTS
Investments with a maturity of less than one year that are not readily
convertible to cash before their maturity are classified as short-term
investments and are stated at their fair value (see Note 8).
INVENTORIES
Portions of the HEICO Aerospace and Trilectron 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 these 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.
-22-
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, including assets recorded under capital leases which are
amortized over the shorter of their useful lives or the term of the related
leases. Property, plant and equipment useful lives are as follows:
Buildings and components............. 7 to 55 years
Building improvements................ 3 to 15 years
Machinery and equipment.............. 3 to 20 years
The costs of major renewals and betterments are capitalized. Repairs and
maintenance are charged to operations as incurred. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any
related gain or loss is reflected in earnings.
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:
Excess of cost over the
fair market value
of net assets acquired............. 20 to 40 years
Deferred charges..................... 3 to 20 years
The Company continually evaluates the periods of intangible asset
amortization to determine whether events and circumstances subsequent to the
origination dates of such assets warrant revised estimates of useful lives. In
addition, the Company periodically reviews the excess of cost over the fair
value of net assets acquired (goodwill) to assess recoverability based upon
expectations of undiscounted cash flows and operating income of each
consolidated entity having a material goodwill balance. 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. There have not been any significant revised estimates nor recognition of
goodwill impairment during the three years ended October 31, 1996.
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
Company's financial instruments also include a note receivable (see Note 3) and
long-term debt (see Note 5).
The carrying amount of the note receivable is $10,000,000 as of October
31, 1996, which approximates its fair market value. Long-term
-23-
debt at October 31, 1996 includes industrial development revenue bonds with a
carrying value of $5,480,000 and other long-term debt with a carrying value of
$1,036,000. 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. At October 31, 1996, the Company had no
significant concentrations of credit risk.
REVENUE RECOGNITION
Revenues are 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. 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.
INCOME TAXES
In fiscal 1994, the Company adopted, effective November 1, 1993, Statement of
Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes,"
which requires the use of the liability method of accounting for deferred income
taxes. The cumulative effect of this change in accounting for income taxes is a
$381,000 benefit ($.08 per share) and is reported separately in the Consolidated
Statements of Operations for the year ended October 31, 1994. The provision for
income taxes includes Federal, state and local income taxes currently payable
and those deferred because of temporary differences between the financial
statement and tax basis of assets and liabilities.
INCOME PER SHARE
Income per share is calculated on the basis of the weighted average number of
shares outstanding plus common share equivalents arising from the assumed
exercise of stock options, if dilutive, and has been adjusted for the effect of
any stock dividends and splits (see Note 4).
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value based method of
accounting for stock options. Entities may elect to either adopt the measurement
criteria of the statement for accounting purposes, thereby recognizing an amount
in results of operations on a prospective basis, or disclose the pro forma
effects of the new measurement criteria in Notes to Consolidated Financial
Statements. The Company intends to adopt the pro forma disclosure features of
SFAS 123, which are effective for fiscal year 1997.
-24-
NOTE 2 - ACQUISITION
In September 1996, the Company, through HEICO Aviation, acquired effective as of
September 1, 1996 all of the outstanding stock of Trilectron for $7.0 million in
cash and the assumption of debt aggregating $2.3 million. Trilectron is a
leading manufacturer of ground power, air conditioning and air starting
equipment for civil and military aircraft and is 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 will be 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.
The following table presents unaudited proforma consolidated operating
results as if the acquisition of Trilectron had occurred at the beginning of
fiscal 1995. The proforma consolidated operating results do not purport to
present actual operating results had the acquisition been made at the beginning
of fiscal 1995, or the results which may occur in the future.
