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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
For the fiscal year ended October 31, 2002 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) 987-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share New York Stock Exchange
Class A Common Stock, par value $.01 per share (Name of Each Exchange On
(Title of Each Class) 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. |X|
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant was $175,000,000 based on the closing price
of Common Stock and Class A Common Stock as of December 31, 2002 as reported by
the New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of
common stock, as of December 31, 2002:
Common Stock, $.01 par value 9,431,375 shares
Class A Common Stock, $.01 par value 11,587,444 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III. See Item
15(a)(3) beginning on page 58 for a listing of exhibits.
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Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature are
forward-looking and the words "believe," "expect," "estimate" and similar
expressions are generally intended to identify forward-looking statements. Any
forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with the investors and analysts in the
normal course of business through meetings, phone calls and conference calls,
concerning our operations, economic performance and financial condition are
subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o Our ability to introduce new products;
o Our ability to make acquisitions and achieve operating synergies from
acquired businesses;
o Our ability to continue to control costs and maintain quality;
o Product pricing levels;
o Product specification costs and requirements;
o Governmental and regulatory demands;
o U.S. governmental export policies and restrictions;
o Competition on military programs;
o Military program funding by U.S. and non-U. S. government agencies;
o Risks inherent in changes in market interest rates;
o Anticipated trends in our businesses, including trends in the markets
for aircraft engine and aircraft component replacement parts, aircraft
engine overhaul and electronics equipment and airline fleet changes;
o The demand for commercial air travel;
o The adverse impact of the September 11, 2001 terrorist attacks on
commercial airlines and the economy in general;
o Credit risk related to receivables from customers; and
o Economic conditions within and outside of the aerospace, defense and
electronics industries.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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PART I
Item 1. Business
The Company
HEICO Corporation ("HEICO," "we," "us," "our" or "the Company") believes it
is the world's largest manufacturer of Federal Aviation Administration
(FAA)-approved jet engine and aircraft component replacement parts, other than
the original equipment manufacturers (OEMs) and their subcontractors. HEICO is
also a leading manufacturer of certain electronic equipment to the aerospace,
defense, medical, telecommunications and electronics industries. The Company's
businesses are comprised of two operating segments, the Flight Support Group
(FSG) consisting of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and its
subsidiaries and the Electronic Technologies Group (ETG) consisting of HEICO
Electronic Technologies Corp. (HEICO Electronic) and its subsidiaries. The FSG
uses proprietary technology to design and manufacture jet engine and aircraft
component replacement parts for sale at lower prices than those manufactured by
OEMs. These parts are approved by the FAA and are the functional equivalent of
parts sold by OEMs. In addition, the FSG repairs, refurbishes and overhauls jet
engine and aircraft components for domestic and foreign commercial air carriers
and aircraft repair companies, and manufactures thermal insulation products and
other component parts primarily for aerospace, defense and commercial
applications. In fiscal 2002, the FSG accounted for 70% of our revenues. The ETG
designs, manufactures and sells various types of electronic and electro-optical
products, including infrared simulation and test equipment, hybrid laser
rangefinder receivers, electrical power supplies, back-up power supplies,
electromagnetic interference and radio frequency interference shielding, high
power laser diode drivers, amplifiers, photodetectors, amplifier modules and
flash lamp drivers. In addition, the ETG also repairs and overhauls inertial
navigation systems and other avionics, instruments and components for
commercial, military and business aircraft operators. In fiscal 2002, the ETG
accounted for 30% of our revenues.
We have continuously operated in the aerospace industry for over 40 years.
Since assuming control in 1990, current management has achieved significant
sales and profit growth through expanded product offerings, an expanded customer
base, increased research and development expenditures and the completion of
acquisitions. Since fiscal 1998, we have added ten subsidiaries to our FSG and
five subsidiaries to our ETG through acquisitions. See Item 7 of this annual
report, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," for details of our most recent acquisitions. As a result of
internal growth and acquisitions, our revenues from continuing operations have
grown from $34.6 million in fiscal 1996 to $172.1 million in fiscal 2002, a
compound annual growth rate of approximately 31% over the six-year period.
In October 1997, we entered into a strategic alliance with Lufthansa
Technik AG (Lufthansa), the technical services subsidiary of Lufthansa German
Airlines AG. Lufthansa is the world's largest independent provider of
engineering and maintenance services for aircraft components and jet engines and
supports over 200 airlines, governments and other customers. As part of the
transaction, Lufthansa acquired a 20% minority interest in HEICO Aerospace, and
partially funded the accelerated development of additional FAA-approved
replacement parts for jet engines and aircraft components over the subsequent
four years pursuant to a research and development cooperation agreement. This
strategic alliance has enabled us to expand domestically and internationally by
enhancing our ability to (i) identify key jet aircraft and component replacement
parts with significant profit potential by utilizing Lufthansa's extensive
operating data on engine and component parts, (ii) introduce those parts
throughout the world in an efficient manner due to Lufthansa's testing and
diagnostic resources, and (iii) broaden our customer base by capitalizing on
Lufthansa's established relationships and alliances within the airline industry.
In February 2001, we entered into a joint venture with AMR Corporation
(AMR), parent company of American Airlines, one of the world's largest airlines,
to develop, design and sell FAA-approved jet engine and aircraft component
replacement parts through our subsidiary, HEICO Aerospace. As part of the joint
venture, AMR will reimburse HEICO Aerospace a portion of new product research
and development costs. The joint venture is 16% owned by AMR. AMR and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
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support on a worldwide basis. We believe that AMR's investment, along with its
vast technical experience as an operator and overhauler of aircraft and engines,
will allow us to accelerate the development of new FAA-approved replacement
parts and, accordingly, to manufacture and market such parts.
In May 2002, we entered into a strategic relationship with United Airlines,
Inc. (United Airlines) through our subsidiary, HEICO Aerospace, making it the
third such unique partnering relationship between HEICO Aerospace and a major
international airline. The strategic relationship provides for the acceleration
of HEICO's efforts in developing a broad range of jet engine and aircraft
component replacement parts for FAA approval. United Airlines has agreed to
purchase these newly developed parts, and most of HEICO Aerospace's current
FAA-approved parts product line, on an exclusive basis from HEICO Aerospace.
Flight Support Group
The FSG is headquartered in Hollywood, Florida and designs, engineers,
manufactures, repairs and/or overhauls jet engine and aircraft parts and
components such as combustion chambers, compressor blades, vanes, seals and
various other engine and aircraft parts. The FSG also manufactures specialty
aviation and defense components as a subcontractor. The FSG serves a broad
spectrum of the aviation industry, including (i) commercial airlines and air
cargo carriers, (ii) repair and overhaul facilities, (iii) OEMs, and (iv) U.S.
and foreign governments.
Jet engine and aircraft component replacement parts can be categorized by
their ongoing ability to be repaired and returned to service. The general
categories (in all of which we participate) are as follows: (i) rotable; (ii)
repairable; and (iii) expendable. A rotable is a part which is removed
periodically as dictated by an operator's maintenance procedures or on an as
needed basis and is typically repaired or overhauled and re-used an indefinite
number of times. An important subset of rotables is "life limited" parts. A life
limited rotable has a designated number of allowable flight hours and/or cycles
(one take-off and landing generally constitutes one cycle) after which it is
rendered unusable. A repairable is similar to a rotable except that it can only
be repaired a limited number of times before it must be discarded. An expendable
is generally a part which is used and not thereafter repaired for further use.
Jet engine and aircraft component replacement parts are classified within
the industry as (i) factory-new, (ii) new surplus, (iii) overhauled, (iv)
serviceable, and (v) as removed. A factory-new or new surplus part is one that
has never been installed or used. Factory-new parts are purchased from
FAA-approved manufacturers (such as HEICO or OEMs) or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part is one that has
been completely repaired and inspected by a licensed repair facility such as
ours. An aircraft spare part is classified as "repairable" if it can be repaired
by a licensed repair facility under applicable regulations. A part may also be
classified as "repairable" if it can be removed by the operator from an aircraft
or engine while operating under an approved maintenance program and is airworthy
and meets any manufacturer or time and cycle restrictions applicable to the
part. A "factory-new," "new surplus," "overhauled" or "serviceable" part
designation indicates that the part can be immediately utilized on an aircraft.
A part in "as removed" condition requires inspection and possibly functional
testing, repair or overhaul by a licensed facility prior to being returned to
service in an aircraft.
Factory-New Jet Engine and Aircraft Component Replacement Parts. The
principal business of the FSG is the research and development, design,
manufacture and sale of FAA-approved replacement parts that are sold to domestic
and foreign commercial air carriers and aircraft repair and overhaul companies.
Our principal competitors are Pratt & Whitney, a division of United Technologies
Corporation (UTC) and General Electric Company (General Electric), including its
CFM International joint venture. The FSG's factory-new replacement parts include
various jet engine and aircraft component replacement parts. A key element of
our growth strategy is the continued design and development of an increasing
number of Parts Manufacturer Approval (PMA) replacement parts in order to
further penetrate our existing customer base and obtain new customers. We select
the jet engine and aircraft component replacement parts to design and
manufacture through a selection process which analyzes industry
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information to determine which replacement parts are expected to generate the
greatest profitability. As part of Lufthansa's investment in the FSG, Lufthansa
has the right to select 50% of the parts for which we will seek PMAs, provided
that such parts are technologically and economically feasible and substantially
comparable with the profitability of our other PMA parts.
The following table sets forth (i) the lines of engines for which we
provide jet engine replacement parts and (ii) the approximate number of such
engines currently in service as estimated by us.
Number
OEM Lines In Service Principal Engine Application
- ------------------------------- ------ ---------- ---------------------------------------
Pratt & Whitney JT8D 8,500(1) Boeing 727 and 737 (100 and 200 series)
McDonnell Douglas DC-9 and MD-80
JT9D 1,700 Boeing 747 (100, 200 and 300
series) and 767 (200 series)
Airbus A300 and A310
McDonnell Douglas DC-10
PW2000 1,200 Boeing 757
PW4000 2,300 Boeing 747-400, 767-300 and 777
Airbus A300, A310 and A330
McDonnell Douglas MD-11
CFM International (a joint CFM56 11,500 Boeing 737 (300, 400, 500, 700,
venture of General Electric and 800 and 900 series)
SNECMA) Airbus A320 series and A340-200 and
300 series
General Electric CF6 5,000 Boeing 747 and 767
Airbus A300, A310 and A330
McDonnell Douglas MD-11
IAE (a joint venture of Pratt & Whitney V2500 1,700 Airbus A320 series
and Rolls Royce) McDonnell Douglas MD-90
___________
(1) Includes approximately 2,000 engines, which the Company estimates are on
aircraft currently parked and/or in storage. Such aircraft may or may not
be returned to service.
Repair and Overhaul Services. The FSG provides repair and overhaul services
on selected jet engine and aircraft component parts, as well as on avionics,
instruments, composites and flight surfaces of commercial aircraft. The FSG also
provides repair and overhaul services to military aircraft operators and
aircraft repair and overhaul companies. Our repair and overhaul operations
require a high level of expertise, advanced technology and sophisticated
equipment. Services include the repair, refurbishment and overhaul of numerous
accessories and parts mounted on gas turbine engines and airframes. Components
overhauled include fuel pumps, generators, fuel controls, pneumatic valves,
starters and actuators, turbo compressors and constant speed drives, hydraulic
pumps, valves and actuators, composite flight controls, electro-mechanical
equipment and auxiliary power unit accessories.
Manufacture of Specialty Aircraft/Defense Related Parts and Subcontracting
for OEMs. The FSG manufactures thermal insulation blankets primarily for
aerospace, defense and commercial applications. The FSG also manufactures
specialty components for sale as a subcontractor to OEMs and the U.S.
government.
FAA Approvals and Product Design
Non-OEM manufacturers of jet engine replacement parts must receive a Parts
Manufacture Approval (PMA) from the FAA to sell the part. The PMA approval
process includes the submission of sample parts, drawings and
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testing data to one of the FAA's Aircraft Certification Offices where the
submitted data are analyzed. We believe that an applicant's ability to
successfully complete the PMA process is limited by several factors, including
(i) the agency's confidence level in the applicant, (ii) the complexity of the
part, (iii) the volume of PMAs being filed, and (iv) the resources available to
the FAA. We also believe that companies such as HEICO that have demonstrated
their manufacturing capabilities and established favorable track records with
the FAA generally receive a faster turnaround time in the processing of PMA
applications. Finally, we believe that the PMA process creates a significant
barrier to entry in this market niche through both its technical demands and its
limits on the rate at which competitors can bring products to market.
As part of our growth strategy, we have continued to increase our research
and development activities. Research and development expenditures by the FSG
increased from approximately $300,000 in 1991 to approximately $7.8 million in
fiscal 2002. We believe that our FSG's research and development capabilities are
a significant component of our historical success and an integral part of our
growth strategy.
Our expanded research and development activities have included development
of more complex jet engine and aircraft component replacement parts. In October
1999, we received our first PMA for a compressor blade from the FAA and we are
continuing research and development of other complex parts. We believe the
development and sale of complex parts represents a significant long-term market
opportunity. In fiscal 2002, the FAA granted us PMAs for approximately 300 new
parts; however, no assurance can be given that the FAA will continue to grant
PMAs or that we will achieve acceptable levels of net sales and gross profits on
such parts in the future.
We benefit from our proprietary rights relating to certain designs,
engineering, manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our unique manufacturing capabilities are required by the
customer's specifications or designs, thereby necessitating reliance on us for
production of such designed products.
While we have developed proprietary techniques, software and manufacturing
expertise for the manufacture of jet engine and aircraft component replacement
parts, we have no patents for these proprietary techniques and choose to rely on
trade secret protection. We believe that although our proprietary techniques,
software and expertise are subject to misappropriation or obsolescence,
development of improved methods and processes and new techniques by us will
continue on an ongoing basis as dictated by the technological needs of our
business.
Continuing Impact of September 11, 2001 and the Economic Softness Thereafter
In the aftermath of the September 11, 2001 terrorist attacks and the weak
economy that followed, passenger traffic on commercial flights has been
significantly lower than prior to the attacks. In addition, many commercial
airlines have reduced their operating schedules and are struggling to return to
profitability. As a result, we have seen a direct decline in sales to commercial
aerospace markets, particularly sales of JT8D PMA replacement parts. However,
over two-thirds of our PMA parts offered for sale are non-JT8D and we are
continually working to increase our market penetration of non-JT8D parts. In
fiscal 2002, we increased our new product and development expense by $2.0
million (more than 25%) over fiscal 2001 to develop new FAA-approved
replacement parts.
Although softness in the airline industry may continue in the foreseeable
future, we believe our products and services offer our customers substantial
opportunities for cost savings. In addition, our diversification of operations
beyond the commercial aerospace markets we have historically served has
cushioned the impact of the events of September 11, 2001 and the economic
softness thereafter. Revenues from the defense industry and other markets,
including industrial, medical, electronics and telecommunications, represented
approximately one-third of our total Company-wide revenues in fiscal 2002 with
defense customers representing approximately 25% of revenues.
5
Electronic Technologies Group
The ETG is headquartered in Miami, Florida and designs, manufactures and
sells various types of electrically and electro-optical engineered products,
such as power supplies, shielding for communications, computer and aerospace
applications, infrared simulation and test equipment, laser diode drivers and
hybrid laser rangefinder receivers. In addition, the ETG also repairs and
overhauls inertial navigation systems and other avionics, instruments and
components used on commercial, military and business aircraft.
Products of the ETG include:
o Electro-optical Infrared Simulation and Test Equipment. The ETG is a
leading international designer and manufacturer of state-of-the-art
aerospace and defense electro-optical infrared simulation and test
equipment. These products include high precision blackbody sources,
optical systems and fully integrated test calibration systems. In
addition, the MIRAGE IR Scene Simulator is used to project infrared
scenes to assist with product development and training for complex
infrared targeting and imaging systems and other items.
o Electro-optical Laser Products. The ETG is engaged in the design and
manufacture of electro-optical laser products primarily for use in the
laser industry. These products include hybrid laser rangefinder
receivers, amplifiers, photodetectors, amplifier modules, flash lamp
drivers and power supplies.
o On-board Aircraft Power Supplies and Batteries. The ETG manufactures
power supply and current control products and replacement components
used in aircraft. These products include battery and charger units to
support emergency lighting, emergency fuel shut-off devices, emergency
exit door power assists, static inverters for emergency lighting and
cockpit lighting dimmers. While entire units may require replacement
periodically, there is an ongoing replacement market for batteries,
which have an estimated service life of approximately 3 to 5 years.
These products are mainly sold to OEM customers and customers in the
retrofit and modification market.
o Circuit Board Shielding. The ETG manufactures electromagnetic
interference and radio frequency interference shielding for circuit
boards and other items utilized in telecommunications, aerospace, and
microwave applications. The circuit board shielding technology reduces
electronic noise and protects sensitive components. The ETG has a line
of patented products and the ability to fabricate in a wide variety of
shapes and applications, which we believe is a manufacturing
advantage.
o Repair and Overhaul Services. The ETG is engaged in the repair and
overhaul of inertial navigation systems which are used by commercial
and military aircraft operators to ascertain their location during
flight operations. In addition, the ETG also repairs and overhauls
various avionics, instruments and other components for a wide array of
commercial, military and business aircraft operators.
Until the September 2000 sale of Trilectron, the ETG also served the
commercial and military ground support equipment markets. This entire product
line was sold in the sale discussed in Note 3 to the Consolidated Financial
Statements.
Financial information about operating segments, foreign and domestic operations
and export sales
See Note 15 to the Consolidated Financial Statements for financial
information by operating segment and information about foreign and domestic
operations as well as export sales.
6
Sales, Marketing and Customers
Each of our operating segments independently conducts sales and marketing
efforts directed at their respective customers and industries and, in some
cases, collaborates with other operating divisions and subsidiaries within its
group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association (AIA), the leading trade association representing the nation's
manufacturers of commercial, military and business aircraft, aircraft engines
and related components and equipment. Due in large part to our established
industry presence, we enjoy strong customer relations, name recognition and
repeat business.
We sell our products to a broad customer base consisting of domestic and
foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 21% of total net sales during the year
ended October 31, 2002.
Competition
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing of engine parts as a result of lower labor costs and other factors.
Our jet engine and aircraft component replacement parts business competes
primarily with Pratt & Whitney and General Electric. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the FSG, we compete with both the leading jet engine OEMs and a large number of
machining, fabrication and repair companies, some of which have greater
financial and other resources than we do. Competition is based mainly on price,
product performance, service and technical capability.
Competition for the repair and overhaul of jet engine and aircraft
components comes from three principal sources: OEMs, major commercial airlines
and other independent service companies. Some of these companies have greater
financial and other resources than we do. Some major commercial airlines own and
operate their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own aircraft components and for third
parties. OEMs also maintain service centers that provide repair and overhaul
services for the components they manufacture. Other independent service
organizations also compete for the repair and overhaul business of other users
of aircraft components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
7
Our ETG competes with several large and small domestic and foreign
competitors, some of which have greater financial and other resources than we
do. The market for our electronic products are niche markets with several
competitors with competition based mainly on design, technology, quality, price
and customer satisfaction.
Raw Materials
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel,
pre-plated phospher bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
Backlogs
Our total backlog of unshipped orders was $36.3 million on October 31, 2002
versus $47.0 million on October 31, 2001. Our FSG had a backlog of unshipped
orders as of October 31, 2002 of $13.1 million as compared to $12.3 million as
of October 31, 2001. This backlog excludes forecasted shipments for certain
contracts of the FSG pursuant to which customers provide only estimated annual
usage and not firm purchase orders. Our backlogs within the FSG are typically
short-lead in nature with many product orders being received within the month of
shipment. Our ETG had a backlog of $23.1 million as of October 31, 2002 as
compared to $34.6 million as of October 31, 2001. The year-over-year decline in
backlogs of the ETG is due primarily to the timing of several large-order
placements and shipments. Substantially all of the backlog of orders as of
October 31, 2002 are expected to be delivered during fiscal 2003.
Government Regulation
The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft parts operated in the United States. Its regulations are designed to
ensure that all aircraft and aviation equipment are continuously maintained in
proper condition to ensure safe operation of the aircraft. Similar rules apply
in other countries. All aircraft must be maintained under a continuous condition
monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for the various
types of aircraft and equipment are prescribed by regulatory authorities and can
be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us.
There has been no material adverse effect to our consolidated financial
statements as a result of these government regulations.
Environmental Regulation
Our operations are subject to extensive, and frequently changing, federal,
state and local environmental laws and substantial related regulation by
government agencies, including the Environmental Protection Agency (the EPA).
Among other matters, these regulatory authorities impose requirements that
regulate the operation, handling, transportation, and disposal of hazardous
materials, the health and safety of workers, and require us to obtain and
maintain licenses and permits in connection with our operations. This extensive
regulatory framework imposes
8
significant compliance burdens and risks on us. Notwithstanding these burdens,
we believe that we are in material compliance with all federal, state, and local
laws and regulations governing our operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 mandates general requirements for safe workplaces for all
employees and established the Occupational Safety and Health Administration
(OSHA) in the Department of Labor. In particular, OSHA provides special
procedures and measures for the handling of some hazardous and toxic substances.
In addition, specific safety standards have been promulgated for workplaces
engaged in the treatment, disposal or storage of hazardous waste. Requirements
under state law, in some circumstances, may mandate additional measures for
facilities handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA's health and safety
requirements.
Insurance
We are a named insured under policies which include the following coverage:
(i) product liability, including grounding; (ii) personal property, inventory
and business income at our facilities; (iii) general liability coverage; (iv)
employee benefit liability; (v) international liability and automobile
liability; (vi) umbrella liability coverage; and (vii) various other activities
or items subject to certain limits and deductibles. We believe that coverages
are adequate to insure against the various liability risks of our business. We
have seen an increase in insurance costs following the September 11, 2001
terrorist attacks, however, the increase in these costs has not had a
significant adverse impact on our operations.