1996 1995
------------- -------------
Net sales.................................. $ 48,198,000 $ 39,544,000
============= =============
Net income from continuing operations...... $ 4,186,000 $ 1,685,000
============= =============
Net income................................. $ 10,413,000 $ 2,943,000
============= =============
Net income per share from continuing
operations.............................. $ 0.71 $ 0.32
============= =============
Net income per share....................... $ 1.76 $ 0.56
============= =============
NOTE 3 - 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. ("USDL"). In consideration for the sale of MediTek, the Company received
$13,828,000 in cash and a five-year, 6-1/2% promissory note (the "Convertible
Note") in the principal amount of $10,000,000, which is convertible, at the
option of the Company, into 1,081,081 shares of USDL common stock.
In order to assure the Company's liquidity with respect to the
Convertible Note and the USDL common stock into which it is convertible, USDL
(i) granted the Company demand and piggy-back registration rights with respect
to such shares of USDL common stock, and (ii) agreed to prepay the Convertible
Note at the Company's request at any time until such registration is completed.
The terms of such demand registration rights, as amended in December 1996,
require USDL to use its best efforts to cause a registration statement
-25-
covering all of the USDL common stock into which the Convertible Note is
convertible to be declared effective by the Securities and Exchange Commission
by July 1, 1997. The terms of such piggy-back registration rights give the
Company rights to include such USDL common stock in certain registration
statements filed by USDL from January 1, 1997 until January 1, 2000. Upon 15
days' prior written notice, USDL may require the Company to convert the
Convertible Note into USDL common stock at any time beginning on the later of
December 31, 1997 or the date that such shares of USDL common stock have been
registered, if the closing price of the USDL common stock has averaged at least
$9.25 per share for the immediately preceding ten trading days. Also, beginning
on December 31, 1997, USDL may prepay the Convertible Note at any time upon 60
days' prior written notice. The Company retains the right to convert the
promissory note into the applicable shares of USDL common stock at any time
prior to prepayment.
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, 1995 and 1994
have been reported separately as discontinued operations in the Consolidated
Statement of Operations. No amounts related to the discontinued operations
remain in the October 31, 1996 Consolidated Balance Sheet.
The condensed statement of operations related to the discontinued health
care services segment during fiscal years 1996, 1995 and 1994 are presented
below:
EIGHT MONTHS
ENDED JUNE 30, YEARS ENDED OCTOBER 31,
-------------- ---------------------------
1996 1995 1994
-------------- ----------- ------------
Net revenues................. $ 11,382,000 $14,766,000 $13,181,000
============== =========== ============
Income before income taxes... $ 1,680,000 $ 2,152,000 $ 1,448,000
Income tax expense........... 717,000 894,000 618,000
-------------- ----------- ------------
Net income................... $ 963,000 $ 1,258,000 $ 830,000
============== =========== ============
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.
With the sale of the health care services segment, the Company's
operations are within a single business segment, the aerospace products and
services industry.
NOTE 4 - STOCK DIVIDENDS AND SPLIT
In June 1996, December 1995 and May 1995, the Company's Board of Directors
declared 10% stock dividends that were paid in July 1996, February 1996 and July
1995, respectively. In March 1996, the Company's Board of Directors declared a
three-for-two stock split that was distributed in April 1996. On December 13,
1996, the Company's Board of Directors declared a 10% stock dividend payable
January 17, 1997 to shareholders of record on January 8, 1997. These
transactions were valued based on the closing market prices of the Company's
stock as of their respective declaration dates. During fiscal 1996, retained
earnings was charged $20,963,000 as a result of the issuance of a combined total
of 2,354,785 shares of the Company's common stock.
-26-
During fiscal 1995, retained earnings was charged $7,881,000 as a result of the
issuance of a combined total of 483,558 shares of the Company's common stock.
All income per share, dividend per share and common shares outstanding
information has been retroactively restated to reflect these stock dividends and
split.