Employees
As of December 31, 2002, we had 953 full-time employees, of which 687 were
in the FSG, 253 were in the ETG, and 13 were corporate. None of our employees
are represented by a union. We believe that our employee relations are good.
Available Information
We maintain an Internet web site with an address of http://www.heico.com.
We make available free of charge through our web site our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we file such material with, or furnish it to, the Securities and Exchange
Commission. The information contained on or through our web site is not
incorporated into this annual report on Form 10-K.
9
Item 2. Properties
The Company owns or leases a number of facilities, which are utilized by
its Flight Support Group (FSG), Electronic Technologies Group (ETG), and
Corporate office. Summary information on the facilities utilized within the FSG
and the ETG to support its principal operating activities is as follows:
Flight Support Group
Manufacture of Jet Engine and Aircraft Component Replacement Parts
Location Square footage Owned/Leased Description
----------------- ---------------- ----------------- ----------------------------------------------
Florida 140,000 Owned Manufacturing and engineering facilities,
warehouse and corporate headquarters
Florida 2,000 Leased Engineering facility
California 91,000 Leased Manufacturing and engineering facility
New Mexico 45,000 Leased Manufacturing and engineering facility
Georgia 40,000 Owned Manufacturing and engineering facility
Washington 30,000 Leased Manufacturing and engineering facilities
Connecticut 15,000 Leased Manufacturing and engineering facility
Tennessee 6,000 Leased Manufacturing and engineering facility
Arizona 2,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Jet Engine and Aircraft Components
Location Square footage Owned/Leased Description
----------------- ---------------- ----------------- ----------------------------------------------
Florida 159,000(1) Owned Overhaul and repair facilities
California 27,000 Leased Overhaul and repair facilities
Electronic Technologies Group
Manufacture of Electronic and Electro-Optical Equipment
Location Square footage Owned/Leased Description
----------------- ---------------- ------------------ ----------------------------------------------
Florida 71,000 Leased Manufacturing and engineering facilities
California 14,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Aircraft Electronic Equipment
Location Square footage Owned/Leased Description
----------------- ---------------- ------------------ ----------------------------------------------
Ohio 19,000 Leased Overhaul and repair facility
10
Corporate
Location Square footage Owned/Leased Description
----------------- ---------------- ----------------- ----------------------------------------------
Florida (2) Owned Corporate headquarters and administrative
offices
_________
(1) Subsequent to October 31, 2002, the Company began consolidating the
operations of two of its Florida-based owned facilities. Upon completion of
the consolidation, a 45,000-square foot facility (included in this total)
will be vacant, which the Company plans to lease or sell.
(2) The square footage of the Company's corporate headquarters is included
within the square footage for Florida under the caption "FSG - Manufacture
of Jet Engine and Aircraft Component Replacement Parts." The Company also
has 6,000 square feet of administrative offices within Florida.
All of the facilities owned or leased by the Company are in good operating
condition, are well maintained and are in regular use, except the facility noted
above that is in the process of being consolidated. The Company believes that
its existing facilities are sufficient to meet its operational needs for the
foreseeable future.
Item 3. Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial position.
Item 4. Submission of Matters to a Vote of Securities Holders
There were no matters submitted to a vote of securities holders during the
fourth quarter of fiscal 2002.
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:
Director
Name Age Position(s) Since
- ---- --- ----------- --------
Laurans A. Mendelson 64 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 56 Executive Vice President and Chief Financial
Officer
Eric A. Mendelson 37 Executive Vice President and Director, President 1992
and Chief Executive Officer of HEICO
Aerospace Holdings Corp.
Victor H. Mendelson 35 Executive Vice President, General Counsel and 1996
Director, President and Chief Executive Officer
of HEICO Electronics Technologies Corp.
James L. Reum 71 Executive Vice President of HEICO
Aerospace Holdings Corp.
11
Laurans A. Mendelson has served as Chairman of the Board of the Company
since December 1990. Mr. Mendelson has also served as Chief Executive Officer of
the Company since February 1990, and as President of the Company since September
1991. Mr. Mendelson serves on the board of governors and is a member of the
Finance Committee of the Aerospace Industries Association in Washington, D.C. He
also serves on the Board of Directors and is Chairman of the Audit Committee of
Hawker Pacific Aerospace, which provides overhaul and repair services to the
aviation industry. Mr. Mendelson is also a member of the Board of Trustees, the
Executive Committee and Founders Club of Mount Sinai Medical Center in Miami
Beach, Florida. In addition, Mr. Mendelson served as a Trustee of Columbia
University in The City of New York from 1995 to 2001, as well as, Chairman of
the Trustees' Audit Committee. Mr. Mendelson currently serves as Trustee
Emeritus of Columbia University and maintains membership positions on the
Trustee Committees he had before becoming Trustee Emeritus. Mr. Mendelson is a
Certified Public Accountant. Laurans Mendelson is the father of Eric Mendelson
and Victor Mendelson.
Thomas S. Irwin has served as Executive Vice President and Chief Financial
Officer of the Company since September 1991 and served as Senior Vice President
of the Company from 1986 to 1991 and Vice President and Treasurer from 1982 to
1986. Mr. Irwin is a Certified Public Accountant.
Eric A. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1992 to 2001, and has been
President and Chief Executive Officer of HEICO Aerospace, a subsidiary of the
Company, since is formation in 1997 and President of HEICO Aerospace Corporation
since 1993. He also served as President of HEICO's Jet Avion Corporation, a
wholly owned subsidiary of HEICO Aerospace, from 1993 to 1996 and served as Jet
Avion's Executive Vice President and Chief Operating Officer from 1991 to 1993.
From 1990 to 1991, Mr. Mendelson was Director of Planning and Operations of the
Company. Mr. Mendelson is a co-founder, and, since 1987, has been Managing
Director of Mendelson International Corporation (MIC), a private investment
company, which is a shareholder of HEICO. Eric Mendelson is the son of Laurans
Mendelson and the brother of Victor Mendelson.
Victor H. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1996 to 2001, as President and
Chief Executive Officer of HEICO Electronic Technologies Corp., a subsidiary of
the Company, since September 1996 and as General Counsel of the Company since
1993. He served as Executive Vice President of the Company's former MediTek
Health Corporation subsidiary from 1994 and its Chief Operating Officer from
1995 until its sale in July 1996. He was the Company's Associate General Counsel
from 1992 until 1993. From 1990 until 1992, he worked on a consulting basis with
the Company, developing and analyzing various strategic opportunities. Mr.
Mendelson is a co-founder, and, since 1987, has been President of MIC, a private
investment company, which is a shareholder of HEICO. He is a Trustee of St.
Thomas University, Miami, Florida and Chairman of its Finance Committee, as well
as a Director of the Florida Grand Opera. Victor Mendelson is the son of Laurans
Mendelson and the brother of Eric Mendelson.
James L. Reum retired from full-time service to HEICO Aerospace in August
2001 and remains active on a part-time basis with HEICO Aerospace as Executive
Vice President. He served as Chief Operating Officer of HEICO Aerospace and its
predecessor from 1995 to 1999, President of LPI Industries Corporation from 1991
to 1998 and President of Jet Avion Corporation from 1996 to 1998. From 1990 to
1991, he served as Director of Research and Development for Jet Avion
Corporation. From 1986 to 1989, Mr. Reum was self-employed as a management and
engineering consultant to companies primarily within the aerospace industry.
From 1957 to 1986, he was employed in various management positions with
Chromalloy Gas Turbine Corp., Cooper Airmotive (later named Aviall, Inc.),
United Airlines, Inc. and General Electric Company.
12
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 New York 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 fiscal 2002, the
Company's Directors, Executive Officers and 10% shareholders complied with all
Section 16(a) filing requirements applicable to them.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Class A Common Stock and Common Stock are listed and traded
on the New York Stock Exchange (NYSE) under the symbols "HEI.A" and "HEI,"
respectively. The following table sets forth, for the periods indicated, the
high and low closing prices for the Class A Common Stock and the Common Stock as
reported on the NYSE, as well as the amount of cash dividends paid per share
during such periods. Lufthansa Technik AG, as a 20% shareholder of our FSG, will
be entitled to 20% of any dividends paid by our FSG with the balance payable to
the Company.
In August 2001, the Company paid a 10% stock dividend on all shares
outstanding in Class A Common Stock. The quarterly sales prices and cash
dividend amounts have been retroactively adjusted for the 10% stock dividend.
Class A Common Stock
Cash Dividends
High Low Per Share
Fiscal 2001:
First Quarter................ $13.17 $ 9.15 $ .022
Second Quarter............... 15.55 11.00 --
Third Quarter................ 17.91 13.73 $ .023
Fourth Quarter............... 17.58 9.40 --
Fiscal 2002:
First Quarter................ $14.10 $10.85 $ .025
Second Quarter............... 14.45 12.58 --
Third Quarter................ 14.30 9.31 $ .025
Fourth Quarter............... 10.34 6.05 --
On December 31, 2002, there were 1,086 holders of record of the Class A
Common Stock.
Common Stock
Cash Dividends
High Low Per Share
Fiscal 2001:
First Quarter................. $17.05 $11.14 $ .022
Second Quarter................ 16.64 12.36 --
Third Quarter................. 19.26 13.91 $ .023
Fourth Quarter................ 20.58 10.98 --
Fiscal 2002:
First Quarter................. $17.80 $13.74 $ .025
Second Quarter................ 17.43 14.20 --
Third Quarter................. 17.25 11.44 $ .025
Fourth Quarter................ 13.10 7.70 --
On December 31, 2002, there were 1,082 holders of record of the Common
Stock.
14
Item 6. Selected Financial Data
For the year ended October 31, (1)
----------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands, except per share data)
Operating Data:
Net sales............................................. $ 95,351 $141,269 $202,909 $171,259 $172,112
-------- -------- -------- -------- --------
Gross profit.......................................... 36,104 57,532 75,811 71,146 61,502
Selling, general and administrative expenses.......... 17,140 24,717 37,888 40,155 39,102
-------- -------- -------- -------- --------
Operating income...................................... 18,964 32,815 37,923 30,991 22,400
-------- -------- -------- -------- --------
Interest expense...................................... 984 2,173 5,611 2,486 2,248
-------- -------- -------- -------- --------
Interest and other income............................. 2,062 894 929 1,598 97
-------- -------- -------- -------- --------
Gain on sale of product line.......................... -- -- 17,296(2) -- 1,230(3)
-------- -------- -------- -------- --------
Income (loss):
From continuing operations ...................... 10,509 16,337 27,739(2) 15,833 15,226(3)(4)
From gain on sale of discontinued operations..... -- -- (1,422)(5) -- --
-------- -------- -------- -------- --------
Net income............................................ $ 10,509 $ 16,337 $ 26,317(2) $ 15,833 $ 15,226(3)(4)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding:(6)
Basic............................................ 15,124 17,933 19,114 19,925 20,913
Diluted.......................................... 18,805 21,348 21,908 22,305 22,484
Per Share Data:(6)
Income from continuing operations:
Basic............................................ $ .69 $ .91 $ 1.45(2) $ .79 $ .73(3)(4)
Diluted.......................................... .56 .77 1.27(2) .71 .68(3)(4)
Net income:
Basic............................................ .69 .91 1.38(2) .79 .73(3)(4)
Diluted.......................................... .56 .77 1.20(2) .71 .68(3)(4)
Cash dividends........................................ .041 .041 .044 .045 .050
Balance Sheet Data (as of October 31):
Working capital....................................... $ 40,587 $ 63,278 $ 55,469 $ 71,515 $ 69,235
Total assets.......................................... 133,061 273,163 281,732 325,640 336,332
Total debt (including current portion)................ 30,520 73,501 40,042 67,014 55,986
Minority interests in consolidated subsidiaries....... 14,892 30,022 33,351 36,845 38,313
Shareholders' equity.................................. 67,607 139,289 169,844 188,769 207,064
__________
(1) Results include the results of acquisitions and disposition of a product
line from each respective effective date.
(2) Represents the pretax gain on sale of Trilectron Industries, Inc.
(Trilectron) in September 2000. The gain on sale of Trilectron increased
income from continuing operations and net income in fiscal 2000 by
$10,542,000, or $.55 per basic share and $.48 per diluted share, net of
tax.
(3) Represents the increase in the gain on sale of the Trilectron product
line of $1,230,000 ($765,000, or $.04 per basic share and $.03 per
diluted share, net of tax) resulting from the elimination of certain
reserves upon expiration of indemnification provisions of the sale.
(4) Net income includes the recovery of a portion of taxes paid in prior
years resulting from a recently completed income tax audit, which
increased net income by $2,107,000, or $.10 per basic share and $.09 per
diluted share, net of related expenses.
(5) Represents an adjustment to the gain from the sale of the discontinued
health care operations ($.07 per basic share and $.07 per diluted share,
net of tax) that were sold in fiscal 1996.
(6) Information has been adjusted to reflect a three-for-two stock split in
December 1997, a 50% stock distribution paid in shares of Class A Common
Stock in April 1998 and 10% stock dividends paid in shares of Class A
Common Stock in July 2000 and August 2001.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's operations are comprised of two operating segments, the
Flight Support Group (FSG) and the Electronic Technologies Group (ETG).
The FSG consists of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and
its subsidiaries, which primarily:
o Manufacture Jet Engine and Aircraft Component Replacement Parts
- The FSG designs and manufactures jet engine and aircraft
component replacement parts for sale at lower prices than those
manufactured by the original equipment manufacturers. The
Federal Aviation Administration (FAA) has approved these parts
and they are the functional equivalent of parts sold by original
equipment manufacturers. The FSG also manufactures and sells
specialty parts as a subcontractor for original equipment
manufacturers and the United States government.
o Repair and Overhaul Jet Engine and Aircraft Components - The FSG
repairs and overhauls jet engine and aircraft components for
domestic and foreign commercial air carriers, military aircraft
operators and aircraft repair and overhaul companies.
The ETG consists of HEICO Electronic Technologies Corp. (HEICO
Electronic) and its subsidiaries, which primarily:
o Manufacture Electronic and Electro-Optical Equipment - The ETG
designs, manufactures and sells electronic and electro-optical
equipment and components, including power supplies, laser
rangefinder receivers, infra-red simulation, calibration and
testing equipment and electromagnetic interference shielding for
commercial and military aircraft operators, electronics
companies and telecommunications equipment suppliers.
o Repair and Overhaul Aircraft Electronic Equipment - The ETG
repairs and overhauls inertial navigation systems and other
avionics equipment for commercial, military and business
aircraft operators.
The Company's results of operations during each of the past three fiscal
years have been affected by a number of transactions. This discussion of the
Company's financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included herein. For further information regarding the acquisitions and
strategic alliances discussed below, see Note 2 to the Consolidated Financial
Statements. The acquisitions have been accounted for using the purchase method
of accounting and are included in the Company's results of operations from the
effective date of acquisition.
During fiscal 2000, the Company acquired Future Aviation, Inc. for $14.7
million. During fiscal 2001, the Company acquired Analog Modules, Inc., Aero
Design, Inc., Avitech Engineering Corporation, and Aviation Facilities, Inc. for
an aggregate purchase price of approximately $24.6 million. In addition, the
Company acquired Inertial Airline Services, Inc. for $20 million in cash and $5
million in HEICO Class A Common Stock (289,964 shares) paid at closing. The
Company guaranteed that the resale value of such Class A Common Stock would be
at least $5 million through August 31, 2002, which both parties agreed to extend
to August 31, 2003. Based on the closing market price of HEICO Class A Common
Stock on October 31, 2002, the Company would have had to pay the seller an
additional amount of approximately $2.8 million in cash, which would have been
recorded as a reduction of shareholders' equity. In addition, subject to meeting
certain earnings targets during the first two years following the acquisition,
the Company may be obligated to pay additional consideration of $3 million in
cash. Concurrent with the purchase, the Company loaned the seller $5 million,
which is due August 31, 2003 and is secured by the 289,964 shares of HEICO Class
A Common Stock. The loan is reflected as a reduction in the equity section of
the Company's consolidated balance sheet as a note receivable secured by Class A
Common Stock.
16
During fiscal 2002, the Company acquired Jetseal, Inc. The purchase price was
not significant to the Company's consolidated financial statements.
The source of the purchase prices for these acquisitions was primarily
from proceeds of the Company's Credit Facility. Had the fiscal 2000, fiscal
2001, and fiscal 2002 acquisitions been made at the beginning of their
respective fiscal years, the pro forma consolidated results would not have been
materially different from the reported results.
In October 1997, the Company entered into a strategic alliance with
Lufthansa Technik AG (Lufthansa), the technical services subsidiary of Lufthansa
German Airlines, whereby Lufthansa invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid to HEICO Aerospace pursuant to a
research and development cooperation agreement, which has partially funded the
accelerated development of additional FAA-approved replacement parts for jet
engines and aircraft components. The funds received as a result of the research
and development cooperation agreement reduced research and development expenses
in the periods such expenses were incurred. In addition, Lufthansa and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
support for jet engine and aircraft component replacement parts on a worldwide
basis. In connection with subsequent acquisitions by HEICO Aerospace, Lufthansa
invested additional amounts aggregating to approximately $21 million pursuant to
its option to maintain a 20% equity interest.
In February 2001, the Company entered into a joint venture with AMR
Corporation (AMR) to develop, design and sell FAA-approved jet engine and
aircraft component replacement parts through its subsidiary, HEICO Aerospace. As
part of the joint venture, AMR will reimburse HEICO Aerospace a portion of new
product research and development costs. The funds received as a result of the
new product research and development costs paid by AMR generally reduce new
product research and development expenses in the period such expenses are
incurred. The balance of the development costs are incurred by the joint
venture, which is 16% owned by AMR. In addition, AMR and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support on a
worldwide basis.
In September 2000, the Company consummated the sale of all of the
outstanding capital stock of HEICO Electronic's wholly-owned subsidiary,
Trilectron Industries, Inc. (Trilectron). In consideration of the sale of
Trilectron's capital stock, the Company received an aggregate of $69.0 million
in cash and retained certain property having a book value of approximately $1.5
million, which was sold in fiscal 2001. The proceeds from the sale were used to
pay down the outstanding balance on the Company's Credit Facility.
The sale of Trilectron did not meet the requirements for classification
as a discontinued operation in accordance with APB Opinion No. 30 because its
activities could not be clearly distinguished, physically and operationally and
for financial reporting purposes, from the other assets, results of operations,
and activities of the ETG operating segment of which it was a part. Trilectron
was managed as part of the ETG and the ETG was treated as a single operating
segment. The ETG shared facilities, staff, information technology processing and
other centrally provided services with no allocation of costs and interest
expense between the divisions within the ETG. Accordingly, the sale was reported
as a sale of a product line and Trilectron's results of operations through the
date of the closing have been reported in the Company's consolidated statements
of operations.
The sale of Trilectron resulted in a pretax gain in fiscal 2000 of
$17,296,000 ($10,542,000 or $.48 per diluted share, net of income tax). The
pretax gain is net of expenses of $10.8 million directly related to the
transaction. Expenses related to the sale included Board-approved management
incentive bonuses, professional service fees, contract indemnification costs,
required reserves and miscellaneous costs and expenses. See Note 3 to the
Consolidated Financial Statements for further details of expenses related to the
sale. In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 or $.03 per diluted share, net of income tax) on the
17
sale of the Trilectron product line due to the elimination of certain of the
above reserves upon the expiration of indemnification provisions of the sales
contract.
Critical Accounting Policies
The Company believes that the following are its most critical accounting
policies, some of which require management to make judgments about matters that
are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon shipment of
products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Variations in actual labor
performance, changes to estimated profitability and final contract settlements
may result in revisions to the cost estimates. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For contracts in which costs cannot be dependably estimated,
revenue is recognized on the completed-contract method. A contract is considered
complete when all costs except insignificant items have been incurred or the
item has been accepted by the customer. The aggregate effects of changes in
estimates relating to inventories and/or long-term contracts did not have a
significant impact on net income and diluted net income per share in fiscal 2002
or fiscal 2000. Changes in estimates increased net income and diluted net income
per share by $700,000, or $.03 per diluted share in fiscal 2001 as further
explained in Notes 14 and 16 to the Consolidated Financial Statements.
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company set up an
allowance for estimated uncollectible accounts and record a corresponding charge
to bad debt expense. The Company estimates uncollectible receivables based on
such factors as its prior experience, its appraisal of a customer's ability to
pay, and economic conditions within and outside of the aerospace, defense and
electronics industries. Actual bad debt expense could differ from estimates
made.
Valuation of Inventories
Portions of the inventories are stated at the lower of cost or market,
with cost being determined on the first-in, first-out basis. The remaining
portions of the inventories are stated at the lower of cost or market, on a per
contract basis, with estimated total contract costs being allocated ratably to
all units. The effects of changes in estimated total contract costs are
recognized in the period determined. Losses, if any, are recognized fully when
identified.
The Company periodically evaluates the carrying value of inventories,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates a reasonable amount to be provided for
slow moving, obsolete or damaged inventory. These estimates could vary
significantly, either favorably or unfavorably, from actual requirements based
upon future economic conditions, customer inventory levels or competitive
factors that were not foreseen or did not exist when the valuation allowances
were established.
Valuation of Goodwill
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," effective
November 1, 2001. SFAS 142 eliminates the amortization of goodwill. Pursuant to
SFAS 142, the Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
18
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any. The determination of fair value requires the Company
to make a number of estimates, assumptions and judgments. If there is a material
change in such assumptions used by the Company in determining fair value or if
there is a material change in the conditions or circumstances influencing fair
value, the Company could be required to recognize a material impairment charge.