NOTE 5 - CREDIT FACILITIES, LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of:
OCTOBER 31,
-----------------------------
1996 1995
---------- -----------
Industrial development revenue bonds.. $5,480,000 $1,980,000
Term loan borrowing under revolving
credit facility..................... 317,000 633,000
Equipment loans....................... 719,000 430,000
Mortgage note payable in monthly in-
stallments including interest at
at 8.625% due January, 1999......... -- 497,000
Capital leases with various ex-
piration dates from 1995 to 2003,
at various interest rates from
10.625% to 12.03%................... -- 3,812,000
Other long-term debt.................. -- 518,000
---------- -----------
6,516,000 7,870,000
Less current maturities............... (494,000) (794,000)
---------- -----------
$6,022,000 $7,076,000
========== ===========
The amount of long-term debt maturing in each of the next five years is
$494,000 in fiscal 1997, $170,000 in fiscal 1998, $170,000 in fiscal 1999,
$138,000 in fiscal 2000 and $71,000 in fiscal 2001.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds represent bonds issued by Broward
County, Florida in 1996 (the 1996 bonds) and in 1988 (the 1988 bonds).
The 1996 bonds were issued in the amount of $3,500,000 for the purpose
of renovating and expanding the Hollywood facility. As of October 31, 1996, the
Company has been reimbursed $851,000 for such qualified expenditures and the
balance of the unexpended bond proceeds of $2,649,000 are held by the trustee
and is available for future qualified expenditures. The 1996 bonds are due
October 2011 and bear interest at a variable rate calculated weekly (3.75% at
October 31, 1996). 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.
The 1988 bonds are due April 2008 and bear interest at a variable rate
calculated weekly (3.70% at October 31, 1996). 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.
-27-
The pledged properties for the 1996 and 1988 bonds have a carrying value
aggregating approximately $5,555,000 at October 31, 1996.
Trilectron has been approved by Manatee County, Florida for $3,000,000
of industrial development revenue bonds to finance the construction of a larger
facility in Palmetto, Florida and the purchase of additional equipment. These
bonds are expected to be issued in fiscal 1997.
REVOLVING CREDIT FACILITY
The Company has a $7 million credit facility available for funding acquisitions,
working capital and general corporate requirements. Borrowings under this credit
facility bear interest at 1/4% over the bank's prime rate, adjusted daily, and
are convertible to term loans that bear interest, at the Company's option, at
1/4% over the bank's prime rate, adjusted daily, or a fixed interest rate of 200
basis points over the bank's prime rate in effect on the day of the conversion.
Term loan borrowings under the credit facility are payable in 36 to 48 monthly
installments. The credit facility is secured by substantially all the assets of
HEICO Aerospace and its subsidiaries. The revolving portion of the facility
expires in April 1997 and may be renewed annually by mutual agreement. This
credit facility and the letters of credit securing the 1996 bonds and 1988 bonds
contain covenants which, among other things, restrict borrowings, capital
expenditures and cash dividends, require the maintenance of certain net worth,
working capital and debt service amounts and ratios, require the continued
employment of the current Chairman, President and Chief Executive Officer and
require that he and his affiliates maintain a specified ownership position in
the Company.
In October 1994, the Company borrowed $950,000 from the $7 million
credit facility, of which $317,000 is outstanding as of October 31, 1996 with
interest accruing at 8.5%.
EQUIPMENT LOAN FACILITY
In March 1994, a bank committed to advance up to $1,900,000, as amended in
fiscal 1995, 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 the bank's prime rate. The term loans are secured by collateral
representing the related purchased equipment, which has a carrying value of
approximately $905,000 at October 31, 1996. In December 1996, the Company
received a commitment to extend the facility until December 1997.
OTHER LONG-TERM DEBT
The mortgage note payable, capital leases and other long-term debt were assumed
by USDL as part of the sale of MediTek in July 1996. (See Note 3)
-28-
NOTE 6 - LEASE COMMITMENTS
The Company leases certain property and equipment, including manufacturing
facilities and office equipment under operating leases. Some of these leases
provide the Company with the option after the initial lease term either 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:
Year ending October 31,
1997.................................. $ 332,000
1998.................................. 259,000
1999.................................. 133,000
2000.................................. 27,000
----------
Total minimum lease commitments....... $ 751,000
==========
Total rent expense charged to continuing operations for all operating
leases in fiscal 1996, fiscal 1995 and fiscal 1994 amounted to $166,000,
$133,000 and $68,000, respectively.