Based on the annual goodwill test for impairment as of October 31, 2002, the
Company determined there is no impairment of its goodwill, which aggregated to
$187.7 million.
Results of Operations
The following table sets forth the results of operations, net sales and
operating income by operating segment and the percentage of net sales
represented by the respective items including fiscal 2000 results as adjusted to
exclude the direct results of operations of the Trilectron product line. The
Company believes fiscal 2000 results as adjusted provide more meaningful
information in certain cases for comparing the results of operations in fiscal
2001 and fiscal 2002. Accordingly, certain discussion of fiscal 2001 results
below reflects comparisons to the Company's fiscal 2000 results as adjusted to
exclude the direct results of operations of Trilectron.
For the year ended October 31,
---------------------------------------------------------------------------
2000 2001 2002
--------------------------------- ------------- ------------
As Reported As Adjusted
------------ ------------
Net sales $202,909,000 $152,756,000 $171,259,000 $172,112,000
------------ ------------ ------------ ------------
Cost of sales 127,098,000 86,061,000 100,113,000 110,610,000
Selling, general and
administrative expenses 37,888,000 32,198,000 40,155,000 39,102,000
------------ ------------ ------------ ------------
Total operating costs and expenses 164,986,000 118,259,000 140,268,000 149,712,000
------------ ------------ ------------ ------------
Operating income $ 37,923,000 $ 34,497,000 $ 30,991,000 $ 22,400,000
============ ============ ============ ============
Net sales by segment: (1)
Flight Support Group $119,304,000 $119,304,000 $132,459,000 $120,097,000
Electronic Technologies Group 83,605,000 33,452,000 38,800,000 52,510,000
Intersegment sales -- -- -- (495,000)
------------ ------------ ------------ ------------
$202,909,000 $152,756,000 $171,259,000 $172,112,000
============ ============ ============ ============
Operating income by segment:(1)
Flight Support Group $ 29,621,000 $ 29,621,000 $ 27,454,000 $ 15,846,000
Electronic Technologies Group 12,464,000 9,038,000 7,835,000 11,873,000
Other, primarily corporate (4,162,000) (4,162,000) (4,298,000) (5,319,000)
------------ ------------ ------------ ------------
$ 37,923,000 $ 34,497,000 $ 30,991,000(2) $ 22,400,000
============ ============ ============ ============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 37.4% 43.7% 41.5% 35.7%
Selling, general and
administrative expenses 18.7% 21.1% 23.4% 22.7%
Operating income 18.7% 22.6% 18.1% 13.0%
Interest expense 2.8% N/A 1.5% 1.3%
Interest and other income 0.5% N/A 0.9% 0.1%
Gain on sale of product line 8.5% N/A -- 0.7%
Income tax expense 9.6% N/A 6.7% 2.9%
Minority interests 1.6% N/A 1.6% 0.8%
Net income 13.0% N/A 9.2% 8.8%
_______________
(1) During fiscal 2002, one of the Company's subsidiaries formerly included
in the Electronic Technologies Group was reclassified to the Flight
Support Group. Prior period results have been retroactively restated to
reflect the revised segment classification.
(2) For the fiscal year ended October 31, 2001, operating income as adjusted
for the adoption of SFAS 142 would have been $37,826,000 including
operating income of the Flight Support Group and the Electronic
Technologies Group of $32,469,000 and $9,655,000, respectively.
19
Comparison of Fiscal 2002 to Fiscal 2001
Net Sales
Net sales in fiscal 2002 totaled $172.1 million, up 1% when compared to
net sales of $171.3 million in fiscal 2001. The increase reflects higher sales
within the ETG, which increased 35% to $52.5 million in fiscal 2002 compared to
$38.8 million in fiscal 2001, partially offset by lower sales within the FSG,
which decreased 9% to $120.1 million in fiscal 2002 from $132.5 million in
fiscal 2001. The sales increase within the ETG is primarily attributed to
revenues resulting from acquisitions as the Company expanded its operations to
include laser and navigation technologies, partially offset by lower sales of
electromagnetic interference (EMI) shielding products to the electronics and
communications industries. The sales decrease within the FSG primarily reflects
lower commercial aftermarket parts and services sales as a result of the impact
of the September 11, 2001 terrorist attacks and continued weakness within the
commercial aviation industry, partially offset by sales from newly acquired
businesses. The fiscal 2002 increase in sales attributable to newly acquired
businesses of both the ETG and the FSG is approximately $22 million.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 35.7% in fiscal 2002 as
compared to 41.5% in fiscal 2001. This decrease is primarily due to lower
margins within the FSG attributed to lower sales of higher margin FAA-approved
replacement parts and a $1.9 million increase in new product research and
development expenses over fiscal 2001 spending. The decrease was partially
offset by slightly higher gross margins in the ETG due primarily to increased
sales of higher margin defense related products. Cost of sales in fiscal 2002
and fiscal 2001 includes approximately $9.7 million and $7.7 million,
respectively, of new product research and development expenses net of
reimbursements pursuant to cooperation and joint venture agreements. The fiscal
year-over-year increase in new product research and development expenses relates
primarily to the development of FAA-approved replacement parts. New product
development, which is critical to the Company's long-term growth, reduced
diluted earnings per share by approximately $.04 in fiscal 2002 versus fiscal
2001.
Selling, general and administrative (SG&A) expenses decreased $1.1
million to $39.1 million in fiscal 2002 from $40.2 million in fiscal 2001. The
decrease in SG&A expenses is mainly due to the elimination of goodwill
amortization as required under SFAS 142, partially offset by additional SG&A
expenses of newly acquired businesses and professional fees associated with a
recently completed income tax audit, which resulted in the recovery of a portion
of taxes paid in prior years as further explained below within "Income Tax
Expense". As a percentage of sales, SG&A expenses decreased to 22.7% in fiscal
2002 compared to 23.4% in fiscal 2001. The decrease is primarily due to the
elimination of goodwill amortization, partially offset by the impact of lower
year-over-year sales, excluding sales from new acquisitions, and the
professional fees associated with the recently completed income tax audit.
Operating Income
Operating income decreased to $22.4 million in fiscal 2002 from $31.0
million in fiscal 2001. As a percentage of sales, operating income decreased
from 18.1% in fiscal 2001 to 13.0% in fiscal 2002. The decrease in operating
income reflects lower operating income within the FSG, which decreased to $15.8
million in fiscal 2002 from $27.5 million in fiscal 2001, partially offset by
higher operating income within the ETG, which increased to $11.9 million in
fiscal 2002 compared to $7.8 million in fiscal 2001. The decline in operating
income as a percentage of sales reflects a decline in the FSG's operating income
as a percentage of sales from 20.7% in fiscal 2001 to 13.2% in fiscal 2002,
partially offset by an increase in the ETG's operating income as a percentage of
sales from 20.2% in fiscal 2001 to 22.6% in fiscal 2002. The decrease in the
FSG's operating income as a percentage of sales reflects the lower sales and
gross margins discussed above, partially offset by the elimination of goodwill
amortization. The
20
increase in the ETG's operating income as a percentage of sales reflects the
higher sales and gross margins discussed above, and the elimination of goodwill
amortization.
Interest Expense
Interest expense decreased to $2.2 million in fiscal 2002 from $2.5
million in fiscal 2001. The decrease was principally due to lower interest rates
in fiscal 2002, partially offset by a higher weighted average balance
outstanding under the Company's Credit Facility in fiscal 2002 related to
borrowings made during fiscal 2001 to fund acquisitions.
Interest and Other Income
Interest and other income decreased from $1.6 million in fiscal 2001 to
$97,000 in fiscal 2002. The decrease is mainly due to the inclusion in fiscal
2001 of a gain of $657,000 on the sale of property retained in the sale of the
Trilectron product line sold in fiscal 2000 and a realized gain of $180,000 on
the sale of long-term investments. The decrease also reflects lower investment
interest rates and other income in fiscal 2002.
Gain on Sale of Product Line
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 net of tax, or $.03 per diluted share) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions of the sales contract.
Income Tax Expense
Income tax expense in fiscal 2002 reflects the recovery of a portion of
taxes paid in prior years resulting from a recently completed income tax audit,
which increased net income by $2.1 million, or $.09 per diluted share, net of
related expenses (including professional fees and interest) as explained further
in Note 7 to the Consolidated Financial Statements. The recovery was the
principal driver behind the reduction in the Company's effective tax rate from
38.1% in fiscal 2001 to 23.0% in fiscal 2002. The elimination of goodwill
amortization also contributed to the year-over-year decline in the effective tax
rate. For a detailed analysis of the provision for income taxes, see Note 7 to
the Consolidated Financial Statements.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. Minority interests decreased to $1.3 million
in fiscal 2002 from $2.8 million in fiscal 2001 due mainly to the lower earnings
within the FSG.
Net Income
The Company's net income was $15.2 million, or $.68 per diluted share,
in fiscal 2002 compared to net income of $15.8 million, or $.71 per diluted
share in fiscal 2001. The slightly lower net income in fiscal 2002 reflects the
lower operating income discussed above, partially offset by the income tax
recovery and lower minority interests as discussed above. Net income for fiscal
2001 as adjusted on a pro forma basis for the adoption of SFAS 142 would have
been $20.2 million, or $.91 per diluted share.
Outlook
Like most companies supplying the airline industry, the Company's fiscal
2002 results were negatively impacted by the events of September 11, 2001
coupled with a weak economy as sales to commercial airlines fell after the
terrorist
21
attacks. While the airline industry as a whole struggles to return to
profitability, the Company is pleased to note that it continues to increase
market share and penetration and continues to operate profitably with positive
cash flow from operations and free cash flow (cash flow from operations less
capital expenditures). Further, the Company's diversification of its operations
beyond the commercial aerospace markets it has historically served has cushioned
the impact of the events of September 11, 2001 and the economic softness
thereafter. Revenues from the defense industry and other markets, including
industrial, medical, electronics and telecommunications, represented
approximately one-third of the Company's total revenues in fiscal 2002 with
defense customers representing approximately 25% of revenues.
Although softness in the airline industry may continue in the
foreseeable future, the Company believes its products and services offer its
customers substantial opportunities for cost savings. Furthermore, the Company
believes that its strategy of developing new revenue sources and further
expanding its markets through both internal growth and acquisitions, combined
with a strong balance sheet, will result in long-term growth. The near-term
impact of the uncertainties within the commercial aviation industry and domestic
economy make it difficult for the Company to predict its short-term sales and
earnings. The Company does currently believe, however, that sales and earnings
will improve in fiscal 2003 relative to fiscal 2002 levels.
Comparison of Fiscal 2001 to Fiscal 2000
Net Sales
Net sales in fiscal 2001 totaled $171.3 million, up 12% when compared to
fiscal 2000 net sales of $152.8 million as adjusted (to exclude Trilectron).
The increase in sales for fiscal 2001 reflects an increase of $13.2
million (an 11% increase) to $132.5 million from the Company's FSG and an
increase of $5.3 million as adjusted (a 16% increase) to $38.8 million in
revenues from the Company's ETG. The FSG sales increase primarily represents
revenues resulting from an increase in FAA-approved (PMA) replacement parts
sales and an increase in jet engine and aircraft component repair and overhaul
revenues. PMA replacement parts sales in fiscal 2001 increased over fiscal 2000
primarily as a result of new products while component repair and overhaul
revenues increased as a result of the Company's entry into the regional and
business aviation maintenance repair and overhaul (MRO) market through an
acquisition made in fiscal 2000, partially offset by softness in the commercial
MRO market. The FSG's sales increase includes additional revenue of $9.8 million
from businesses acquired during fiscal 2000 and fiscal 2001. The FSG's
commercial aerospace operations experienced a decline in sales after the
September 11, 2001 terrorist attacks. The ETG's sales increase is primarily
attributed to revenues of $9.0 million resulting from fiscal 2001 acquisitions,
partially offset by weakness in sales of EMI shielding products to the
electronics and communications industries reflecting the general economic
weakness within some of the technology industries.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 41.5% for fiscal 2001 as
compared to 43.7% as adjusted for fiscal 2000. This decrease reflects lower
margins within the FSG contributed by a budgeted increase in new product
research and development expenses of $3.5 million resulting from lower new
product research and development reimbursements as discussed below and softness
within the commercial component repair and overhaul market, partially offset by
the impact of higher PMA replacement parts sales. The decrease also reflects
lower margins within the ETG as a result of lower sales of higher margin EMI
shielding products. Cost of sales amounts for fiscal 2001 and fiscal 2000
include approximately $5.8 million and $2.3 million, respectively, of new
product research and development expenses of HEICO Aerospace. These amounts are
net of $1,275,000 and $5,200,000 received in fiscal 2001 and fiscal 2000,
respectively, pursuant to research and development cooperation and joint venture
agreements (see Note 2 to the Consolidated Financial Statements).
22
Selling, general and administrative (SG&A) expenses increased $8.0
million to $40.2 million for fiscal 2001 from $32.2 million as adjusted for
fiscal 2000. As a percentage of net sales, SG&A expenses increased to 23.4% for
fiscal 2001 compared to 21.1% as adjusted for fiscal 2000. The increases in SG&A
expenses and SG&A expenses as a percentage of net sales are primarily a result
of higher marketing costs in the FSG associated with expanding product lines and
a $700,000 increase in goodwill amortization primarily resulting from
acquisitions.
Operating Income
Operating income decreased $3.5 million to $31.0 million (a 10%
decrease) for fiscal 2001 from $34.5 million as adjusted for fiscal 2000. As a
percentage of net sales, operating income decreased from 22.6% in fiscal 2000 as
adjusted to 18.1% in fiscal 2001. The decrease in operating income and operating
income as a percentage of net sales reflects a decrease of $2.1 million (a 7%
decrease) from $29.6 million to $27.5 million in the Company's FSG and a
decrease of $1.2 million (a 13% decrease) from $9.0 million as adjusted to $7.8
million in the Company's ETG. The FSG's operating income as a percentage of net
sales declined from 24.8% in fiscal 2000 to 20.7% in fiscal 2001 while the ETG's
operating income as a percentage of net sales decreased from 27.0% in fiscal
2000 to 20.2% in fiscal 2001. The decrease in the FSG's operating income and
operating income as a percentage of net sales in fiscal 2001 was due primarily
to the impact of higher PMA replacement parts sales discussed above being more
than offset by lower gross profit margins reflecting lower new product research
and development reimbursements, higher marketing costs and higher goodwill
amortization. Operating income for fiscal 2001 was also affected by softness in
the commercial MRO market and the impact of the September 11, 2001 events on
commercial airline customers. The decrease in the ETG's operating income and
operating income as a percentage of net sales was due primarily to lower sales
of higher margin EMI shielding products discussed above, partially offset by
additional earnings from acquisitions.
Interest Expense
Interest expense decreased $3.1 million to $2.5 million from fiscal 2000
to fiscal 2001. The decrease was principally due to a decrease in the
outstanding debt balances during the period related to repayment of borrowings
on the Company's Credit Facility from the proceeds from the sale of Trilectron
and a decrease in interest rates partially offset by additional borrowings to
partially fund acquisitions.
Interest and Other Income
Interest and other income increased by $669,000 to $1.6 million from
fiscal 2000 to fiscal 2001 due principally to a pretax gain of $657,000 realized
on the sale of property retained in the sale of Trilectron and a realized gain
of $180,000 on the sale of long-term investments.
Income Tax Expense
The Company's effective tax rate decreased to 38.1% in fiscal 2001 from
38.6% in fiscal 2000, primarily due to a higher tax benefit on export sales
partially offset by higher non-deductible goodwill resulting from acquisitions.
For a detailed analysis of the provisions for income taxes, see Note 7 to the
Consolidated Financial Statements.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. Minority interests decreased $499,000 to $2.8
million in fiscal 2001 from $3.3 million in fiscal 2000 mainly due to minority
interest income of $342,000 representing AMR's share in the new product research
and development costs incurred within the joint venture.
23
Income from Continuing Operations
The Company's income from continuing operations was $15.8 million, or
$.71 per diluted share, in fiscal 2001. Income from continuing operations in
fiscal 2000 was $27.7 million, or $1.27 per diluted share, including the impact
of the gain on sale of Trilectron, which was $10.5 million ($.48 per diluted
share). The decrease in income from continuing operations is primarily due to
the gain on the sale of product line in the fourth quarter of fiscal 2000 and
the lower operating income discussed above.
Net Income
The Company's net income was $15.8 million, or $.71 per diluted share,
in fiscal 2001. In fiscal 2000, net income was $26.3 million, or $1.20 per
diluted share, including the impact of the gain on sale of Trilectron, which was
$10.5 million ($.48 per diluted share). The lower net income in fiscal 2001 is
primarily due to the Trilectron gain and the lower operating income discussed
above. Trilectron, which was sold in the fourth quarter of fiscal 2000,
contributed approximately $.05 per diluted share to earnings in fiscal 2000.
Inflation
The Company has generally experienced increases in its costs of labor,
materials and services consistent with overall rates of inflation. The impact of
such increases on the Company's net income has been generally minimized by
efforts to lower costs through manufacturing efficiencies and cost reductions.
Liquidity and Capital Resources
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
interest and principal on debt, capital expenditures and increases in working
capital.
The Company believes that its operating cash flow and available
borrowings under the Company's Credit Facility will be sufficient to fund cash
requirements for the foreseeable future.
Operating Activities
Cash flow from operations was $23.3 million for fiscal 2002, principally
reflecting net income of $15.2 million, depreciation and amortization of $4.5
million, deferred income tax provision of $3.9 million, and a tax benefit
related to stock option exercises of $2.9 million, partially offset by an
increase in net operating assets of $3.4 million. The increase in net operating
assets (current assets used in operations net of current liabilities) primarily
resulted from higher inventories and capitalized tooling costs in the FSG
associated with new products.
Cash flow from operations was $16.5 million for fiscal 2001, principally
reflecting net income of $15.8 million, depreciation and amortization and
minority interest of $10.6 million and $2.8 million, respectively, offset by an
increase in net operating assets of $12.9 million. The increase in net operating
assets (current assets used in operations net of current liabilities) primarily
resulted from an increase in inventories to meet increased PMA sales and payment
of income taxes of approximately $7 million on the fiscal 2000 gain from the
sale of Trilectron.
Cash flow from operations was $12.1 million in fiscal 2000 principally
reflecting net income of $26.3 million, adjustments for gain on sale of product
line, depreciation and amortization, minority interest, and tax benefits related
to stock option exercises of $17.3 million, $9.8 million, $3.3 million and $1.7
million, respectively, offset by an
24
increase in net operating assets of $11.5 million. The increase in net operating
assets primarily resulted from an increase in accounts receivable resulting from
extended payment terms, and an increase in inventories to meet increased sales
orders under certain ETG contracts, as well as increases in income taxes payable
and accrued expenses of $7.9 million and $1.2 million, respectively, mainly due
to the sale of Trilectron. Excluding cash flow used in the operations of
Trilectron prior to its sale, cash flow from operations totaled approximately
$21 million in fiscal 2000.
Investing Activities
Cash used in investing activities during the three fiscal year period
ended October 31, 2002 was primarily cash used in various acquisitions,
including contingent payments, totaling $90.5 million. For further details on
acquisitions see Notes 2 and 16 to the Consolidated Financial Statements.
Capital expenditures aggregated to $21.4 million over the last three fiscal
years, primarily reflecting the purchases of new facilities and the expansion of
existing production facilities and capabilities. The principal cash provided by
investing activities was $12.4 million and $48.4 million generated in fiscal
2001 and fiscal 2000, respectively, as a result of the sale of Trilectron in
fiscal 2000. In addition, the Company received proceeds of $9.2 million in
fiscal 2001 from the sale of long-term investments and property that was held
for disposition.
Financing Activities
The Company's principal financing source of cash over the past three
fiscal years ended October 31, 2002 was proceeds from long-term debt of $91.2
million, including $90.0 million from the Company's Credit Facility and proceeds
from stock option exercises of $3.9 million. During this same period, the
Company repaid $103.4 million of the outstanding balance on its Credit Facility
and other long-term debt and paid cash dividends aggregating to $2.8 million.
In July 1998, the Company entered into a $120 million revolving credit
facility (Credit Facility) with a bank syndicate, which contains both revolving
credit and term loan features. The Credit Facility may be used for working
capital and general corporate needs of the Company and to finance acquisitions
(generally not in excess of $25.0 million for any single acquisition nor in
excess of an aggregate of $25.0 million for acquisitions during any four fiscal
quarter period without the requisite approval of the bank syndicate) on a
revolving basis through July 2003. The Company has the option to convert
outstanding advances to term loans amortizing over a period through July 2005.
The Company plans to renew or replace this Credit Facility prior to its July
2003 expiration date. Advances under the Credit Facility accrue interest, at the
Company's choice of the London Interbank Offered Rate (LIBOR) or the higher of
the Prime Rate or the Federal Funds Rate, plus applicable margins (based on the
Company's ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization). The Company is required to maintain certain
financial covenants, including minimum net worth, limitations on capital
expenditures (excluding expenditures for the acquisition of businesses) and
limitations on additional indebtedness. See Note 5 to the Consolidated Financial
Statements for further information regarding the Credit Facility.
25
New Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), "Reporting Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model (based on the model in SFAS 121) for long-lived assets that are
to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of carrying value or fair value less cost to sell.