NOTE 7 - INCOME TAXES
The provision for income taxes on income from continuing operations before
cumulative effect of change in accounting principle for each of the three years
ended October 31, 1996 is as follows:
1996 1995 1994
---------- ---------- -----------
Current:
Federal..................... $4,084,000 $1,592,000 $ 407,000
State....................... 459,000 318,000 135,000
---------- ---------- -----------
4,543,000 1,910,000 542,000
Deferred...................... (387,000) (245,000) 171,000
---------- ---------- -----------
Total income tax expense ..... 4,156,000 1,665,000 713,000
Less income taxes for
discontinued operations..... (2,436,000) (894,000) (618,000)
---------- ---------- -----------
Income taxes on income from
continuing operations....... $1,720,000 $ 771,000 $ 95,000
========== ========== ===========
A net deferred tax liability of $661,000 relating to MediTek was written
off as a result of the sale of such discontinued operations described in Note 3.
-29-
The following table reconciles the federal statutory tax rate to the
Company's effective rate for continuing operations:
1996 1995 1994
-------- -------- --------
Federal statutory tax
rate........................ 34.0% 34.0% 34.0%
State taxes, less applicable
federal income tax
reduction................... 2.3 2.6 1.1
Tax benefits on export
sales....................... (5.1) (6.4) (13.6)
Tax benefits from tax free
investments................. (1.1) (.2) (1.2)
Tax benefits from dividend
income...................... (.2) (.1) (.2)
Nondeductible amortization
of intangible assets........ .3 .8 2.4
Reversal of excess
income tax provisions upon
completion of tax audit..... -- -- (8.0)
Other, net................... 1.7 4.2 (1.6)
-------- -------- --------
Effective tax rate........... 31.9% 34.9% 12.9%
-------- -------- --------
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, 1996, 1995 and 1994 are as follows:
OCTOBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- -----------
Deferred tax assets:
Inventory........................... $ 600,000 $ 412,000 $ 306,000
Bad debt allowances................. 62,000 436,000 261,000
Retirement and deferred compen-
sation liabilities................ 148,000 102,000 76,000
Vacation accruals................... 147,000 112,000 115,000
Customer rebates and credits........ 860,000 371,000 279,000
Warranty accruals................... 94,000 -- --
Alternative minimum tax credit...... -- 13,000 147,000
Capital loss carryforward........... -- -- 1,560,000
Other............................... 147,000 147,000 67,000
---------- ---------- -----------
2,058,000 1,593,000 2,811,000
Valuation allowance................. -- -- (1,560,000)
---------- ---------- -----------
Total deferred tax assets........... 2,058,000 1,593,000 1,251,000
---------- ---------- -----------
Deferred tax liabilities:
Accelerated depreciation............ 927,000 1,208,000 948,000
Intangible asset amortization....... 345,000 545,000 280,000
Retirement plan liability........... (127,000) -- --
Equity in losses of partnerships.... -- (35,000) 387,000
Other............................... (8,000) 2,000 8,000
---------- ---------- -----------
Total deferred tax liabilities...... 1,137,000 1,720,000 1,623,000
---------- ---------- -----------
Net deferred tax asset (liability).. $ 921,000 $ (127,000) $ (372,000)
========== ========== ===========
The $1,560,000 deferred tax asset related to the Company's $4.6 million
capital loss carryforward had a 100% valuation allowance as of October 31, 1994.
-30-
NOTE 8 - INVESTMENT IN FINANCIAL INSTRUMENTS
In fiscal 1995, the Company entered into transactions in which it simultaneously
purchased and sold call options on an industry sector index of equity securities
(the Index Options) expiring in November 1995. The Index Options were purchased
with temporary surplus funds of approximately $2.9 million for investment
purposes. Prior to the end of fiscal 1995, the Company traded substantially all
of the purchase option position and entered into a similar purchase option
position having the same November 1995 expiration date. The gain realized in
fiscal 1995 fully utilized the Company's $4.6 million capital loss carryover.
The deferred tax asset related to the Company's $4.6 million capital loss
carryforward had a 100% valuation allowance as of October 31, 1994. As of
October 31, 1995, the investments in the purchased and sold call option
contracts are netted because the terms of the Index Option contracts provide for
a right of offset. The net investment as of October 31, 1995 in the amount of
$2.9 million is recorded at fair market value as represented by the net cash
proceeds realized upon termination of the option contracts in November 1995 and
is included in short-term investments. Upon termination of the option contracts
in November 1995, the Company recognized a $4.6 million capital loss for income
tax purposes. For financial statement purposes, the transactions did not result
in any material gain or loss.
NOTE 9 - 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, par value $.01 per
share, of the Company. The Rights trade with the common stock and are not
exercisable or transferable apart from the 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.
-31-
NOTE 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 1996,
shareholders of the Company approved an increase in the number of shares
issuable pursuant to the 1993 Plan by 251,178 shares. A third plan, the Combined
Stock Option Plan expired in February 1993 and was replaced by the 1993 Plan. In
September 1996, the Board of Directors reserved 70,180 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 1,634,558 shares of the Company's stock
are reserved for issuance to directors, officers and key employees as of October
31, 1996. 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.
Information concerning all of the stock option transactions for the
three years ended October 31, 1996 follows:
SHARES UNDER OPTION
SHARES ---------------------------------
AVAILABLE PRICE
FOR OPTION SHARES PER SHARE
------------ ---------- -------------------
Outstanding,
October 31, 1993 418,940 1,301,854 $ 3.28 - $ 8.95
Granted............... (173,496) 173,496 $ 4.73 - $ 5.46
Cancelled............. 4,392 (63,178) $ 4.61 - $ 8.16
Exercised............. -- (4,831) $ 4.61
------------ ---------- -------------------
Outstanding,
October 31, 1994 249,836 1,407,341 $ 3.28 - $ 8.95
Granted............... (194,032) 194,032 $ 4.33 - $ 8.64
Cancelled............. 57,922 (62,316) $ 4.38 - $ 8.16
Exercised............. -- (126,924) $ 3.47 - $ 8.16
------------ ---------- -------------------
Outstanding,
October 31, 1995 113,726 1,412,133 $ 3.28 - $ 8.95
Additional shares
approved for 1993
Stock Option Plan... 251,178 -- --
Shares approved
for grant in
the Trilectron
acquisition......... 70,180 -- --
Granted............... (328,803) 328,803 $ 9.08 - $16.64
Cancelled............. 18,950 (29,412) $ 4.61 - $11.44
Exercised............. -- (202,197) $ 4.38 - $ 8.95
------------ ---------- -------------------
Oustanding,
October 31, 1996 125,231 1,509,327 $ 3.28 - $16.64
============ ========== ===================
-32-
All of the above options were granted at the fair market value of the
stock on the date of grant. As of October 31, 1996, options for 1,280,429 shares
were exercisable at a weighted average option price of $6.05. If there were a
change in control of the Company, options for an additional 228,898 shares would
become immediately exercisable. The weighted average option price for all
options outstanding as of October 31, 1996 is $6.86. All stock option share and
price per share information has been retroactively restated for stock dividends
and splits.
NOTE 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 658,845 shares of the Company's
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 452,429 shares of its 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 1996, 1995 and
1994 totaled $364,000, $240,000 and $206,000, respectively, net of interest
income earned on the note received from the Plan of $272,000 in fiscal 1996,
$299,000 in fiscal 1995 and $331,000 in fiscal 1994.