That requirement eliminates the requirement of APB 30 that discontinued
operations be measured at net realizable value or that entities include under
"discontinued operations" in the financial statements amounts for operating
losses that have not yet occurred. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
generally the provisions of the statement will be applied prospectively. The
Company does not expect the adoption of SFAS 144 to have a material effect on
its results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 (SFAS 145), "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement eliminates the SFAS 4 requirement that
gains and losses from extinguishment of debt be classified as an extraordinary
item, and requires that such gains and losses be evaluated for extraordinary
classification under the criteria of APB 30. This statement also amends SFAS 13,
"Accounting for Leases," to require that certain lease modifications that have
economic effects that are similar to sales-leaseback transactions be accounted
for in the same manner as sales-leaseback transactions. SFAS 145 also makes
various other technical corrections to existing pronouncements. This statement
is effective for fiscal years beginning after May 15, 2002. The Company does not
expect the adoption of SFAS 145 to have a material effect on its results of
operations or financial position.
In July 2002, the FASB issued SFAS No. 146 (SFAS 146), "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF 94-3. SFAS 146 also establishes that fair
value is the objective for the initial measurement of the liability. This
statement is effective for exit or disposal activities initiated after December
31, 2002. The Company does not expect the adoption of SFAS 146 to have a
material effect on its results of operations or financial position.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from changes in values of
financial instruments, including interest rate risk and liquidity risk. The
Company engages in transactions in the normal course of business that expose it
to market risks. The primary market risk to which the Company has exposure is
interest rate risk, mainly related to its revolving credit facility and
industrial revenue bonds, which had an aggregate outstanding balance of $56.0
million at October 31, 2002. Interest rates on the revolving credit facility
borrowings are based on LIBOR plus a variable margin, while interest rates on
the industrial development revenue bonds are based on variable rates. Interest
rate risk associated with the Company's variable rate debt is the potential
increase in interest expense from an increase in
26
interest rates. Based on the outstanding debt balance at October 31, 2002, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $160,000 in fiscal 2003.
The Company maintains a portion of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a hypothetical 10% increase in interest rates as of October 31,
2002 would not have a material effect on the Company's results of operations or
financial position.
27
Item 8. Financial Statements and Supplementary Data
HEICO CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report................................................ 29
Consolidated Balance Sheets as of October 31, 2002 and 2001................. 30
Consolidated Statements of Operations for the years ended
October 31, 2002, 2001 and 2000........................................... 32
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended October 31, 2002, 2001 and 2000................ 33
Consolidated Statements of Cash Flows for the years ended
October 31, 2002, 2001 and 2000........................................... 34
Notes to Consolidated Financial Statements.................................. 35
28
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, 2002 and 2001, and
the related consolidated statements of operations, of shareholders' equity and
comprehensive income, and of cash flows for each of the three years in the
period ended October 31, 2002. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
December 18, 2002
29
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of October 31,
--------------------------------
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 4,539,000 $ 4,333,000
Accounts receivable, net.................... 28,407,000 31,506,000
Inventories................................. 54,514,000 52,017,000
Prepaid expenses and other current assets... 7,811,000 5,281,000
Deferred income taxes....................... 3,295,000 3,180,000
------------- -------------
Total current assets..................... 98,566,000 96,317,000
Property, plant and equipment, net............. 40,059,000 39,298,000
Goodwill and other intangible assets, net...... 189,482,000 183,048,000
Other assets................................... 8,225,000 6,977,000
------------- -------------
Total assets............................. $ 336,332,000 $ 325,640,000
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
30
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of October 31,
----------------------------------
2002 2001
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt....................................... $ 6,756,000 $ 27,000
Trade accounts payable..................................................... 7,640,000 7,768,000
Accrued expenses and other current liabilities............................. 14,935,000 16,443,000
Income taxes payable....................................................... -- 564,000
------------- -------------
Total current liabilities............................................. 29,331,000 24,802,000
Long-term debt, net of current maturities....................................... 49,230,000 66,987,000
Deferred income taxes........................................................... 6,240,000 2,064,000
Other non-current liabilities................................................... 6,154,000 6,173,000
------------- -------------
Total liabilities..................................................... 90,955,000 100,026,000
------------- -------------
Minority interests in consolidated subsidiaries................................. 38,313,000 36,845,000
------------- -------------
Commitments and contingencies (Notes 2, 3, 5, 6 and 17)
Shareholders' equity:
Preferred Stock, par value $.01 per share;
Authorized -- 10,000,000 shares issuable in series; 200,000
designated as Series A Junior Participating Preferred Stock,
none issued.......................................................... -- --
Common Stock, $.01 par value; Authorized -- 30,000,000 shares;
Issued and Outstanding -- 9,380,174 and 9,317,453 shares,
respectively......................................................... 94,000 93,000
Class A Common Stock, $.01 par value; Authorized -- 30,000,000 shares;
Issued and Outstanding -- 11,570,195 and 11,515,779 shares,
respectively......................................................... 116,000 115,000
Capital in excess of par value............................................. 153,847,000 150,605,000
Accumulated other comprehensive loss....................................... -- (226,000)
Retained earnings.......................................................... 58,007,000 43,830,000
------------- -------------
212,064,000 194,417,000
Less: Note receivable secured by Class A Common Stock (5,000,000) (5,000,000)
Note receivable from employee savings and investment plan............ -- (648,000)
------------- -------------
Total shareholders' equity........................................... 207,064,000 188,769,000
------------- -------------
Total liabilities and shareholders' equity........................... $ 336,332,000 $ 325,640,000
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
31
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended October 31,
--------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales.................................................... $172,112,000 $171,259,000 $202,909,000
------------ ------------ ------------
Operating costs and expenses:
Cost of sales............................................. 110,610,000 100,113,000 127,098,000
Selling, general and administrative expenses.............. 39,102,000 40,155,000 37,888,000
------------ ------------ ------------
Total operating costs and expenses........................... 149,712,000 140,268,000 164,986,000
------------ ------------ ------------
Operating income............................................. 22,400,000 30,991,000 37,923,000
Interest expense............................................. (2,248,000) (2,486,000) (5,611,000)
Interest and other income.................................... 97,000 1,598,000 929,000
Gain on sale of product line................................. 1,230,000 -- 17,296,000
------------ ------------ ------------
Income from continuing operations
before income taxes and minority interests................ 21,479,000 30,103,000 50,537,000
Income tax expense........................................... 4,930,000 11,480,000 19,509,000
------------ ------------ ------------
Income from continuing operations before minority interests.. 16,549,000 18,623,000 31,028,000
Minority interests in consolidated subsidiaries.............. 1,323,000 2,790,000 3,289,000
------------ ------------ ------------
Income from continuing operations............................ 15,226,000 15,833,000 27,739,000
Adjustment to gain on sale of discontinued health care opera-
tions, net of applicable income tax benefit of $208,000... -- -- (1,422,000)
------------ ------------ ------------
Net income................................................... $ 15,226,000 $ 15,833,000 $ 26,317,000
============ ============ ============
Basic per share data:
Income from continuing operations....................... $ .73 $ .79 $ 1.45
Adjustment to gain on sale of discontinued health care
operations........................................... -- -- (.07)
------------ ------------ ------------
Net income.............................................. $ .73 $ .79 $ 1.38
============ ============ ============
Diluted per share data:
Income from continuing operations....................... $ .68 $ .71 $ 1.27
Adjustment to gain on sale of discontinued health care
operations........................................... -- -- (.07)
------------ ------------ ------------
Net income.............................................. $ .68 $ .71 $ 1.20
============ ============ ============
Weighted average number of common shares outstanding:
Basic................................................... 20,912,531 19,924,962 19,114,323
============ ============ ============
Diluted................................................. 22,484,254 22,305,365 21,908,473
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
32
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Class A Capital in Other
Common Common Excess of Comprehensive Retained Notes Comprehensive
Stock Stock Par Value Loss Earnings Receivable Income
-------- -------- ------------ ------------- ------------- ------------ -------------
Balances as of October 31, 1999.... $ 84,000 $ 73,000 $ 91,094,000 $ (2,235,000) $ 52,280,000 $(2,007,000)
10% Common and Class A stock
dividend paid in
Class A shares ................ -- 15,000 17,125,000 -- (17,158,000) --
Repurchase of stock................ -- -- (105,000) -- -- --
Exercise of stock options.......... 1,000 2,000 978,000 -- -- --
Tax benefit for stock
option exercises............... -- -- 1,736,000 -- -- --
Payment on note receivable
from employee savings and
investment plan................ -- -- -- -- -- 556,000
Cash dividends ($.044 per share) .. -- -- -- -- (828,000) --
Net income for the year............ -- -- -- -- 26,317,000 -- $ 26,317,000
Unrealized gain on investments,
net of tax of $998,000......... -- -- -- 1,603,000 -- -- 1,603,000
-------------
Comprehensive income............... -- -- -- -- -- -- $ 27,920,000
=============
Other.............................. -- -- 310,000 -- 3,000 --
-------- -------- ------------ ------------ ------------- ------------
Balances as of October 31, 2000.... 85,000 90,000 111,138,000 (632,000) 60,614,000 (1,451,000)
10% Common and Class A
stock dividend paid in
Class A shares ................ -- 19,000 31,648,000 -- (31,709,000) --
Shares issued in connection with
business acquisition (Note 2).. -- 3,000 4,997,000 -- -- (5,000,000)
Exercise of stock options.......... 8,000 3,000 2,420,000 -- -- --
Tax benefit for stock
option exercises............... -- -- 334,000 -- -- --
Payment on note receivable
from employee savings and
investment plan................ -- -- -- -- -- 803,000
Cash dividends ($.045 per share) .. -- -- -- -- (900,000) --
Net income for the year............ -- -- -- -- 15,833,000 -- $ 15,833,000
Unrealized gain on investments,
net of tax of $394,000......... -- -- -- 632,000 -- -- 632,000
Unrealized loss on interest rate
swap, net of tax of $144,000... -- -- -- (226,000) -- -- (226,000)
-------------
Comprehensive income............... -- -- -- -- -- -- $ 16,239,000
=============
Other.............................. -- -- 68,000 -- (8,000) --
-------- -------- ------------ ------------ ------------- ------------
Balances as of October 31, 2001.... 93,000 115,000 150,605,000 (226,000) 43,830,000 (5,648,000)
Repurchase of stock................ -- -- (200,000) -- -- --
Exercise of stock options.......... 1,000 1,000 436,000 -- -- --
Tax benefit for stock option
exercises...................... -- -- 2,944,000 -- -- --
Payment on note receivable
from employee savings
and investment plan............ -- -- -- -- -- 648,000
Cash dividends ($.050 per share) .. -- -- -- -- (1,045,000) --
Net income for the year............ -- -- -- -- 15,226,000 -- $ 15,226,000
Unrealized gain on interest rate
swap, net of tax of $144,000... -- -- -- 226,000 -- -- 226,000
-------------
Comprehensive income............... -- -- -- -- -- -- $ 15,452,000
=============
Other.............................. -- -- 62,000 -- (4,000) --
-------- -------- ------------ ------------ ------------- ------------
Balances as of October 31, 2002.... $ 94,000 $116,000 $153,847,000 $ -- $ 58,007,000 $(5,000,000)
======== ======== ============ ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
33
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended October 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Operating Activities:
Net income ............................................................ $ 15,226,000 $ 15,833,000 $ 26,317,000
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization ................................. 4,532,000 10,588,000 9,775,000
Gain on sale of product line .................................. (1,230,000) -- (17,296,000)
Gain on sale of property held for disposition ................. -- (657,000) --
Gain on sale of investments ................................... -- (180,000) --
Deferred income tax provision (benefit) ....................... 3,917,000 760,000 (175,000)
Minority interests in consolidated subsidiaries ............... 1,323,000 2,790,000 3,289,000
Tax benefit on stock option exercises ......................... 2,944,000 334,000 1,736,000
Deferred financing costs ...................................... -- -- 8,000
Change in assets and liabilities, net of acquisitions and
dispositions:
Decrease (increase) in accounts receivable ............... 3,421,000 1,194,000 (11,569,000)
Increase in inventories .................................. (2,996,000) (6,773,000) (7,471,000)
Increase in prepaid expenses and other current assets .... (2,967,000) (329,000) (1,662,000)
(Decrease) increase in trade payables, accrued expenses
and other current liabilities ........................ (588,000) 1,154,000 1,159,000
(Decrease) increase in income taxes payable .............. (564,000) (8,147,000) 7,866,000
Other .................................................... 267,000 (37,000) 155,000
------------ ------------ ------------
Net cash provided by operating activities ............................. 23,285,000 16,530,000 12,132,000
------------ ------------ ------------
Investing Activities:
Acquisitions, net of cash acquired, including contingent payments ..... (4,515,000) (61,207,000) (24,799,000)
Capital expenditures .................................................. (5,853,000) (6,927,000) (8,665,000)
Proceeds from sale of product line, net of expenses ................... -- -- 44,377,000
Proceeds from receivable from sale of product line .................... -- 12,412,000 4,000,000
Proceeds from sale of long-term investments ........................... -- 7,039,000 --
Proceeds from sale of property held for disposition ................... -- 2,157,000 --
Payment received from employee savings and investment plan note
receivable .......................................................... 648,000 803,000 556,000
Other ................................................................. (1,664,000) (160,000) (724,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities ................... (11,384,000) (45,883,000) 14,745,000
------------ ------------ ------------
Financing Activities:
Proceeds from the issuance of long-term debt:
Revolving credit facility ...................................... 5,000,000 56,000,000 29,000,000
Other .......................................................... -- -- 1,167,000
Principal payments on long-term debt .................................. (16,028,000) (29,028,000) (58,381,000)
Proceeds from the exercise of stock options ........................... 438,000 2,431,000 981,000
Cash dividends paid (including fractional Class A share payments
of $41,000 and $18,000 in fiscal 2001 and fiscal 2000, respectively) (1,045,000) (941,000) (846,000)
Repurchases of common stock ........................................... (200,000) -- (105,000)
Minority interest investment .......................................... -- 414,000 --
Other ................................................................. 140,000 3,000 83,000
------------ ------------ ------------
Net cash (used in) provided by financing activities ................... (11,695,000) 28,879,000 (28,101,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .................. 206,000 (474,000) (1,224,000)
Cash and cash equivalents at beginning of year ........................ 4,333,000 4,807,000 6,031,000
------------ ------------ ------------
Cash and cash equivalents at end of year .............................. $ 4,539,000 $ 4,333,000 $ 4,807,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
34
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
HEICO Corporation, through its principal subsidiaries HEICO Aerospace
Holdings Corp. (HEICO Aerospace) and HEICO Electronic Technologies Corp. (HEICO
Electronic) and their subsidiaries (collectively, the Company), is principally
engaged in the design, manufacture and sale of aerospace, defense and
electronics related products and services throughout the United States and
internationally. HEICO Aerospace's principal subsidiaries include HEICO
Aerospace Corporation, Jet Avion Corporation, LPI Industries Corporation,
Aircraft Technology, Inc., Northwings Accessories Corporation, McClain
International, Inc., Associated Composite, Inc., Rogers-Dierks, Inc., Air Radio
& Instruments Corp., Turbine Kinetics, Inc., Thermal Structures, Inc., Future
Aviation, Inc., Aero Design, Inc., Avitech Engineering Corporation, HEICO
Aerospace Parts Corp., Aviation Facilities, Inc., and Jetseal, Inc. HEICO
Electronic's principal subsidiaries include Radiant Power Corp., Leader Tech,
Inc., Santa Barbara Infrared, Inc., Analog Modules, Inc. and Inertial Airline
Services, Inc. Trilectron Industries, Inc., which was sold September 2000, was
formerly a subsidiary of HEICO Electronic. For further details of acquired and
sold subsidiaries listed above, see Notes 2 and 3. The Company's customer base
is primarily the commercial airline, defense and electronics industries. As of
October 31, 2002, the Company's principal operations are located in Glastonbury,
Connecticut; Atlanta, Georgia; Cleveland, Ohio; Anacortes and Spokane,
Washington; Corona, Hayward, and Santa Barbara, California; and Fort Myers,
Hollywood, Miami, Orlando, Sarasota, Tampa and Titusville, Florida.
Basis of presentation
The consolidated financial statements include the accounts of HEICO
Corporation and its subsidiaries, all of which are wholly-owned except for HEICO
Aerospace, which is 20%-owned by Lufthansa Technik AG (Lufthansa), the technical
services subsidiary of Lufthansa German Airlines. In addition, HEICO Aerospace
consolidates a joint venture formed in February 2001 (Note 2), which is
16%-owned by American Airlines' parent company, AMR Corporation (AMR), and an
80%-owned subsidiary. HEICO Aerospace also accounts for a 50%-owned joint
venture formed in fiscal 2002 under the equity method. The Company's investment
in the 50%-owned joint venture and its share of its operating results were not
significant to the Company's consolidated financial statements. All significant
intercompany balances and transactions are eliminated.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities 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.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
35
Cash and cash equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Inventories
Portions of the inventories are stated at the lower of cost or market,
with cost being determined on the first-in, first-out basis. The remaining
portions of the inventories are stated at the lower of cost or market, on a per
contract basis, with estimated total contract costs being allocated ratably to
all units. The effects of changes in estimated total contract costs are
recognized in the period determined. Losses, if any, are recognized fully when
identified.
Tooling costs
Tooling costs are capitalized, generally as a component of other assets,
and amortized over their estimated useful lives, ranging from 2 to 5 years.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided mainly on the straight-line method over the estimated
useful lives of the various assets. Property, plant and equipment useful lives
are as follows:
Buildings and components.................................. 7 to 55 years
Building and leasehold improvements....................... 3 to 15 years
Machinery and equipment................................... 3 to 20 years
The costs of major renewals and betterments are capitalized. Repairs and
maintenance are charged to operations as incurred. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any
related gain or loss is reflected in earnings.
Goodwill and other intangible assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," effective
November 1, 2001. SFAS 142 eliminates the amortization of goodwill. Prior to the
adoption of SFAS 142, goodwill was being amortized on a straight-line basis over
periods ranging from 20 to 40 years. The Company has performed the transitional
impairment test as of November 1, 2001, which requires a comparison of carrying
values to fair values, and if appropriate, the carrying value of impaired assets
is reduced to fair value. As a result of the test performed, the Company
determined there was no goodwill impairment as of the date of adoption. Pursuant
to SFAS 142, the Company tests goodwill for impairment annually as of October 31
or more frequently if events or changes in circumstance indicate that the
carrying amount of these assets may not be fully recoverable.
The Company's intangible assets subject to amortization under SFAS 142
consist primarily of licenses, loan costs, patents and non-compete covenants and
are amortized on the straight-line method over their legal or estimated useful
lives, ranging from 3 to 20 years. See Note 16 for additional disclosures
related to goodwill and other intangible assets.
36
Financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other current liabilities approximate
fair value due to the relatively short maturity of the respective instruments.
The carrying value of long-term debt approximates fair market value due to its
floating interest rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions and limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different geographical regions.
Long-term investments are stated at fair value based on quoted market
prices.
Revenue recognition
Revenue is recognized on an accrual basis, primarily upon shipment of
products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For contracts in which costs cannot be dependably estimated,
revenue is recognized on the completed-contract method. A contract is considered
complete when all costs except insignificant items have been incurred or the
item has been accepted by the customer. The aggregate effects of changes in
estimates relating to inventories and/or long-term contracts were not material
except as noted in the unaudited quarterly financial information presented in
Note 14 to the Consolidated Financial Statements. Revenues earned from rendering
services represented less than 10% of consolidated net sales for all periods
presented.
Long-term contracts
Accounts receivable and accrued expenses and other current liabilities
include amounts related to the production of products under fixed-price
contracts exceeding terms of one year. Certain of these contracts recognize
revenues on the percentage-of-completion method, measured by the percentage of
costs incurred to date to estimated total costs for each contract. This method
is used because management considers costs incurred to be the best available
measure of progress on these contracts. Certain other contracts have revenues
recognized on the completed-contract method. This method is used when the
Company does not have adequate historical data to ensure that estimates are
reasonably dependable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Variations in actual labor performance, changes to
estimated profitability and final contract settlements may result in revisions
to cost estimates and are recognized in income in the period in which the
revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted percentage-of-completion contracts," included in accounts
receivable, represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings," included in
accrued expenses and other current liabilities, represents billings in excess of
revenues recognized on contracts accounted for under either the
percentage-of-completion method or the completed-contract method. Billings are
made based on the completion of certain milestones as provided for in the
contracts.
37
Income taxes
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from periods
recognized for income tax purposes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Net income per share
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period plus potentially dilutive
common shares arising from the assumed exercise of stock options, if dilutive.
The dilutive impact of potentially dilutive common shares is determined by
applying the treasury stock method.
Stock based compensation
The Company measures compensation cost for stock options using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company
has elected to continue using the accounting methods prescribed by APB 25 and to
provide in Note 11 the pro forma disclosures required by Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
Contingencies
Losses for contingencies such as product warranties, litigation and
environmental matters are recognized in income when they are probable and can be
reasonably estimated. Gain contingencies are not recognized in income until they
have been realized.
New accounting standards
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), "Reporting Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model (based on the model in SFAS 121) for long-lived assets that are
to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of carrying value or fair value less cost to sell.
That requirement eliminates the requirement of APB 30 that discontinued
operations be measured at net realizable value or that entities include under
"discontinued operations" in the financial statements amounts for operating
losses that have not yet occurred. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
generally the provisions of the statement will be applied prospectively. The
Company does not expect the adoption of SFAS 144 to have a material effect on
its results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 (SFAS 145), "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement eliminates the SFAS 4 requirement that
gains and losses from extinguishment of debt be classified as an extraordinary
item, and requires
38
that such gains and losses be evaluated for extraordinary classification under
the criteria of APB 30. This statement also amends SFAS 13, "Accounting for
Leases," to require that certain lease modifications that have economic effects
that are similar to sales-leaseback transactions be accounted for in the same
manner as sales-leaseback transactions. SFAS 145 also makes various other
technical corrections to existing pronouncements. This statement is effective
for fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of SFAS 145 to have a material effect on its results of operations or
financial position.
In July 2002, the FASB issued SFAS No. 146 (SFAS 146), "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF 94-3. SFAS 146 also establishes that fair
value is the objective for the initial measurement of the liability. This
statement is effective for exit or disposal activities initiated after December
31, 2002. The Company does not expect the adoption of SFAS 146 to have a
material effect on its results of operations or financial position.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
Acquisitions
In June 2000, the Company, through a subsidiary, acquired substantially
all of the assets and certain liabilities of Future Aviation, Inc. (Future) for
$14.7 million in cash. The source of the purchase price was proceeds from the
Company's Credit Facility. Future is engaged in the repair and overhaul of
aircraft components and accessories principally serving the regional, commuter
and business aircraft market.
In April 2001, the Company, through a subsidiary, acquired substantially
all of the assets and certain liabilities of Analog Modules, Inc. (AMI) for
$15.6 million in cash. The source of the purchase price was proceeds from the
Company's Credit Facility. AMI is engaged in the design and manufacture of
electronic products primarily for use in the laser and electro-optics
industries.
In August 2001, the Company, through a subsidiary, acquired Inertial
Airline Services, Inc. (IAS) pursuant to a stock purchase agreement, for $20
million in cash and $5 million in HEICO Class A Common Stock (289,964 shares)
paid at closing. The Company guaranteed that the resale value of such Class A
Common Stock would be at least $5 million through August 31, 2002, which both
parties agreed to extend to August 31, 2003. Based on the closing market price
of HEICO Class A Common Stock on October 31, 2002, the Company would have had to
pay the seller an additional amount of approximately $2.8 million in cash, which
would have been recorded as a reduction of shareholders' equity. In addition,
subject to meeting certain earnings targets during the first two years following
the acquisition, the Company may be obligated to pay additional consideration of
$3 million in cash. Concurrent with the purchase, the Company loaned the seller
$5 million, which is due August 31, 2003 and is secured by the 289,964 shares of
HEICO Class A Common Stock. The loan is reflected as a reduction in the equity
section of the Company's consolidated balance sheet as a note receivable secured
by Class A Common Stock. The source of the purchase price, including the loan,
was proceeds from the Company's Credit Facility. IAS is engaged primarily in the
repair and overhaul of inertial navigation systems and other avionics equipment,
which are used by commercial, military and business aircraft.
During fiscal 2001, the Company, through subsidiaries, also acquired
certain assets and liabilities of Avitech Engineering Corporation (Avitech),
Aviation Facilities, Inc. (AFI) and Aero Design, Inc. The purchase price of each
acquisition was insignificant and in total aggregated to approximately $9
million. Aero Design, Inc. and AFI are in the business of design and manufacture
of FAA-approved replacement parts. Avitech is engaged in the repair
39
and overhaul of aircraft components and accessories principally serving the
regional commuter and business aircraft market.
In November 2001, the Company, through a subsidiary, acquired certain
assets and liabilities of Jetseal, Inc. (Jetseal). The purchase price was not
significant to the Company's consolidated financial statements and the pro forma
consolidated operating results assuming the acquisition had been consummated as
of the beginning of fiscal 2002 would not have been materially different from
the reported results. Jetseal is engaged in the manufacture of compression
seals.
In connection with the acquisition of Air Radio & Instruments Corp. in
fiscal 1999, the former shareholders received additional consideration of $1.25
million in fiscal 2000 as a result of meeting certain earnings objectives under
the terms of the acquisition. In connection with the acquisition of
Rogers-Dierks, Inc. in fiscal 1999, the Company paid $1.1 million of deferred
payments over the two-year period ended October 31, 2001 and the Company paid a
total of $5.9 million in additional purchase consideration between fiscal 2000
and fiscal 2001 as a result of meeting certain earnings objectives. In addition,
the former shareholders of Santa Barbara Infrared, Inc. (acquired in fiscal
1999) received additional consideration of $3.6 million in fiscal 2001 as part
of the final purchase price adjustment.
All of the acquisitions described above were accounted for using the
purchase method of accounting and the results of each company were included in
the Company's results from their effective purchase dates. The costs of each
acquisition have been allocated to the assets acquired and liabilities assumed
based on their fair values at the date of acquisition as determined by
management (See Note 16 - Supplemental disclosures of cash flow information).
Strategic alliances and sale of minority interests in consolidated subsidiaries
In October 1997, the Company entered into a strategic alliance with
Lufthansa, whereby Lufthansa invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid over four years to HEICO Aerospace
pursuant to a research and development cooperation agreement, which has
partially funded the accelerated development of additional Federal Aviation
Administration (FAA)-approved replacement parts for jet engines and aircraft
components. The funds received as a result of the research and development
cooperation agreement reduced research and development expenses in the periods
such expenses were incurred. In addition, Lufthansa and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support for jet
engine and aircraft component replacement parts on a worldwide basis. In
connection with subsequent acquisitions by HEICO Aerospace, Lufthansa invested
additional amounts aggregating to approximately $21 million pursuant to its
option to maintain a 20% equity interest.
In February 2001, the Company entered into a joint venture with AMR to
develop, design and sell FAA-approved jet engine and aircraft component
replacement parts through its subsidiary, HEICO Aerospace. As part of the joint
venture, AMR will reimburse HEICO Aerospace a portion of new product research
and development costs. The funds received as a result of the new product
research and development costs paid by AMR generally reduce new product research
and development expenses in the period such expenses are incurred. The balance
of the development costs are incurred by the joint venture, which is 16% owned
by AMR. In addition, AMR and HEICO Aerospace have agreed to cooperate regarding
technical services and marketing support on a worldwide basis. See Note 16 for
additional disclosures on research and development expenses.
3. SALE OF PRODUCT LINE
In September 2000, the Company consummated the sale of all of the
outstanding capital stock of HEICO Electronic's wholly-owned subsidiary,
Trilectron Industries, Inc. (Trilectron), to a subsidiary of Illinois Tool Works
40
Inc. In consideration of the sale of Trilectron's capital stock, the Company
received $52.5 million in cash, an unsecured non-interest bearing promissory
note for $12.0 million payable in three equal installments over 90 days, a
purchase price adjustment of $4.5 million based on the net worth of Trilectron
as of the closing date of the sale, and retained certain property having a book
value of approximately $1.5 million, which was sold in fiscal 2001. The proceeds
from the sale were used to pay down the outstanding balance on the Company's
Credit Facility.
The sale of Trilectron did not meet the requirements for classification
as a discontinued operation in accordance with APB 30 because its activities
could not be clearly distinguished, physically and operationally and for
financial reporting purposes, from the other assets, results of operations, and
activities of the Company's Electronic Technologies Group (ETG) operating
segment of which it was a part. Trilectron was managed as part of the ETG and
the ETG was treated as a single operating segment. The ETG shared facilities,
staff, information technology processing and other centrally provided services
with no allocation of costs and interest expense between the divisions within
the ETG. Accordingly, the sale was reported as a sale of a product line and
Trilectron's results of operations through the date of the closing have been
reported in the Company's consolidated statements of operations.
The sale of Trilectron resulted in a pretax gain in fiscal 2000 of
$17,296,000 ($10,542,000 or $.48 per diluted share, net of income tax). The
pretax gain is net of expenses of $10.8 million directly related to the
transaction.
A summary of the components of the expenses of the sale of the
Trilectron product line are as follows:
Bonuses and related costs $ 6,700,000 (a)
Professional service fees 2,500,000 (b)
Contract indemnification, reserves and
miscellaneous costs and expenses 1,600,000 (c)
-----------
Total expenses of sale $10,800,000
===========
(a) Represents incentive bonus payments which were approved by the
Board of Directors contingent upon the sale of Trilectron and
paid from the proceeds of the sale.
(b) Represents investment banking, legal, accounting and tax
consulting fees, all of which were incurred in connection with
the sale.
(c) Represents reserves related to indemnification provisions entered
into in connection with the sale of Trilectron, estimated
expenses of relocating Radiant Power, Corp. from the Trilectron
facility to new facilities and miscellaneous other expenses and
costs which were incurred in connection with the sale of
Trilectron.
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 or $.03 per diluted share, net of income tax) on the sale
of the Trilectron product line due to the elimination of certain of the above
reserves upon the expiration of indemnification provisions of the sales
contract.
4. ADJUSTMENT TO GAIN ON SALE OF DISCONTINUED OPERATIONS
In January 1999, the Company received notice of a proposed adjustment
pursuant to an examination by the Internal Revenue Service (IRS) of the
Company's fiscal 1995 and fiscal 1996 tax returns, disallowing the utilization
of a $4.6 million capital loss carryforward to partially offset the gain
recognized by the Company in connection with the sale of its health care
operations in July 1996. In fiscal 2000, the Company reached a settlement
pursuant to which the IRS conceded one-third of the original tax adjustment.
Accordingly, the additional taxes and related interest, aggregating $1.4 million
($.07 per diluted share) is reflected as adjustment to gain on sale of
discontinued health care operations in the consolidated statement of operations
for fiscal 2000.
41
5. CREDIT FACILITIES AND LONG-TERM DEBT
Long-term debt consists of:
As of October 31,
----------------------------
2002 2001
------------ ------------
Borrowings under revolving credit facility ................. $ 54,000,000 $ 65,000,000
Industrial Development Revenue Refunding Bonds-- Series 1988 1,980,000 1,980,000
Equipment loans ............................................ 6,000 34,000
------------ ------------
55,986,000 67,014,000
Less: Current maturities of long-term debt ................. (6,756,000) (27,000)
------------ ------------
$ 49,230,000 $ 66,987,000
============ ============
Current maturities of long-term debt includes $6,750,000 of the
outstanding borrowings under the revolving credit facility assuming borrowings
outstanding as of October 31, 2002 are converted to a term loan pursuant to the
Company's option to convert such borrowings as set forth below. The aggregate
amount of long-term debt maturing in each of the next five fiscal years is
$6,756,000 in fiscal 2003, $27,000,000 in fiscal 2004, $20,250,000 in fiscal
2005, $0 in fiscal 2006, $0 in fiscal 2007, and $1,980,000 thereafter.
Revolving credit facility
In July 1998, the Company entered into a $120 million revolving credit
facility (Credit Facility) with a bank syndicate, which contains both revolving
credit and term loan features. The Credit Facility may be used for working
capital and general corporate needs of the Company and to finance acquisitions
(generally not in excess of $25.0 million for any single acquisition nor in
excess of an aggregate of $25.0 million for acquisitions during any four fiscal
quarter period without the requisite approval of the bank syndicate) on a
revolving basis through July 2003. The Company has the option to convert
outstanding advances to term loans amortizing over a period through July 2005.
The Company plans to renew or replace this Credit Facility prior to its July
2003 expiration date. Advances under the Credit Facility accrue interest, at the
Company's choice of the London Interbank Offered Rate (LIBOR) or the higher of
the Prime Rate or the Federal Funds Rate, plus applicable margins (based on the
Company's ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization). The applicable margins range from .00% to .50%
for Prime Rate based borrowings and from .75% to 2.00% for LIBOR based
borrowings. A fee of .20% to .40% is charged on the amount of the unused
commitment depending on the leverage ratio of the Company. The Credit Facility
is secured by all the assets, excluding real estate, of the Company and its
subsidiaries and contains covenants which, among other things, requires the
maintenance of certain working capital, leverage and debt service ratios as well
as minimum net worth requirements. At October 31, 2002 and 2001, the Company had
a total of $54 million and $65 million, respectively, borrowed under the Credit
Facility at weighted average interest rates of 2.9% and 3.4%, respectively. The
amounts were primarily borrowed to partially fund acquisitions (Note 2).
Interest rate swap agreements
Periodically, the Company enters into interest rate swap agreements to
manage interest expense related to its Credit Facility. Interest rate risk
associated with the Company's variable rate Credit Facility is the potential
increase in interest expense from an increase in interest rates. A derivative
instrument (e.g. interest rate swap agreement) that hedges the variability of
cash flows related to a recognized liability is designated as a cash flow hedge.
On an ongoing basis, the Company assesses whether derivative instruments
used in hedging transactions are highly effective in offsetting changes in cash
flows of the hedged items and therefore qualify as cash flow hedges. For a
derivative instrument that qualifies as a cash flow hedge, the effective portion
of changes in fair value of the derivative is deferred and recorded as a
component of other comprehensive income until the hedged transaction
42
occurs and is recognized in earnings. All other portions of changes in the fair
value of a cash flow hedge are recognized in earnings immediately.
The cumulative effect of the Company's interest rate swap agreement
(which expired in February 2002) on accumulated other comprehensive income as of
October 31, 2002 and October 31, 2001 was income of $226,000 (net of $144,000 in
income tax expense) and a loss of $226,000 (net of $144,000 in income tax
benefit), respectively.
Industrial development revenue bonds
The industrial development revenue bonds outstanding at October 31, 2002
represent bonds issued by Broward County, Florida in 1988 (the 1988 bonds). The
1988 bonds are due April 2008 and bear interest at a variable rate calculated
weekly (1.90% and 2.05% at October 31, 2002 and 2001, respectively). The 1988
bonds as amended are secured by a letter of credit expiring February 2004 and a
mortgage on the related properties pledged as collateral.
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
non-cancelable terms in excess of one year are as follows:
Year ending October 31,
2003.................................................. $ 2,392,000
2004.................................................. 1,324,000
2005.................................................. 867,000
2006.................................................. 613,000
2007.................................................. 493,000
Thereafter............................................ 2,370,000
-----------
Total minimum lease commitments....................... $ 8,059,000
===========
Total rent expense charged to operations for operating leases in fiscal
2002, fiscal 2001, and fiscal 2000 amounted to $2,956,000, $2,217,000 and
$2,041,000, respectively.
7. INCOME TAXES
The provision (benefit) for income taxes on income from continuing
operations for each of the three fiscal years ended October 31 is as follows:
2002 2001 2000
------------ ------------ ------------
Current:
Federal .............. $ 849,000 $ 9,611,000 $ 17,690,000
State ................ 164,000 1,109,000 1,994,000
------------ ------------ ------------
1,013,000 10,720,000 19,684,000
Deferred ............... 3,917,000 760,000 (175,000)
------------ ------------ ------------
Total income tax expense $ 4,930,000 $ 11,480,000 $ 19,509,000
============ ============ ============
43
The Company recently completed a tax audit of its fiscal 1998 and fiscal
1999 income tax returns with the IRS that resulted in the recovery of a portion
of income taxes paid in prior years. The recovery is based on a settlement
reached with the IRS under which a portion of the reimbursements received
pursuant to a research and development cooperation agreement was treated as
shareholder reimbursements excluded from taxable income. The recovery, net of
expenses (including related professional fees and interest), increased net
income in fiscal 2002 by $2.1 million ($.09 per diluted share).
The following table reconciles the federal statutory tax rate to the
Company's effective tax rate from continuing operations for each of the three
fiscal years ended October 31:
2002 2001 2000
------ ------ ------
Federal statutory tax rate ................................... 35.0% 35.0% 35.0%
State taxes, less applicable federal income tax reduction .... 2.8 2.6 2.5
Net tax benefits on export sales ............................. (2.7) (2.4) (1.4)
Nondeductible amortization of intangible assets .............. -- 2.7 1.6
Recovery of taxes paid in prior years resulting from tax audit (11.6) -- --
Other, net ................................................... (.5) .2 .9
------ ----- -----
Effective tax rate ................................. 23.0% 38.1% 38.6%
====== ===== =====
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, 2002 and
2001 are as follows:
As of October 31,
-----------------------------
2002 2001
------------ ------------
Deferred tax assets:
Inventories ..................................... $ 1,868,000 $ 1,296,000
Bad debt allowances ............................. 619,000 468,000
Capitalized research and development expenses ... 1,088,000 --
Deferred compensation liability ................. 1,769,000 1,650,000
Vacation accruals ............................... 384,000 253,000
Customer rebates and credits .................... 244,000 480,000
Retirement plan liability ....................... 227,000 226,000
Warranty accruals ............................... 269,000 327,000
Accrued items related to sale of product line ... 65,000 720,000
Unrealized loss on interest rate swap/investments -- 144,000
Other ........................................... 25,000 134,000
----------- -----------
Total deferred tax assets ............. 6,558,000 5,698,000
----------- -----------
Deferred tax liabilities:
Accelerated depreciation ........................ 2,355,000 1,120,000
Intangible asset amortization ................... 7,077,000 3,201,000
Other ........................................... 71,000 261,000
----------- -----------
Total deferred tax liabilities ........ 9,503,000 4,582,000
----------- -----------
Net deferred tax (liability) asset .... $(2,945,000) $ 1,116,000
=========== ===========
44
The net deferred tax (liability) asset is classified on the balance
sheet as follows:
As of October 31,
-----------------------------
2002 2001
------------ ------------
Net deferred tax (liability) asset:
Current......................................... $ 3,295,000 $ 3,180,000
Long term....................................... (6,240,000) (2,064,000)
----------- -----------
Net deferred tax (liability) asset......... $(2,945,000) $ 1,116,000
=========== ===========
A deferred tax charge of $144,000 relating to an unrealized gain on an
interest rate swap was recorded as an adjustment to shareholders' equity in
fiscal 2002. A net deferred tax charge of $250,000 relating to unrealized gains
on long-term investments and an unrealized loss on an interest rate swap was
recorded as an adjustment to shareholders' equity in fiscal 2001. A deferred tax
charge of $998,000 relating to unrealized gains on long-term investments was
recorded as an adjustment to shareholders' equity in fiscal 2000.
In connection with its acquisitions, the Company assumed net deferred
tax assets of $37,000 in fiscal 2000. No deferred tax assets or liabilities were
assumed in fiscal 2002 or fiscal 2001.
8. STOCK DIVIDENDS
In July 2000 and August 2001, the Company paid 10% stock dividends on
all shares outstanding, payable in Class A Common Stock. Each 10% dividend was
valued based on the closing market price of the Company's Class A Common Stock
as of the day prior to the declaration date. All income per share, dividend per
share, price per share, exercise price, stock option, and common shares
outstanding information has been retroactively restated to reflect the stock
dividends.
9. PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1993, pursuant to a plan adopted by the Board of Directors on such
date, the Board declared a distribution of one Preferred Stock Purchase Right
(the Rights) for each outstanding share of common stock of the Company. The
Rights trade with the common stock and are not exercisable or transferable apart
from the Common Stock and Class A Common Stock until after a person or group
either acquires 15% or more of the outstanding common stock or commences or
announces an intention to commence a tender offer for 30% or more of the
outstanding common stock. Absent either of the aforementioned events
transpiring, the Rights will expire at the close of business on November 2,
2003.
The Rights have certain anti-takeover effects and, therefore, will cause
substantial dilution to a person or group who attempts to acquire the Company on
terms not approved by the Company's Board of Directors or who acquires 15% or
more of the outstanding common stock without approval of the Company's Board of
Directors. The Rights should not interfere with any merger or other business
combination approved by the Board since they may be redeemed by the Company at
$.01 per Right at any time until the close of business on the tenth day after a
person or group has obtained beneficial ownership of 15% or more of the
outstanding common stock or until a person commences or announces an intention
to commence a tender offer for 30% or more of the outstanding common stock.
45
10. COMMON STOCK AND CLASS A COMMON STOCK
In accordance with the Company's share repurchase program, 33,000 shares
of Class A Common Stock were repurchased at a total cost of $200,000 in fiscal
2002 and 6,600 shares of Common Stock were repurchased at a total cost of
$105,000 in fiscal 2000. No shares were repurchased in fiscal 2001.
Each share of Common Stock is entitled to one vote per share. Each share
of Class A Common Stock is entitled to a 1/10 vote per share. Holders of the
Company's Common Stock and Class A Common Stock are entitled to receive when, as
and if declared by the Board of Directors, dividends and other distributions
payable in cash, property, stock, or otherwise. In the event of liquidation,
after payment of debts and other liabilities of the Company, and after making
provision for the holders of preferred stock, if any, the remaining assets of
the Company will be distributable ratably among the holders of all classes of
common stock.
11. STOCK OPTIONS
The Company currently has three stock option plans, the 1993 Stock
Option Plan (1993 Plan), the Non-Qualified Stock Option Plan (NQSOP), and the
2002 Stock Option Plan (2002 Plan). A total of 4,731,902 shares of the Company's
stock are reserved for issuance to employees, directors, officers, and
consultants as of October 31, 2002, including 4,424,092 shares currently under
option and 307,810 shares available for future grants. Options issued under the
1993 Plan and the 2002 Plan may be designated as incentive stock options (ISOs)
or non-qualified stock options (NQSOs). ISOs are granted at not less than 100%
of the fair market value at the date of grant (110% thereof in certain cases)
and are exercisable in percentages specified at the date of grant over a period
up to ten years. Only employees are eligible to receive ISOs. NQSOs may be
granted at less than fair market value and may be immediately exercisable.
Options granted under the NQSOP may be granted at no less than the fair market
value at the date of grant and are generally exercisable in four equal annual
installments commencing one year from the date of grant. Pursuant to the 2002
Plan, which was approved by the Shareholders in fiscal 2002, an aggregate of
520,000 shares are reserved for issuance upon the exercise of options granted
under the Plan. The options granted pursuant to the 2002 Plan may be with
respect to Common Stock and/or Class A Common Stock, in such proportions as
shall be determined by the Board of Directors or the Stock Option Plan Committee
in its sole discretion. Options under all stock option plans expire not later
than ten years after the date of grant, unless extended by the Stock Option Plan
Committee or the Board of Directors.
All stock option share and price per share information has been
retroactively restated for stock dividends and splits.