In 1991, the Company established a Directors Retirement Plan covering
its then current directors. The net assets of this plan as of October 31, 1996
are not material to the financial position of the Company. During fiscal 1996,
1995 and 1994, $82,000, $75,000 and $73,000 respectively, was expensed for this
plan.
-33-
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Net sales:
1996.......... $ 6,978,000 $ 7,942,000 $ 8,059,000 $11,586,000
1995.......... $ 5,392,000 $ 6,394,000 $ 6,904,000 $ 6,923,000
Gross profit:
1996.......... $ 2,322,000 $ 2,716,000 $ 2,897,000 $ 4,234,000
1995.......... $ 1,740,000 $ 1,960,000 $ 2,205,000 $ 2,211,000
Net income from
continuing operations:
1996.......... $ 578,000 $ 647,000 $ 1,053,000 $ 1,387,000
1995.......... $ 191,000 $ 268,000 $ 514,000 $ 464,000
Net income:
1996.......... $ 870,000 $ 1,082,000 $ 6,553,000 $ 1,387,000
1995.......... $ 569,000 $ 652,000 $ 721,000 $ 753,000
Net income per share
share from continuing
operations:
1996.......... $ .10 $ .11 $ .17 $ .23
1995.......... $ .04 $ .05 $ .09 $ .08
Net income
per share:
1996.......... $ .15 $ .18 $ 1.07 $ .23
1995.......... $ .11 $ .13 $ .14 $ .14
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.
The amounts above differ from those previously reported on Forms 10-Q
because these amounts have been restated to reflect the results of the Company's
health care operations as discontinued operations for all periods presented.
-34-
NOTE 13 - OTHER CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS
AND STATEMENTS OF CASH FLOWS INFORMATION
Accounts receivable are composed of the following:
BALANCE AT OCTOBER 31,
-----------------------------
1996 1995
------------ -------------
Accounts receivable ............................................. $ 7,882,000 $ 9,531,000
Net costs and estimated earnings
in excess of billings on un-
completed contracts ........................................... 265,000 --
Less allowance for doubtful
accounts ...................................................... (268,000) (1,174,000)
Less contractual allowances ..................................... -- (1,648,000)
------------ -------------
Accounts receivable, net ........................................ $ 7,879,000 $ 6,709,000
============ =============
Inventories are composed of the following:
BALANCE AT OCTOBER 31,
-----------------------------
1996 1995
------------ -------------
Finished products ............................................... $ 4,428,000 $ 2,534,000
Work in process ................................................. 5,845,000 1,721,000
Materials, parts, assemblies and
supplies ...................................................... 5,004,000 1,104,000
Total inventories ............................................... $ 15,277,000 $ 5,359,000
============ =============
Inventories related to long-term contracts aggregated $628,000 as of
October 31, 1996. There were no such inventories as of October 31, 1995.
Property, plant and equipment, including capital leases, are composed of the
following:
BALANCE AT OCTOBER 31,
-----------------------------
1996 1995
------------ -------------
Land ............................................................ $ 523,000 $ 131,000
Buildings and improvements ...................................... 5,418,000 6,026,000
Machinery and equipment ......................................... 13,658,000 18,040,000
------------ -------------
19,599,000 24,197,000
Less accumulated depreciation ................................... (13,754,000) (14,901,000)
------------ -------------
Property, plant and equipment, net .............................. $ 5,845,000 $ 9,296,000
============ =============
Intangible assets are composed of the following:
BALANCE AT OCTOBER 31,
-----------------------------
1996 1995
------------ -------------
Excess of cost over the fair value
of net assets acquired ........................................ $ 4,882,000 $ 12,324,000
Deferred charges ................................................ 679,000 1,473,000
Other ........................................................... -- 25,000
------------ -------------
5,561,000 13,822,000
Less accumulated amortization ................................... (805,000) (1,377,000)
------------ -------------
Intangible assets, net .......................................... $ 4,756,000 $ 12,445,000
============ =============
Accrued expenses and other current liabilities are composed of the
following:
BALANCE AT OCTOBER 31,
-----------------------------
1996 1995
------------ -------------
Accrued employee compensation ................................... $ 2,071,000 $ 1,711,000
Accrued customer rebates and
credits ....................................................... 1,848,000 1,378,000
Accrued property taxes .......................................... 435,000 505,000
Other ........................................................... 1,549,000 1,452,000
------------ -------------
Total accrued expenses and other
current liabilities ........................................... $ 5,903,000 $ 5,046,000
============ =============
-35-
SALES
Export sales were $9,806,000 in fiscal 1996, $5,762,000 in fiscal 1995 and
$3,678,000 in fiscal 1994.