46
Information concerning stock option activity for each of the three
fiscal years ended October 31 is as follows:
Shares Under Option
----------------------------
Shares Weighted Average
Available Exercise
For Option Shares Price
---------- ---------- ----------------
Outstanding as of October 31, 1999 ........ 417,016 5,577,449 $ 8.52
Granted ................................... (338,377) 338,377 $ 12.74
Cancelled ................................. 727,339 (760,340) $ 21.67
Exercised ................................. -- (208,196) $ 4.71
-------- ----------
Outstanding as of October 31, 2000 ........ 805,978 4,947,290 $ 6.95
Shares approved by Board of Directors for
grant to former shareholders of SBIR .. 229,900 -- --
Granted ................................... (995,200) 995,200 $ 14.56
Cancelled ................................. 153,370 (415,406) $ 15.51
Exercised ................................. -- (1,374,810) $ 2.90
-------- ----------
Outstanding as of October 31, 2001 ........ 194,048 4,152,274 $ 9.06
Shares approved by Board of Directors for
grant to former shareholders of SBIR .. 250,000 -- --
Shares approved by the Shareholders for the
2002 Stock Option Plan ................ 520,000 -- --
Granted ................................... (700,900) 700,900 $ 10.71
Cancelled ................................. 44,662 (278,945) $ 15.12
Exercised ................................. -- (150,137) $ 2.91
-------- ----------
Outstanding as of October 31, 2002 ........ 307,810 4,424,092 $ 9.14
======== ==========
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of October 31, 2002 is as follows:
Common Stock
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------
Weighted Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Prices Outstanding Exercise Price Contractual Life (Years) Exercisable Exercise Price
- ----------------- ----------- -------------- ------------------------ ----------- --------------
$ 1.20 - $ 2.75 545,067 $1.74 1.3 545,067 $1.74
$ 2.76 - $ 6.05 334,965 $3.85 2.9 334,965 $3.85
$ 6.06 - $10.22 358,033 $8.31 4.4 357,883 $8.31
$10.23 - $24.11 949,951 $14.86 8.6 575,200 $14.62
--------- ---------
2,188,016 $ 8.83 5.2 1,813,115 $7.51
========= =========
Class A Common Stock
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------
Weighted Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Prices Outstanding Exercise Price Contractual Life (Years) Exercisable Exercise Price
- ----------------- ----------- -------------- ------------------------ ----------- --------------
$ 1.20 - $ 2.75 412,815 $1.71 1.3 412,815 $1.71
$ 2.76 - $ 6.05 276,345 $3.86 3.0 276,345 $3.86
$ 6.06 - $10.22 716,938 $8.59 7.4 558,248 $8.25
$10.23 - $24.11 829,978 $15.90 7.2 485,690 $17.05
--------- ---------
2,236,076 $ 9.45 5.6 1,733,098 $8.46
========= =========
If there were a change in control of the Company, options for an
additional 374,901 shares of Common Stock and 493,478 shares of Class A Common
Stock would become immediately exercisable.
47
The Company applies APB 25 and related Interpretations in accounting for
its stock option plans. Accordingly, compensation expense has been recorded in
the accompanying consolidated financial statements for those options granted
below the fair market value of the stock on the date of grant. The amount of
compensation expense recognized in accordance with APB 25 was not significant to
the Company's results of operations during fiscal 2002, fiscal 2001, and fiscal
2000. Had the fair value of all grants under these plans been recognized as
compensation expense over the vesting period of the grants, consistent with SFAS
123, the Company's net income would have been $11,381,000 ($.54 and $.51 basic
and diluted net income per share, respectively) for fiscal 2002, $11,479,000
($.58 and $.51 basic and diluted net income per share, respectively) for fiscal
2001, and $23,337,000 ($1.22 and $1.07 basic and diluted net income per share,
respectively) for fiscal 2000. The SFAS 123 pro forma disclosures for fiscal
2001 and fiscal 2000 have been restated to give affect to the actual number of
options that vested in the respective fiscal years.
The estimated weighted average fair value of options granted was $8.03
per share for Common Stock and $5.89 per share for Class A Common Stock in
fiscal 2002, $11.23 per share for Common Stock and $8.94 per share for Class A
Common Stock in fiscal 2001, and $9.15 per share for Common Stock and $8.95 per
share for Class A Common Stock in fiscal 2000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions for each of the three fiscal years ended October 31:
2002 2001 2000
------------------ ------------------- -------------------
Class A Class A Class A
Common Common Common Common Common Common
Stock Stock Stock Stock Stock Stock
------ ------ ------ ------ ------ ------
Expected stock price volatility...................... 53.61% 52.87% 55.65% 55.47% 55.83% 55.12%
Risk free interest rate ............................. 4.51% 4.12% 5.24% 5.22% 6.22% 6.16%
Dividend yield ...................................... .25% .32% .30% .34% .31% .33%
Expected option life (years)......................... 8 8 8 8 8 8
12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for each of the three fiscal years ended October 31:
2002 2001 2000
--------------- -------------- --------------
Numerator:
Net income.......................................... $15,226,000 $15,833,000 $26,317,000
=============== ============== ==============
Denominator:
Weighted average common shares outstanding - basic.. 20,912,531 19,924,962 19,114,323
Effect of dilutive stock options.................... 1,571,723 2,380,403 2,794,150
--------------- -------------- --------------
Weighted average common shares outstanding - diluted 22,484,254 22,305,365 21,908,473
=============== ============== ==============
Net income per share - basic............................. $.73 $.79 $1.38
Net income per share - diluted........................... $.68 $.71 $1.20
Anti-dilutive stock options excluded..................... 1,301,403 644,938 1,484,318
48
13. RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the
Plan) under which eligible employees of the Company and its participating
subsidiaries may contribute up to 15% of their annual compensation as defined by
the Plan. Prior to January 1, 2002, participants were able to contribute up to
10% of their annual compensation. The Company generally contributes specified
percentages ranging from 25% to 50% of employee contributions up to 3% of annual
pay in the Company's Common Stock or cash, as determined by the Company.
Effective January 2002, the Company's match of employee contributions paid in
Common Stock is based on the fair market value of the shares at the date of
contribution. Prior to January 2002, the Company made matching contributions
through the promissory note discussed below. The Plan also provides that the
Company may contribute additional amounts in its common stock or cash at the
discretion of the Board of Directors. Employee contributions can not be invested
in Company stock.
In 1992, the Company sold 987,699 shares of the Company's Common Stock
and 804,975 shares of Class A Common Stock to the Plan for an aggregate price of
$4,122,000 entirely financed through a promissory note with the Company. The
promissory note was payable in nine equal annual installments, inclusive of
principal and interest at the rate of 8% per annum, and a final installment due
September 2002. The promissory note was fully paid off effective December 2001.
As the Plan accrued each payment of principal, an appropriate percentage of
stock was allocated to eligible employees' accounts in accordance with
applicable regulations under the Internal Revenue Code. The unallocated shares
of stock collateralized the 1992 promissory note. The per share cost to the Plan
for the 1992 stock sale ($2.30 per share) was determined based on the average
closing market price of the Company's stock on the twenty business days prior to
the effective date of the sale. In accordance with the provisions of the Plan,
the Company was obligated to make cash contributions in amounts sufficient to
meet the debt service requirements on the promissory note. Principal amounts
repaid on the promissory note were determined based on the value of the shares
released during the preceding twelve months but could not be less than the
minimum annual installments required. Dividends on allocated shares were issued
to participants' accounts. Dividends on unallocated shares were held in the Plan
and could be used to make note payments.
Participants receive 100% vesting in employee contributions. Vesting in
Company contributions is based on number of years of service. Contributions to
the Plan charged to income for fiscal 2002, fiscal 2001, and fiscal 2000 totaled
$691,000, $493,000, and $907,000, respectively, exclusive of interest income
earned on the note received from the Plan of $9,000 in fiscal 2002, $52,000 in
fiscal 2001 and $168,000 in fiscal 2000.
In 1991, the Company established a Directors Retirement Plan covering
its then current directors. The net assets of this plan as of October 31, 2002,
2001 and 2000 are not material to the financial position of the Company. During
fiscal 2002, fiscal 2001, and fiscal 2000, $34,000, $21,000, and $62,000,
respectively, was expensed for this plan.
49
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Net sales:
2002 ................................... $ 41,012,000 $ 43,001,000 $ 42,587,000 $ 45,512,000
2001 ................................... 39,650,000 41,742,000 43,845,000 46,022,000
2000 ................................... 47,940,000 53,548,000 53,912,000 47,509,000
Gross profit:
2002 ................................... 14,850,000 15,359,000 14,936,000 16,357,000
2001 ................................... 17,032,000 18,376,000 18,043,000 17,695,000
2000 ................................... 17,858,000 19,679,000 19,679,000 18,595,000
Income from continuing operations:
2002 ................................... 2,828,000 3,970,000 2,829,000 5,599,000
2001 ................................... 3,908,000 4,814,000 3,964,000 3,147,000
2000 ................................... 4,015,000 4,789,000 4,721,000 14,214,000
Net income:
2002 ................................... 2,828,000 3,970,000 2,829,000 5,599,000
2001 ................................... 3,908,000 4,814,000 3,964,000 3,147,000
2000 ................................... 4,015,000 4,789,000 4,721,000 12,792,000
Income per share from continuing operations:
Basic
2002 ................................... .14 .19 .14 .27
2001 ................................... .20 .25 .19 .15
2000 ................................... .21 .25 .25 .74
Diluted
2002 ................................... .13 .18 .13 .25
2001 ................................... .18 .22 .18 .14
2000 ................................... .18 .22 .22 .65
Net income per share:
Basic
2002 ................................... .14 .19 .14 .27
2001 ................................... .20 .25 .19 .15
2000 ................................... .21 .25 .25 .67
Diluted
2002 ................................... .13 .18 .13 .25
2001 ................................... .18 .22 .18 .14
2000 ................................... .18 .22 .22 .58
Net income in the second quarter of fiscal 2002 includes an additional
gain on the sale of Trilectron as referenced in Note 3. The impact of the gain
was an increase to net income of $765,000 ($.03 per diluted share).
Net income in the fourth quarter of fiscal 2002 includes the recovery of
a portion of taxes paid in prior years resulting from a tax audit as referenced
in Note 7. The impact of the recovery was an increase to net income of
$2,107,000 ($.09 per diluted share).
50
During the first and second quarters of fiscal 2001, the Company made
certain changes in estimates due to estimated costs to complete long-term
contracts accounted for under the percentage-of-completion method being lower
than originally projected. The change in estimates increased net income and
diluted net income per share by $200,000 ($.01 per diluted share) and $400,000
($.02 per diluted share) in the first and second quarters of fiscal 2001,
respectively. Changes in estimates did not have a significant impact on net
income and diluted net income per share in the third and fourth quarters of
fiscal 2001 or in any quarter during fiscal 2002 and fiscal 2000.
Income from continuing operations in the fourth quarter of fiscal 2000
includes the gain on sale of Trilectron and write-off of certain receivables
referenced in Notes 3 and 16, respectively. The impact of the gain and the
write-off was an increase of $10,542,000 ($.48 per diluted share) and a decrease
of $651,000 ($.03 per diluted share), respectively, to income from continuing
operations in the fourth quarter of fiscal 2000. Net income in the fourth
quarter of fiscal 2000 also includes the adjustment to gain on sale of
discontinued operations referenced in Note 4, which reduced net income by
$1,422,000 ($.07 per diluted share).
Due to changes in the average number of common shares outstanding, net
income per share for the full fiscal year may not equal the sum of the four
individual quarters.
15. OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG), consisting of HEICO Electronic and its subsidiaries.
See Note 1 for the list of operating subsidiaries aggregated in each reportable
operating segment. The FSG designs and manufactures FAA-approved replacement
parts, provides FAA-authorized repair and overhaul services and provides
subcontracting services to OEMs in the aviation industry and the U.S.
Government. The ETG designs and manufactures commercial and military power
supplies, circuit board shielding, laser and electro-optical products and
infrared simulation and test equipment and repairs and overhauls aircraft
electronic equipment primarily for the aerospace, defense and electronics
industries.
The Company's reportable business divisions offer distinctive products
and services that are marketed through different channels. They are managed
separately because of their unique technology and service requirements.
51
Segment profit or loss
The accounting policies for segments are the same as those described in
the summary of significant accounting policies (Note 1). Management evaluates
segment performance based on segment operating income.
Segments(1) Other, Primarily
-------------------------- Corporate and Consolidated
FSG ETG Intersegment Totals
--- --- ------------ ------
For the year ended October 31, 2002:
- ------------------------------------
Net sales $120,097,000 $ 52,510,000 ($ 495,000) $172,112,000
Depreciation and amortization 3,012,000 1,213,000 307,000 4,532,000
Operating income 15,846,000 11,873,000 (5,319,000) 22,400,000
Total assets 219,903,000 103,260,000 13,169,000 336,332,000
Capital expenditures 3,083,000 1,969,000 801,000 5,853,000
For the year ended October 31, 2001:
- ------------------------------------
Net sales $132,459,000 $ 38,800,000 $ -- $171,259,000
Depreciation and amortization 7,641,000 2,648,000 299,000 10,588,000
Operating income 27,454,000 7,835,000 (4,298,000) 30,991,000
Total assets 213,001,000 101,817,000 10,822,000 325,640,000
Capital expenditures 4,916,000 1,281,000 730,000 6,927,000
For the year ended October 31, 2000:
- ------------------------------------
Net sales $119,304,000 $ 83,605,000 $ -- $202,909,000
Depreciation and amortization 6,808,000 2,762,000 205,000 9,775,000
Operating income 29,621,000 12,464,000 (4,162,000) 37,923,000
Total assets 197,442,000 54,997,000 29,293,000 281,732,000
Capital expenditures 7,301,000 1,360,000 4,000 8,665,000
_____________
(1) During fiscal 2002, one of the Company's subsidiaries formerly included in
the Electronic Technologies Group (ETG) was reclassified to the Flight
Support Group (FSG). Prior period results have been retroactively restated
to reflect the revised segment classification.
Major customer and geographic information
No one customer accounted for 10 percent or more of the Company's
consolidated net sales during the last three fiscal years. The Company had no
material sales originating or long-lived assets held outside of the United
States during the last three fiscal years.
Export sales were $51,061,000 in fiscal 2002, $46,014,000 in fiscal 2001
and $56,626,000 in fiscal 2000.
16. OTHER CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS
AND STATEMENTS OF CASH FLOWS INFORMATION
Accounts receivable are composed of the following:
As of October 31,
-----------------------------
2002 2001
------------ -------------
Accounts receivable ................. $ 30,029,000 $ 32,415,000
Less: Allowance for doubtful accounts (1,622,000) (909,000)
------------ ------------
Accounts receivable, net .. $ 28,407,000 $ 31,506,000
============ ============
52
In fiscal 2002, fiscal 2001, and fiscal 2000, the Company wrote off
receivables aggregating to $813,000, $577,000 and $1,312,000, respectively, as a
result of bankruptcy filings by certain customers. The charges are included in
selling, general and administrative expenses in the Consolidated Statements of
Operations. The charges reduced fiscal 2002, fiscal 2001, and fiscal 2000 net
income by $442,000 ($.02 per diluted share), $291,000 ($.01 per diluted share),
and $651,000 ($.03 per diluted share), respectively.
Costs and estimated earnings on uncompleted percentage-of-completion
contracts are as follows:
As of October 31,
----------------------------
2002 2001
------------- ------------
Costs incurred on uncompleted contracts ................... $ 4,453,000 $ 7,709,000
Estimated earnings ........................................ 4,252,000 6,224,000
------------ ------------
8,705,000 13,933,000
Less: Billings to date .................................... (8,551,000) (14,770,000)
------------ ------------
$ 154,000 $ (837,000)
============ ============
Included in accompanying balance
sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) ..................... $ 1,737,000 $ 234,000
Accrued expenses and other current liabilities (billings
in excess of costs and estimated earnings) .......... (1,583,000) (1,071,000)
------------ ------------
$ 154,000 $ (837,000)
============ ============
During fiscal 2001, the Company made certain changes in estimates due to
estimated costs to complete long-term contracts accounted for under the
percentage-of-completion method being lower than originally projected. The
change in estimates increased net income and diluted net income per share by
$700,000 ($.03 per diluted share). Changes in estimates did not have a
significant impact on net income and diluted net income per share in fiscal 2002
or fiscal 2000.
Inventories are composed of the following:
As of October 31,
-------------------------
2002 2001
----------- -----------
Finished products ....................... $32,501,000 $27,791,000
Work in process ......................... 8,603,000 7,883,000
Materials, parts, assemblies and supplies 13,410,000 16,343,000
----------- -----------
Total inventories ............. $54,514,000 $52,017,000
=========== ===========
Inventories related to long-term contracts were not significant as of
October 31, 2002 and 2001.
Property, plant and equipment are composed of the following:
As of October 31,
----------------------------
2002 2001
------------ ------------
Land ....................................... $ 2,627,000 $ 2,627,000
Buildings and improvements ................. 20,846,000 18,380,000
Machinery and equipment .................... 41,739,000 37,398,000
Construction in progress ................... 1,702,000 3,566,000
------------ ------------
66,914,000 61,971,000
Less: Accumulated depreciation ............. (26,855,000) (22,673,000)
------------ ------------
Property, plant and equipment, net $ 40,059,000 $ 39,298,000
============ ============
53
Depreciation and amortization expense on property, plant, and equipment
amounted to approximately $4,193,000, $3,090,000 and $3,011,000 for the years
ended October 31, 2002, 2001 and 2000, respectively.
Included in the Company's property, plant and equipment is rotable
equipment located at various customer locations in connection with certain
repair and maintenance agreements. The rotables are stated at a net book value
of $4,417,000 as of October 31, 2002. Under the terms of the agreements, the
customers may cancel the agreements and purchase the equipment at specified
prices. The equipment is currently being depreciated over its estimated life.
Goodwill and other intangible assets are composed of the following:
As of October 31,
------------------------------
2002 2001
------------- --------------
Goodwill ................................ $ 205,213,000 $ 199,661,000
Other intangible assets ................. 4,062,000 2,841,000
------------- -------------
209,275,000 202,502,000
Less: Accumulated amortization .......... (19,793,000) (19,454,000)
------------- -------------
Goodwill and other intangible assets, net $ 189,482,000 $ 183,048,000
============= =============
The following table reflects a comparison of net income and net income
per share for each of the three fiscal years ended October 31, adjusted to give
effect to the adoption of SFAS 142:
2002 2001 2000
--------------- --------------- --------------
Reported net income $15,226,000 $15,833,000 $26,317,000
Add-back after tax goodwill amortization -- 4,398,000 4,006,000
--------------- --------------- --------------
Adjusted net income $15,226,000 $20,231,000 $30,323,000
=============== =============== ==============
Reported net income per share - basic $.73 $.79 $1.38
Add-back after tax goodwill amortization -- .23 .21
--------------- --------------- --------------
Adjusted net income per share - basic $.73 $1.02 $1.59
=============== =============== ==============
Reported net income per share - diluted $.68 $.71 $1.20
Add-back after tax goodwill amortization -- .20 .18
--------------- --------------- --------------
Adjusted net income per share - diluted $.68 $.91 $1.38
=============== =============== ==============
The changes in the carrying amount of goodwill during fiscal 2002 by
segment are as follows:
Consolidated
FSG ETG Total
--------------- --------------- ---------------
Balances as of November 1, 2001 (1) $114,637,000 $67,441,000 $182,078,000
Goodwill acquired during the year 3,437,000 -- 3,437,000
Adjustments to Goodwill 632,000 1,530,000 2,162,000
--------------- --------------- ---------------
Balances as of October 31, 2002 $118,706,000 $68,971,000 $187,677,000
=============== =============== ===============
____________
(1) During fiscal 2002, one of the Company's subsidiaries formerly included in
the Electronic Technologies Group (ETG) was reclassified to the Flight
Support Group (FSG). Balances as of November 1, 2001 have been
retroactively restated to reflect the revised segment classification.
The increase in goodwill for the twelve months ended October 31, 2002
resulted primarily from the acquisition of assets and liabilities of Jetseal,
Inc. in November 2001 and adjustments to the preliminary allocation of the
54
purchase price of other acquisitions based on updated fair value information of
the assets acquired and liabilities assumed as of the dates of acquisition.
Other intangible assets subject to amortization consist primarily of
licenses, loan costs, patents, and non-compete covenants. The gross carrying
amount and accumulated amortization of other intangible assets was $4.1 million
and $2.3 million, respectively, as of October 31, 2002. Amortization expense of
other intangible assets for fiscal 2002 was $339,000. Amortization expense for
the next five fiscal years is expected to be $304,000 in fiscal 2003, $289,000
in fiscal 2004, $239,000 in fiscal 2005, $117,000 in fiscal 2006, and $116,000
in fiscal 2007.
Accrued expenses and other current liabilities are composed of the
following:
As of October 31,
--------------------------
2002 2001
----------- -----------
Accrued employee compensation ................................ $ 4,714,000 $ 4,869,000
Accrued customer rebates and credits ......................... 3,893,000 3,418,000
Accrued expenses related to sale of product line ............. 166,000 1,890,000
Billings in excess of costs and estimated earnings on
uncompleted percentage-of-completion contracts ........... 1,583,000 1,071,000
Other ........................................................ 4,579,000 5,195,000
----------- -----------
Total accrued expenses and other current liabilities $14,935,000 $16,443,000
=========== ===========
Other non-current liabilities include deferred compensation of
$4,624,000 and $3,983,000 as of October 31, 2002 and 2001, respectively.
Research and development expenses
Cost of sales amounts in fiscal 2002, fiscal 2001, and fiscal 2000
include approximately $9,742,000, $7,737,000 and $3,668,000, respectively, of
new product research and development expenses. The expenses for fiscal 2001 and
fiscal 2000 are net of $1,275,000 and $5,200,000, respectively, in
reimbursements pursuant to research and development cooperation and joint
venture agreements (Note 2). The reimbursements pursuant to such agreements were
not significant in fiscal 2002.