No one customer accounted for sales of 10% or more of consolidated sales
during the last three fiscal years.
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal 1996, 1995 and 1994 cost of sales amounts include approximately
$2,400,000, $1,800,000 and $1,200,000, respectively, of new product research and
development expenses.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ARE AS FOLLOWS:
Cash paid for interest was $264,000, $386,000 and $193,000 in 1996, 1995 and
1994, respectively. Cash paid for income taxes was $4,421,000, $1,400,000 and
$881,000 in 1996, 1995 and 1994, respectively.
Non-cash investing and financing activities related to the acquisitions
and contingent note payments during fiscal 1996, 1995 and 1994 were as follows:
1996 1995 1994
------------ ------------ ------------
Fair value of assets acquired:
Intangible assets. $ 3,944,000 $ 1,945,000 $ 2,632,000
Inventories....... 6,635,000 -- --
Accounts re-
ceivable........ 3,051,000 -- 300,000
Property, plant
and equipment... 401,000 -- 249,000
Other assets...... 41,000 154,000 146,000
Cash paid, including
contingent note
payments............ (7,661,000) (2,099,000) (3,078,000)
------------ ------------ ------------
Liabilities assumed... $ 6,411,000 $ -- $ 249,000
============ ============ ============
Non-cash investing and financing activities related to purchases of
property, plant and equipment financed by capital leases during fiscal 1996,
1995 and 1994 amounted to $1,343,000, $2,257,000 and $1,044,000, respectively.
Non-cash investing and financing activities during fiscal 1995 also included
purchases of property, plant and equipment of $2,269,000, investments in and
advances to unconsolidated partnerships of $862,000, deferred charges of
$461,000 and other assets of $139,000 which were financed by capital leases
assumed, issuance of a note payable and distributions from an unconsolidated
partnership during fiscal 1995. Additionally, retained earnings was charged
$20,963,000 in fiscal 1996 and $7,881,000 in fiscal 1995 as a result of the 10%
stock dividends described in Note 4 above.
-36-
NOTE 14 - PENDING LITIGATION
In November 1989, HEICO Aerospace and Jet Avion were named defendants in a
complaint filed by United Technologies Corporation (United) in the United States
District court for the Southern District of Florida. The complaint, as amended
in fiscal 1995, alleges 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 United.
United seeks approximately $10 million in damages for the patent infringement
and approximately $30 million in damages for the misappropriation of trade
secrets and the unfair competition claims. The aggregate damages referred to in
the preceding sentence do not exceed approximately $30 million because a portion
of the misappropriation and unfair competition damages duplicate the $10 million
patent infringement damages. The complaint also seeks, among other things,
pre-judgment interest and treble damages.
In July and November 1995, the Company filed its answers to United's
complaint denying the allegations. In addition, the Company filed counterclaims
against United 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. United filed its answer denying certain
counterclaims and moved to dismiss other counterclaims. A number of motions are
currently pending and no trial date has been set.
Based on currently known facts, the Company's legal counsel has advised
that it believes that the Company should be able to successfully defend the
patent infringement claims alleged in United's complaint. With respect to the
misappropriation and unfair competition claims, legal counsel to the Company has
advised that it believes the likelihood that United will be able to prove a case
regarding such claims within the statute of limitations is remote. Further, the
Company intends to vigorously pursue its counterclaims against United. 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 accompanying 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.