Supplemental disclosures of cash flow information
Cash paid for interest was $2,407,000, $2,379,000 and $5,575,000 in
fiscal 2002, fiscal 2001, and fiscal 2000, respectively. Cash paid for income
taxes was $1,373,000, $18,563,000 and $10,248,000 in fiscal 2002, fiscal 2001,
and fiscal 2000, respectively.
Non-cash investing and financing activities related to acquisitions,
including contingent payments, for each of the three fiscal years ended October
31 is as follows:
2002 2001 2000
------------ ------------ ------------
Fair value of assets acquired:
Liabilities assumed ................... $ 247,000 $ 468,000 $ 31,000
Less:
Intangible assets ................... 3,778,000 37,579,000 19,974,000
Inventories ......................... 371,000 10,882,000 1,698,000
Accounts receivable ................. 351,000 3,147,000 1,567,000
Property, plant and equipment ....... 258,000 8,479,000 83,000
Other assets ........................ 4,000 1,588,000 1,508,000
------------ ------------ ------------
Cash paid, including contingent payments $ (4,515,000) $(61,207,000) $(24,799,000)
============ ============ ============
55
As part of the consideration in connection with the sale of the
Trilectron product line in fiscal 2000, the Company received an unsecured
promissory note for $12.0 million that was paid in full in fiscal 2001 (Note 3).
In connection with the purchase of IAS (Note 2), the Company issued 289,964
shares of HEICO Class A Common Stock then valued at $5 million and issued a $5
million note receivable guaranteed by the issued shares. Additionally, retained
earnings was impacted by $31,709,000 and $17,158,000 in fiscal 2001 and fiscal
2000, respectively, as a result of the 10% stock dividends described in Note 9.
There were no significant capital lease financing activities during fiscal 2002,
fiscal 2001, and fiscal 2000.
17. CONTINGENCIES
Pending litigation
The Company is involved in various legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these matters will not
have a significant effect on the Company's consolidated financial statements.
56
PART III
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
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 2002.
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 2002.
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 2002.
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 2002.
Item 14. Controls and Procedures
Evaluation of Controls and Procedures
Based upon an evaluation performed within 90 days of the date of this
annual report on Form 10-K, the Company's Chief Executive Officer and its Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective (as defined in Exchange Act Rules 13a-14 and 15d-14).
Changes in internal controls
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
57
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
The following consolidated financial statements of the Company and
subsidiaries are included in Part II, Item 8:
Page(s)
Independent Auditors' Report............................................................ 29
Consolidated Balance Sheets at October 31, 2002 and 2001................................ 30 - 31
Consolidated Statements of Operations for the years ended October 31, 2002,
2001 and 2000......................................................................... 32
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended October 31, 2002, 2001 and 2000.................................. 33
Consolidated Statements of Cash Flows for the years ended October 31, 2002,
2001 and 2000......................................................................... 34
Notes to Consolidated Financial Statements.............................................. 35 - 56
(a)(2) Financial Statement Schedules:
No schedules have been submitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits
Exhibit Description
------- -----------
2.1 -- Amended and Restated Agreement of Merger and Plan
of Reorganization, dated as of March 22, 1993, by
and among HEICO Corporation, HEICO Industries,
Corp. and New HEICO, Inc. is incorporated by
reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration
No. 33-57624) Amendment No. 1 filed on March 19,
1993.*
2.2 -- Stock Purchase Agreement, dated August 1, 2000, by
and between HEICO Aviation Products Corp., N/K/A
HEICO Electronic Technologies Corp. and Hobart
Brothers Company (without schedules and exhibits)
is incorporated by reference to Exhibit 2.1 to
Form 8-K dated September 14, 2000.*
2.3 -- First Amendment to Stock Purchase Agreement,
effective as of September 14, 2000, between HEICO
Aviation Products Corp. N/K/A HEICO Electronic
Technologies Corp. and Hobart Brothers Company is
incorporated by reference to Exhibit 2.2 to Form
8-K dated September 14, 2000.*
3.1 -- Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-4
(Registration No. 33-57624) Amendment No. 1 filed
on March 19, 1993.*
58
Exhibit Description
------- -----------
3.2 -- Articles of Amendment of the Articles of
Incorporation of the Registrant, dated April 27,
1993, are incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form
8-B dated April 29, 1993.*
3.3 -- Articles of Amendment of the Articles of
Incorporation of the Registrant, dated November 3,
1993, are incorporated by reference to Exhibit 3.3
to the Form 10-K for the year ended October 31,
1993.*
3.4 -- Articles of Amendment of the Articles of
Incorporation of the Registrant, dated March 19,
1998, are incorporated by reference to Exhibit 3.4
to the Company's Registration Statement on Form
S-3 (Registration No. 333-48439) filed on March
23, 1998.*
3.5 -- Bylaws of the Registrant are incorporated by
reference to Exhibit 3.4 to the Form 10-K for the
year ended October 31, 1996.*
4.0 -- The description and terms of Preferred Stock
Purchase Rights are set forth in a Rights
Agreement between the Company and SunBank, N.A.,
as Rights Agent, dated as of November 2, 1993,
incorporated by reference to Exhibit 1 to the Form
8-K dated November 2, 1993.*
10.1 -- Loan Agreement, dated March 1, 1988, between HEICO
Corporation and Broward County, Florida is
incorporated by reference to Exhibit 10.1 to the
Form 10-K for the year ended October 31, 1994*
10.2 -- SunBank Reimbursement Agreement, dated February
28, 1994, between HEICO Aerospace Corporation and
SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.2 to the Form 10-K for the
year ended October 31, 1994.*
10.3 -- Amendment, dated March 1, 1995, to the SunBank
Reimbursement Agreement dated February 28, 1994
between HEICO Aerospace Corporation and
SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.3 to the Form 10-K from
the year ended October 31, 1995.*
10.4 -- Amendment and Extension, dated February 28, 1999
to the SunBank Reimbursement Agreement dated
February 28, 1994, between SunTrust Bank, South
Florida, N.A. and HEICO Aerospace Corporation is
incorporated by reference to Exhibit 10.4 to the
Form 10-K for the year ended October 31, 1999.*
10.5 -- Amendment, dated July 20, 2000, to the SunBank
Reimbursement Agreement dated February 28, 1994,
between HEICO Aerospace Corporation and SunTrust
Bank is incorporated by reference to Exhibit 10.5
to the Form 10-K for the year ended October 31,
2000.*
10.6 -- HEICO Savings and Investment Plan, as amended and
restated effective January 1, 2002.**
10.7 -- 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.*
59
Exhibit Description
------- -----------
10.8 -- 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.*
10.9 -- HEICO Corporation 1993 Stock Option Plan, as
amended, is incorporated by reference to Exhibit
4.7 to the Company's Registration Statement on
Form S-8 (Registration No. 333-81789) filed on
June 29, 1999.*
10.10 -- HEICO Corporation 2002 Stock Option Plan, effective
March 19, 2002.**
10.11 -- 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.*
10.12 -- 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.*
10.13 -- Stock Purchase Agreement, dated October 30, 1997,
by and among HEICO Corporation, HEICO Aerospace
Holdings Corp. and Lufthansa Technik AG is
incorporated by reference to Exhibit 10.31 to Form
10-K/A for the year ended October 31, 1997.*
10.14 -- Shareholders Agreement, dated October 30, 1997, by
and between HEICO Aerospace Holdings Corp., HEICO
Aerospace Corporation and all of the shareholders
of HEICO Aerospace Holdings Corp. and Lufthansa
Technik AG is incorporated by reference to Exhibit
10.32 to Form 10-K/A for the year ended October
31, 1997.*
10.15 -- Credit Agreement among HEICO Corporation and
SunTrust Bank, South Florida, N.A., as Agent,
dated as of July 30, 1998, is incorporated by
reference to Exhibit 10.2 to Form 8-K dated August
4, 1998.*
10.16 -- First Amendment, dated July 30, 1998 to Credit
Agreement among HEICO Corporation and SunTrust
Bank, South Florida, N.A., as agent, dated as of
July 31, 1998 is incorporated by reference to
Exhibit 10.31 to the Form 10-K for the year ended
October 31, 1999.*
10.17 -- Second Amendment, dated May 12, 1999, to Credit
Agreement among HEICO Corporation and SunTrust
Bank, South Florida, N.A., as agent, dated as of
July 31, 1998 is incorporated by reference to
Exhibit 10.32 to the Form 10-K for the year ended
October 31, 1999.*
10.18 -- Third Amendment, dated as of June 23, 2000, to
Credit Agreement among HEICO Corporation and
SunTrust Bank (formerly known as SunTrust Bank,
South Florida, N.A.) as Agent dated as of July 31,
1998, is incorporated by reference to Exhibit 10.1
to Form 10-Q for the quarterly period ended July
31, 2000.*
21 -- Subsidiaries of the Company.**
23 -- Consent of Deloitte & Touche LLP.**
60
Exhibit Description
------- -----------
99.1 -- Certification Pursuant to 18 U.S.C Section 1350,
or Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
99.2 -- Certification Pursuant to 18 U.S.C Section 1350, or
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.**
__________
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K by the Company during the fourth
quarter of fiscal 2002.
(c) Exhibits
See Item 14(a)(3).
(d) Separate Financial Statements Required
Not applicable.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
Date: January 22, 2003 By: /s/ THOMAS S. IRWIN
------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ LAURANS A. MENDELSON Chairman, President, Chief
Executive Officer and
---------------------------------------------- Director (Principal
Laurans A. Mendelson Executive Officer)
/s/ SAMUEL L. HIGGINBOTTOM Director
----------------------------------------------
Samuel L. Higginbottom
/s/ WOLFGANG MAYRHUBER Director
----------------------------------------------
Wolfgang Mayrhuber
/s/ ERIC A. MENDELSON Director
----------------------------------------------
Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director
-----------------------------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR Director
-----------------------------------------------
Albert Morrison, Jr.
/s/ ALAN SCHRIESHEIM Director
-----------------------------------------------
Alan Schriesheim
62
CERTIFICATION
I, Laurans A. Mendelson, Chief Executive Officer of HEICO Corporation, certify
that:
(1) I have reviewed this annual report on Form 10-K of HEICO Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
(6) The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 22, 2003 /S/ LAURANS A. MENDELSON
--------------------------------
Laurans A. Mendelson
Chief Executive Officer
63
CERTIFICATION
I, Thomas S. Irwin, Chief Financial Officer of HEICO Corporation, certify that:
(1) I have reviewed this annual report on Form 10-K of HEICO Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
(6) The Registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 22, 2003 /S/ THOMAS S. IRWIN
--------------------------
Thomas S. Irwin
Chief Financial Officer
64
EXHIBIT INDEX
Exhibit # Description
10.6 HEICO Savings and Investment Plan, as amended and restated
effective January 1, 2002.
10.10 HEICO Corporation 2002 Stock Option Plan, effective March
19, 2002.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
99.1 Certification Pursuant to 18 U.S.C Section 1350, or Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C Section 1350, or Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
HEICO CORPORATION
EXHIBIT 10.6
TO THE FORM 10-K
FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION FILE NUMBER 1-4604
Exhibit 10.6
HEICO SAVINGS AND INVESTMENT PLAN
ARTICLE 1
INTRODUCTION 1
ARTICLE 2
DEFINITIONS
2.01 "Accounts" 2
2.02 "Actual Deferral Percentage" or "ADP" 2
2.03 "Adjustment" 2
2.04 "Affiliate" 2
2.05 "Authorized Leave of Absence" 2
2.06 "Average Actual Deferral Percentage" 3
2.07 "Average Actual Contribution Percentage" 3
2.08 "Beneficiary" 3
2.09 "Board" 3
2.10 "Code" 3
2.11 "Committee" 4
2.12 "Common Stock" 4
2.13 "Company" 4
2.14 "Compensation" 4
2.15 "Contribution Percentage" 4
2.16 "Early Retirement Date" 4
2.17 "Elective Deferral Contribution" 5
2.18 "Elective Deferral Contribution Account" 5
2.19 "Eligible Employee" 5
2.20 "Employee" 5
2.21 "Employer" 5
2.22 "Employer Contributions" 5
2.23 "Employer Matching Contributions" 6
2.24 "Employer Matching Contributions Account" 6
2.25 "Employment" 6
2.26 "Entry Date" 6
2.27 "ERISA" 6
2.28 "Equity Builder Contributions" 6
2.29 "Equity Builder Contributions Account" 6
2.30 "Excess Aggregate Contributions" 6
2.31 "Excess Contributions" 6
2.32 "Excess Deferral Amount" 6
2.33 "Highly Compensated Employee" 6
2.34 "Hour of Service" 7
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2.35 "Investment Fund" 8
2.36 "Investment Manager" 8
2.37 "Non-Highly Compensated Employee" 9
2.38 "Normal Retirement Date" 9
2.39 "One Year Break in Service" 9
2.40 "Participant" 9
2.41 "PAYSOP Account" 9
2.42 "Plan" 9
2.43 "Plan Year" 9
2.44 "Rollover Contributions" 9
2.45 "Rollover Contribution Account" 10
2.46 "Termination Date" 10
2.47 "Total and Permanent Disability" or "Disability" 10
2.48 "Trust Agreement" 10
2.49 "Trust Fund" or "Trust" 10
2.50 "Trustee" 10
2.51 "Qualified" 10
2.52 "Valuation Date" 10
2.53 "Year of Service" 11
ARTICLE 3
ELIGIBILITY AND PARTICIPATION
3.01 Participation in the Plan 11
3.02 Rollover Contributions 12
3.04 Acquisitions 12
ARTICLE 4
CONTRIBUTIONS
4.01 Elective Deferral Contributions 12
4.02 Elections Regarding Elective Deferral Contributions 14
4.03 Employer Contributions 14
4.04 After-Tax Contributions 15
4.05 Rollover Contributions 15
4.06 Form and Timing of Contributions 16
4.07 Nondeductible Contributions and Contributions Made
by Mistake of Fact 16
4.08 Forfeitures 16
4.09 Investment Funds 17
4.10 Investment of Contributions 17
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ARTICLE 5
MAXIMUM BENEFITS
5.01 Limitation on Annual Additions 17
5.02 Increase in Limitations on Annual Additions 21
ARTICLE 6
ACCOUNTS AND ALLOCATIONS
6.01 Participant Accounts 21
6.02 Value of Account as of Valuation Date 22
6.03 Allocation of Adjustments 22
ARTICLE 7
SPECIAL DISCRIMINATION RULES
7.01 Average Actual Deferral Percentage Limitation 23
7.02 Average Contribution Percentage Limitation 26
7.03 Multiple Use of Alternative Limitation 29
7.04 Repeal of Multiple Use Test 31
ARTICLE 8
VESTING
8.01 Vested Percentage of Accounts 31
8.02 Amount Subject to Distribution Upon Termination of
Employment 32
8.03 Forfeitures 32
ARTICLE 9
IN-SERVICE WITHDRAWALS
9.01 Hardship Withdrawals 34
9.02 Suspension of Contributions Due to Hardship Withdrawal 35
ARTICLE 10
PAYMENTS TO PARTICIPANTS AND THEIR BENEFICIARIES
10.01 Commencement of Distribution 35
10.02 Forms of Payment 36
10.03 Prior Employer Accounts 37
10.04 Valuation Upon Distribution 37
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10.05 Payments When a Loan is Outstanding 37
10.06 Special Distributions 38
10.07 Qualified Domestic Relations Orders 39
10.08 Payment to Minors and Incapacitated Persons 39
10.09 Notices to Participants 39
10.10 Eligible Rollover Distributions 40
10.11 Age 59 1/2 Withdrawals 40
ARTICLE 11
LOANS
11.01 Availability of Loans 41
11.02 Amount of Loans 41
11.02 Conditions of the Loan 41
11.03 Loan Policy 41
ARTICLE 12
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN PROVISIONS
12.01 Effect of Article 42
12.02 Definitions 42
12.03 Purpose and Nature of the Leveraged ESOP 43
12.04 Requirements as to Exempt Loans 44
12.05 Use of Exempt Loan Proceeds 45
12.06 Allocations and Accounting 46
12.07 Use of Cash Dividends on Common Stock 47
12.08 Pass-Through of Dividends on Company Stock 47
12.09 Common Stock Dividends 47
12.10 Diversification Election 49
12.11 Voting and Tendering of Company Stock 50
ARTICLE 13
TOP-HEAVY PROVISIONS
13.01 Top-Heavy 50
13.02 Modification of Top-Heavy Rules 53
ARTICLE 14
PLAN ADMINISTRATION
14.01 Committee 54
14.02 Powers of the Committee 55
14.03 Indemnification of Members of the Committee 56
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14.04 Liabilities for which Members of the Committee
are Indemnified 56
14.05 Company's Right to Settle Claims 56
14.06 Fiduciary Liability Insurance 56
14.07 Designation of Members of the Committee as
Named Fiduciaries 56
14.08 Procedures for Allocating or Delegating
Fiduciary Responsibilities 57
14.09 Filing of Claim 57
14.10 Time for Initial Decision 57
14.11 Notice of Denial 58
14.12 Manner of Reconsideration 58
14.13 Time for Reconsideration 58
14.14 Notice of Adverse Decision on Reconsideration 58
14.15 Expenses of the Committee 59
14.16 Conduct of Committee Business 59
14.17 Agent for Service of Process 59
ARTICLE 15
AMENDMENT AND TERMINATION
15.01 Right to Amend 59
15.02 Termination and Discontinuance of Contributions 60
15.03 Supplements 60
15.04 Merger of the Plan 60
ARTICLE 16
PARTICIPATING EMPLOYERS
16.01 Participation by Participating Employers 61
16.02 Withdrawal of Participating Employers 61
16.03 Requirements of Participating Employers 62
16.04 Transfers between Participating Employers 62
16.05 Participating Employer Contributions 62
ARTICLE 17
MISCELLANEOUS
17.01 Applicable Law 62
17.02 Protected Benefits 63
17.03 Credit for Qualified Military Service 63
17.04 Rights under the Plan 63
17.05 Undefined Terms 63
17.06 Number and Gender 63
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HEICO SAVINGS AND INVESTMENT PLAN
ARTICLE 1
INTRODUCTION
HEICO Corporation ("HEICO") adopted the HEICO Savings and Investment Plan
(the "Plan") effective January 1, 1985 for the benefit of employees of HEICO and
participating affiliated companies. The Plan is hereby amended and restated in
its entirety effective January 1, 2002 (except for those sections of the Plan
that have an alternate effective date).
The Plan is intended to be an employee stock ownership plan within the
meaning of Code Section 4975(e)(7) which is designed to invest primarily in
Common Stock and a stock bonus plan within the meaning of Treasury Regulation
Section 1.401-1(b)(1)(iii) that is qualified under Code Section 401(a). The
purposes of the Plan are (i) to encourage Employee savings by establishing a
formal plan under which Employee contributions are supplemented by Employer
contributions to create a flexible and competitive total compensation program
for Employees, and (ii) to allow Employees the option to defer a portion of
their compensation on a pre-tax basis.
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ARTICLE 2
DEFINITIONS
The following terms when used herein shall have the designated meaning unless a
different meaning is plainly required by the context in which the term is used:
2.01 "Accounts" shall mean the Account established and maintained by the
Committee or Trustee for each Participant or his Beneficiary to which
shall be allocated each Participant's interest in the Trust, and all
dividends, income, gains and losses attributable thereto. Each Account
shall be comprised of the sub-accounts described in Section 6.01.
2.02 "Actual Deferral Percentage" or "ADP" shall mean the ratio, expressed as
a percentage, of Elective Deferral Contributions on behalf of an
Eligible Employee for the Plan Year to the Eligible Employee's
Compensation for the Plan Year. The Actual Deferral Percentage of each
Eligible Employee shall be rounded to the nearest 100th of 1% of such
Employee's Compensation. The Actual Deferral Percentage of an Eligible
Employee who makes no Elective Deferral Contributions during a Plan Year
is zero.
2.03 "Adjustment" shall mean, for a Valuation Date, the aggregate earnings,
realized or unrealized appreciation, losses, expenses, and realized or
unrealized depreciation of the Investment Fund since the immediately
preceding Valuation Date.
2.04 "Affiliate" shall mean the Company and any corporation which is a member
of a controlled group of corporations (as defined in Code Section
414(b)) which includes the Company; any trade or business (whether or
not incorporated) which is under common control (as defined in Code
Section 414(c)) with the Company; any organization (whether or not
incorporated) which is a member of an affiliated service group (as
defined in Code Section 414(m)) which includes the Company; and any
other entity required to be aggregated with the Company pursuant to
regulations under Code Section 414(o).
2.05 "Authorized Leave of Absence" shall mean that period during which the
Participant is absent without Compensation and for which the Committee,
in its sole discretion, has determined him to be on a "Leave of Absence"
instead of having terminated his Employment. However, such discretion of
the Committee shall be exercised in a nondiscriminatory manner. In all
events, a Leave of Absence by reason of service in the armed forces of
the United States shall end no later than the time at which a
Participant's re-employment rights as a member of the armed forces cease
to be protected by law; and a Leave of Absence for any other reason
shall end after six (6) months, except that if the Participant resumes
employment with the Employer prior thereto, the Leave of Absence shall
end on such date of resumption of employment. The date that the Leave of
Absence ends shall be deemed the Termination Date if the Participant
does not resume employment with the Employer. In
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determining a Year of Service for Accrual of Benefits, all such Leaves
of Absence shall be considered periods when the Employee is a
Participant.