-37-
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, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended October 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended October 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective November 1,
1993 to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
December 27, 1996
-38-
- -------------------------------------------------------------------------------
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 1996.
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 1996.
- -------------------------------------------------------------------------------
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 1996.
- -------------------------------------------------------------------------------
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 1996.
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PART IV
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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:
PAGE
Consolidated Balance Sheets at October 31, 1996
and 1995....................................... 17
Consolidated Statements of Operations for the
years ended October 31, 1996, 1995 and 1994.... 19
Consolidated Statements of Shareholders' Equity
for the years ended October 31, 1996, 1995
and 1994....................................... 20
Consolidated Statements of Cash Flows for the
years ended October 31, 1996, 1995 and 1994.... 21
Notes to Consolidated Financial Statements....... 22
Report of Independent Auditors................... 38
(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
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 Company'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 Labs 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.
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Item 14 (a) (3) Exhibits continued
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.
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 Bylaws of the Registrant.
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.
-41-
Item 14 (a) (3) Exhibits continued
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 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.
10.8 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.
10.9 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.
10.10 Loan Agreement, dated October 1, 1996, between
HEICO Aerospace Corporation and Broward County,
Florida.
10.11 SunTrust Bank Reimbursement Agreement, dated
October 1, 1996, between HEICO Aerospace
Corporation and SunTrust Bank, South Florida, N.A.
10.12 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.
10.13 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.
-42-
Item 14 (a) (3) Exhibits continued
10.14 HEICO Corporation 1993 Stock Option Plan.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 Employment and Non-compete Agreements, 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.
10.21 Amendment to 6 1/2% Convertible Note, dated as of
December 24, 1996, by and among U.S. Diagnostic,
Inc. and HEICO Corporation.
10.22 Amendment to Registration and Sale Rights
Agreement, dated as of December 24, 1996, by and
among U.S. Diagnostic, Inc. and HEICO Corporation.
11 Computation of earnings per share.
21 Subsidiaries of the Company.
23.1 Consent of independent auditors.
-43-
Item 14 (a) (3) Exhibits continued
27 Financial Data Schedule
(b) Reports on Form 8-K
The only report on Form 8-K filed by the Company during the
fourth quarter of fiscal 1996 was dated September 16, 1996 and reported under
Item 2, "Acquisition of Disposition of Assets," the purchase of all the
outstanding capital stock of Trilectron Industries, Inc.
(c) Exhibits
See Item 14 (a) (3).
(d) Separate Financial Statements Required
Not applicable.
-44-
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
Date: January 28, 1997 BY: /s/ THOMAS S. IRWIN
-------------------------
THOMAS S. IRWIN
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ LAURANS A. MENDELSON Chairman, January 28, 1997
- -------------------------------- President, Chief
LAURANS A. MENDELSON Executive Officer
and Director (Principal
Executive Officer)
/s/ JACOB T. CARWILE Director January 28, 1997
- --------------------------------
JACOB T. CARWILE
/s/ SAMUEL L. HIGGINBOTTOM Director January 28, 1997
- --------------------------------
SAMUEL L. HIGGINBOTTOM
/s/ PAUL F. MANIERI Director January 28, 1997
- --------------------------------
PAUL F. MANIERI
/s/ ERIC A. MENDELSON Director January 28, 1997
- --------------------------------
ERIC A. MENDELSON
/s/ VICTOR H. MENDELSON Director January 28, 1997
- --------------------------------
VICTOR H. MENDELSON
/s/ ALBERT MORRISON, JR. Director January 28, 1997
- --------------------------------
ALBERT MORRISON, JR.
/s/ ALAN SCHRIESHEIM Director January 28, 1997
- --------------------------------
ALAN SCHRIESHEIM
/s/ GUY C. SHAFER Director January 28, 1997
- --------------------------------
GUY C. SHAFER
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