2.06 "Average Actual Deferral Percentage" shall mean the average, expressed
as a percentage, of the Actual Deferral Percentages of the Eligible
Employees. The Average Actual Deferral Percentage of the Eligible
Employees shall be rounded to the nearest 100th of 1%. If two or more
plans maintained by the Employer or its Affiliates are treated as one
plan for purposes of the nondiscrimination requirements of Code Section
401(a)(4) or the coverage requirements of Code Section 410(b) (other
than for purposes of the average benefits test), all Elective Deferral
Contributions that are made pursuant to those plans shall be treated as
having been made pursuant to one plan.
2.07 "Average Actual Contribution Percentage" shall mean the average,
expressed as percentage, of the Contribution Percentages of the Eligible
Employees. The Average Actual Contribution Percentage of the Eligible
Employees shall be rounded to the nearest 100th of 1%. If two or more
plans maintained by the Employer or its Affiliates are treated as one
plan for purposes of the nondiscrimination requirements of Code Section
401(a)(4) or the coverage requirements of Code Section 410(b) (other
than for purposes of the average benefits test), all Employer Matching
Contributions that are made pursuant to those plans shall be treated as
having been made pursuant to one plan.
2.08 "Beneficiary" shall mean any person, including a contingent beneficiary
or beneficiaries, designated by a Participant to receive benefits
payable in the event of the death of a Participant; except that the
Beneficiary of a Participant who is married shall be the Participant's
spouse, unless such spouse consents in writing to the Participant's
designation of a Beneficiary other than such spouse. Such written
consent must be on a form acceptable to the Committee, delivered to the
Committee, signed by the consenting spouse and notarized. Such consent
shall not be required if it is established to the satisfaction of the
Committee that there is no spouse or the spouse cannot be located. If no
Beneficiary is designated or a designation is revoked, or if a
designated Beneficiary shall not survive to receive payments due
hereunder, all or a part of the Participant's Accounts which have not
been distributed shall be payable to the surviving spouse of the
Participant or, if there is not such surviving spouse, to the
Participant's estate. The foregoing provisions shall not preclude the
designation of the Beneficiary's estate or other conditional
Beneficiaries in the event the first designated Beneficiary does not
survive to receive full payment. A Participant may change his
Beneficiary at any time by similar written designation. Any designation
of a Beneficiary shall take effect upon receipt of written notice to the
Committee.
2.09 "Board" shall mean the Board of Directors of HEICO Corporation.
2.10 "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time. A reference to a specific provision of the
Code shall include such provision and any applicable Treasury Regulation
pertaining thereto.
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2.11 "Committee" shall mean the Committee appointed by the Board of Directors
under Article 14 to administer the Plan.
2.12 "Common Stock" shall mean HEICO Corporation Common Stock that meets the
requirements of Code Section 409(l).
2.13 "Company" shall mean HEICO Corporation or any successor to the HEICO
Corporation by merger, consolidation, or purchase of substantially all
of its assets.
2.14 "Compensation" shall mean the total base salary or wages paid by an
Employer to an Employee during the Plan Year under consideration,
excluding overtime pay, commissions, bonuses, incentive compensation,
any amount paid in lieu of vacation days and all other items of
extraordinary compensation reportable as taxable wages. Compensation
also includes any elective deferrals under a cash-or-deferred
arrangement or cafeteria plan that are not includible in gross income by
reason of Code Section 125 or 402(e)(3), but does not include any other
amounts contributed pursuant to, or received under, this Plan or any
other defined contribution plan. Notwithstanding the foregoing, no
amount may be taken into account as Compensation to the extent that it
exceeds the maximum amount permitted by Code Section 401(a)(17).
Notwithstanding the above, effective for Plan Years beginning January 1,
1998, Compensation shall include any amount which is contributed by an
Employer pursuant to a salary reduction agreement and which is not
includible in the gross income of the Employee under Code Sections 125,
132(f), 402(e), 402(h) or 403(b).
Notwithstanding the above, the annual Compensation of each participant
taken into account in determining allocations for any Plan Year
beginning after December 31, 2001, shall not exceed $200,000, as
adjusted for cost-of-living increases in accordance with section
401(a)(17)(B) of the Code. Annual Compensation means Compensation during
the plan year or such other consecutive 12-month period over which
compensation is otherwise determined under the plan (the determination
period). The cost-of-living adjustment in effect for a calendar year
applies to annual compensation for the determination period that begins
with or within such calendar year.
2.15 "Contribution Percentage" shall mean the ratio, expressed as a
percentage, of the sum of the after tax contributions and Employer
Contributions under the Plan on behalf of an Eligible Employee for the
Plan Year to the Eligible Employee's Compensation for the Plan Year. The
Contribution Percentage of each Eligible Employee shall be rounded to
the nearest 100th of 1% of such Employee's Compensation.
2.16 "Early Retirement Date" shall mean the later of (a) an Employee's 55th
birthday or (b) the date on which he completes 10 Years of Service.
4
2.17 "Elective Deferral Contribution" shall mean any Employer contributions
made to the Plan at the election of the Participant, in lieu of cash
compensation, and shall include contributions made pursuant to a salary
reduction agreement or other deferral mechanism. Elective Deferral
Contributions shall be in whole percentages only. Elective Deferral
Contributions shall not include any amount properly distributed as
excess annual additions.
2.18 "Elective Deferral Contribution Account" shall mean the portion of a
Participant's Account attributable to Elective Deferral Contributions,
and the total of the Adjustments that have been credited to or deducted
from a Participant's Account with respect to Elective Deferral
Contributions.
2.19 "Eligible Employee" shall mean , except for those Employees identified
in the following sentence, all Employees employed by an Employer. The
following Employees shall not be considered Eligible Employees:
(a) Any Employee included in a collective bargaining unit for which
a labor organization is recognized as collective bargaining
agent unless such Employee has been designated by the Committee
as an "Eligible Employee" for the purposes of this Plan;
(b) Any Employee who is employed by an Affiliate that is not an
Participating Employer; or
(c) Any Employee who is a nonresident alien and who does not receive
earned income form the Employer that constitutes income from
sources within the United States.
2.20 "Employee" shall mean any person employed by an Employer, including a
leased employee within the meaning of Code Section 414(n) and an
individual who is treated as an employee pursuant to regulations issued
under Code Section 414(o). An "Employee" also includes any person who
would be an Employee but who is on an Authorized Leave of Absence.
2.21 "Employer" shall mean the Company and any Affiliate that has been
approved by the Board to participate in the Plan and which shall have
taken all action deemed necessary by the Board to participate. All
references in the Plan to the term "Participating Employer" shall mean
the Employer and vice versa. All Employers, groups of employees
designated as participating in the Plan by such Employers (if not all
employees), and the effective date of a company's designation as an
Employer shall be specified in Appendix A.
2.22 "Employer Contributions" shall mean Employer Matching Contributions and
Equity Builder Contributions. All references in the Plan to "Employer
Account(s)" shall mean the Account(s) to which Employer Contributions
are allocated thereto.
5
2.23 "Employer Matching Contributions" shall have the meaning as defined in
Section 4.03.
2.24 "Employer Matching Contributions Account" shall mean the portion of a
Participant's Account attributable to Employer Matching Contributions,
and the total of the Adjustments that have been credited to or deducted
from a Participant's Account with respect to Employer Matching
Contributions.
2.25 "Employment" shall mean the active service of an Employee with the
Employer or an Affiliate.
2.26 "Entry Date" shall mean the January 1 and July 1 of the Plan Year.
2.27 "ERISA" shall mean Public Law 93-406, the Employee Retirement Income
Security Act of 1974, as it may be amended from time to time.
2.28 "Equity Builder Contributions" shall mean contributions that are made by
an Employer on behalf of a Participant that is designated as an Equity
Builder Contribution, pursuant to Section 4.03(b), and is not take into
account under the tests described in Article 7.
2.29 "Equity Builder Contributions Account" shall mean the portion of a
Participant's Account attributable to Equity Builder Contributions, and
the total of the Adjustment that have been credited to or deducted from
a Participant's Account with respect to such Equity Builder
Contributions.
2.30 "Excess Aggregate Contributions" shall mean the amount described in
Section 7.02(e).
2.31 "Excess Contributions" shall mean the amount described in Section
7.01(d).
2.32 "Excess Deferral Amount" shall mean the amount described in Section
4.01(c).
2.33 "Highly Compensated Employee" shall mean, effective for Plan Years
beginning January 1, 1997:
(a) Any Employee who (i) was a five (5) percent owner at any time
during the Plan Year or the preceding Plan Year, or (ii) for the
preceding Plan Year received compensation in excess of $80,000
(adjusted at the same time and in the same manner as under Code
Section 415(d)).
(b) A former Employer if the former Employee separated from service
from an Employer and all Affiliates (or is deemed to have
separated from service from the Employer and all Affiliates)
prior to the determination year, performed no services for an
Employer during the determination year, and was a highly
6
compensated active employee during the separation year or any
determination year ending on or after the date the Employee
attains age 55.
(c) The determination of who is a Highly Compensated Employee
hereunder, including the determination as to the number and
identity of employees in the top paid group, and the
compensation considered shall be made in accordance with the
provisions of Code Section 414(q) and the regulations issued
thereunder.
(e) For purposes of this Section 2.33, the following terms shall
have the following meanings:
(i) Compensation shall mean all compensation within the
meaning of Code Section 414(s), including elective
amounts that are not includible in the gross income of
the Employee under Code Section 125, 132(f)(4),
402(e)(3), 402(h), or 403(b).
(ii) 5 Percent Owner shall mean any Employee who owns or is
deemed to own (within the meaning of Code Section 318),
more than five percent (5%) of the value of outstanding
stock of the Employer or stock possessing more than five
percent (5%) of the total combined voting power of the
Employer.
2.34 "Hour of Service" shall mean:
(a) Each hour for which an Employee is paid, or entitled to payment,
for performance of duties for performance of duties for an
Employer or Employers.
(b) Each hour for which an Employee is paid, or entitled to payment,
by an Employer or Employers, on account of a period of time
during which no duties are performed (irrespective of whether
the employment relationship is terminated) due to vacation,
holiday, illness, incapacity, layoff, jury duty, military duty,
or leave of absence; provided that in no event, shall an
Employee receive credit for more than 501 Hours of Service for
any single continuous period of non-working time.
(c) Each hour for which an Employee is absent from work by reason of
(i) the pregnancy of the Employee, (ii) the birth of a child of
the Employee, (iii) the placement of a child with the Employee
in connection with the adoption of the child by the Employee, or
(iv) the caring for a child referred to in Sections (i) through
(iii) immediately following birth or placement. Hours credited
under this Section shall be credited at the rate
7
of eight (8) hours per day, but shall not, in the aggregate,
exceed the number of hours required to prevent the Employee from
incurring a One-Year Break in Service (a maximum of 501 hours)
during the first computation period in which a One-Year Break in
Service would otherwise occur; provided, however, that this rule
shall apply only during the Plan Year in which the absence from
work begins and the immediately following Plan Year.
(d) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by an Employer or
Employers. These hours shall be credited to the Employee for the
computation period or period to which the award or agreement
pertains, rather than the computation period in which the award,
agreement, or payment is made.
(e) In lieu of the foregoing, an Employee who is not compensated on
an hourly basis (such as salary and commission employees) shall
be credited with 45 Hours of Service for each week (or 10 Hours
of Service for each day) in which such Employee would be
credited with Hours of Service in hourly pay. However, this
method of computing Hours of Service may not be used for any
Employee whose Hours of Service is required to be counted and
recorded by an federal law, such as the Fair Labor Standards
act. Any such method must yield an equivalency of at least 1,000
hours per computation.
(f) The following rules shall apply in determining whether an
Employee completes an "Hour of Service:
(1) The same hours shall not be credited under Sections (a)
or (b) above, as the case may be, and Sections (c)
above.
(2) The rules relating to determining hours of service for
reasons other than the performance of duties and for
crediting hours of service to particular periods of
employment shall be those rules stated in Department of
Labor regulations Title 29, Chapter XXV, subchapter C,
part 2530, Sections 200b-2(b) and 200(b)-2(c),
respectively.
2.35 "Investment Fund" shall mean the separate funds under the Trust Fund
that are distinguished by their investment objectives.
2.36 "Investment Manager" shall mean the term "Investment Manager" as defined
in section 3(38) of ERISA.
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2.37 "Non-Highly Compensated Employee" shall mean an Employee of the Employer
who is not a Highly Compensated Employee.
2.38 "Normal Retirement Age" shall mean the date a Participant attains age
sixty-five (65).
2.39 "One Year Break in Service" shall mean, with respect to any Employee or
Participant, any Computation Period during which he is not credited with
500 Hours of Service.
2.40 "Participant" shall mean an Employee who becomes eligible to participate
in the Plan as provided in Article 3.
(a) For purposes of Article 7, a Participant shall mean any Eligible
Employee who (i) is eligible to receive an allocation of an
Employer Matching Contribution, even if no Employer Matching
Contribution is allocated due to the Eligible Employee's failure
to make a required Elective Deferral Contribution, (ii) is
eligible to make an Elective Deferral Contribution, including an
Eligible Employee whose right to make Elective Deferral
Contributions has been suspended because of an election not to
participate or a hardship distribution, and (iii) is unable to
receive an Employer Matching Contribution or make an Elective
Deferral Contribution because his Compensation is less than a
stated amount.
2.41 "PAYSOP Account" shall mean the portion of a Participant's Account
attributable to contributions formerly made to the Plan under the
provisions of the Code relating to PAYSOP plans. Effective January 1,
2002, the PAYSOP Account will merge with and into the Equity Builder
Account.
2.42 "Plan" shall mean the HEICO Savings and Investment Plan.
2.43 "Plan Year" shall mean the calendar year.
2.44 "Rollover Contributions" shall mean:
(a) amounts transferred to this Plan directly from another qualified
plan;
(b) lump sum distributions received by an Employee from another
qualified plan which are eligible for tax-free rollover
treatment and which are transferred by the Employee to this Plan
within sixty (60) days following his receipt thereof;
(c) amounts transferred to this Plan from a conduit individual
retirement account, provided that such account has no assets
other than assets which were previously distributed to the
Employee by another qualified plan; and further
9
provided that such amounts met the applicable requirements of
Code section 408(d)(3) for rollover treatment on transfer to the
conduit individual retirement account; and
(d) amounts distributed to an Employee from a conduit individual
retirement account meeting the requirements of Section (c) above
which are transferred by the Employee to this Plan within sixty
(60) days of his receipt from such account.
2.45 "Rollover Contribution Account" shall mean the portion of a
Participant's Account attributable to Rollover Contributions, and the
total of the Adjustments which have been credited to or deducted from a
Participant's Account with respect to Rollover Contributions.
2.46 "Termination of Employment" shall mean a Participant's separation from
employment by reasons of retirement, death, or termination for any other
reason. Transfer of employment among Affiliates will not be considered a
termination of employment with any Employer. Termination of Employment
will occur for all purposes of the Plan when an Employee is no longer an
Employee of any Employer or Affiliate.
2.47 "Total and Permanent Disability" or "Disability" shall mean the mental
or physical incapacity of an Employee that, in the opinion of a licensed
physician approved by the Committee, renders him or her totally and
permanently incapable of engaging in any occupation or employment for
remuneration or profit, except for the purpose of rehabilitation not
incompatible with a finding of disability. For the purposes of this
Plan, Disability does not include any incapacity arising from (a)
chronic or excessive use of intoxicants, drugs or narcotics, (b)
intentionally self-inflicted injury or self-induced sickness, (c) any
unlawful act of the Participant, or (d) military service, if the
Participant is eligible to receive a military disability pension.
2.48 "Trust Agreement" shall mean the agreement and any amendments thereto
entered into between the Company and the Trustee to establish the Trust
Fund and specify the duties of the Trustee and the Company.
2.49 "Trust Fund" or "Trust" shall mean the cash and other properties held
and administered by the Trustee pursuant to the Trust Agreement to carry
out the provisions of the Plan.
2.50 "Trustee" shall mean the designated trustee acting at any time under the
Trust Agreement.
2.51 "Qualified" as used in "qualified plan" or "qualified trust" shall mean
a plan and trust which are entitled to the tax benefits provided
respectively by Code Sections 401 and 501 and by related provisions of
the Code.
2.52 "Valuation Date" shall mean the last day of each calendar quarter and
any other date as of
10
which the value of Plan assets is determined.
2.53 "Year of Service" shall mean any Computation Period during which an
Employee is credited with at least 1,000 Hours of Service.
(a) For purposes of applying the vesting rules a Year of Service
shall mean any Computation Period a Participant is credited with
1,000 Hours of Service with an Employer or Affiliate. An
Employee will receive credit for a Year of Service as of the end
of the Computation Period if the Employee completes the required
Hours of Service during such period, even if the Employee is not
employed for the entire period.
(b) The term "Computation Period" for purpose of this Section 2.53
shall mean the 12-month period commencing on the date an
Employee is first credited with an Hour of Service and each
subsequent 12-month period commencing on the anniversary of such
date.
(c) In the case of a Participant who has five (5) consecutive One
Year Breaks in Service, all Years of Service after such period
of break will be disregarded for the purpose of vesting in the
portion of the Participant's Employer Accounts that was credited
before such period of break.
(d) If a Participant has five (5) consecutive One Year Breaks in
Service and had no vested interest in his Employer Accounts
prior to the period of break, all Years of Service credited
before the period of break shall be permanently disregarded for
all purposes under the Plan.
ARTICLE 3
ELIGIBILITY AND PARTICIPATION
3.01 Participation in the Plan
(a) An Eligible Employee shall become a Participant in (and
thereupon be permitted to make Elective Deferral Contributions)
the Plan on the Entry Date coincident with or next following the
later of (i) the date the Employee is credited with One Hour of
Service, or (ii) the date the Employee becomes an Eligible
Employee, if he was not an Eligible Employee.
(b) Prior to becoming a Participant, each Eligible Employee shall be
provided an opportunity to designate the percentage of his
Compensation to be contributed to the Plan under Section 4.01.
Any such designation shall become effective as of the date such
Employee becomes a Participant in accordance with Section
3.01(a)
11
above, provided the designation is made in the manner authorized
by the Plan Administrator.
(c) A Participant who has a Termination Date or who ceases to be an
Eligible Employee but does not have a Termination Date, then
such Participant shall continue to be known as a "Participant",
but shall not be eligible to make Elective Deferral
Contributions and shall not be eligible to receive Employer
Contributions.
(d) If an Employee's termination of Employment occurs after becoming
a Participant and having a vested balance in his Account, such
Employee shall become a Participant again on his date of rehire.
3.02 Rollover Contributions
An Eligible Employee who has not otherwise become a Participant may make
a Rollover Contribution to the Plan before he is otherwise eligible to
Participate in the Plan. Such an Employee becomes a Participant if he
makes a Rollover Contribution. However, until his Entry Date, such an
Employee will not be eligible to make Elective Deferral Contributions or
receive an allocation of Employer Contributions.
3.04 Acquisitions
If a group of persons becomes employed by an Employer (or any of its
subsidiaries or divisions) as a result of an acquisition of another
employer, the Committee shall determine the applicable Entry Date or
special entry date for such acquired employees, and any other terms and
conditions which apply to participation in this Plan. Except to the
extent required by law or provided for by the Committee, employees of an
acquired business shall be treated as having first accrued an Hour of
Service as of the date of the Employer's acquisition of such business.
ARTICLE 4
CONTRIBUTIONS
4.01 Elective Deferral Contributions
(a) Each Employer shall contribute to the Trust, on behalf of each
Participant, Elective Deferral Contributions as specified in a
salary reduction agreement between the Participant and such
Employer; provided, however, that such contribution for a
Participant shall not exceed the lesser of (i) $10,500 (as
adjusted in the manner described in Code Section 402(g)(5) for
the calendar year (including any other elective deferrals within
the meaning of Code Section 402(g)(3) in the case of all
12
other plans, contracts, or arrangements of the Employer)) with
respect to any calendar year, or (ii) 15% of the Participant's
Compensation for such Plan Year.
(b) Notwithstanding any other provision of the Plan, Excess Deferral
Amounts and income allocable thereto shall be distributed no
later than the April 15th immediately following the end of the
applicable Plan Year. A distribution pursuant to this Section
4.01(b) of Excess Deferral Amounts and income, gains and losses
allocable thereto shall be made without regard to any consent
otherwise required under Section 10.01(c) or any other provision
of the Plan. A distribution pursuant to Section 4.01(b) of
Excess Deferral Amounts and income, gains and losses allocable
thereto shall not be treated as a distribution for purposes of
determining whether a distribution required by Section 10.06 is
satisfied. Any distribution under this Section 4.01(b) of less
than the entire Excess Deferral Amount and income, gains and
losses allocable thereto shall be treated as a pro rata
distribution of Excess Deferral Amounts and income, gains and
losses allocable thereto. In no case may an Employee receive
from the Plan as a corrective distribution for a taxable year
under Section 4.01(b) an amount in excess of the individual's
total Elective Deferral Contributions under the Plan for the
taxable year.
(c) "Excess Deferral Amount" shall mean those Elective Deferral
Contributions that are includable in a Participant's gross
income under Code Section 402(g) to the extent such
Participant's Elective Deferral Contributions for a taxable year
exceed the dollar limitation under Code Section 402(g). If an
Excess Deferral Amount is not distributed by the first April 15
following the close of the Participant's taxable year, such
amount shall be treated as an annual addition under the Plan.
(d) The Participant's notice made pursuant to Section 4.01(b) shall
be in writing; shall be submitted to the Committee no later than
March 1 with respect to the preceding calendar year; shall
specify the Participant's Excess Deferral Amount for the
preceding calendar year; and shall be accompanied by the
Participant's written statement that if such amounts are not
distributed, such Excess Deferral Amount, when added to amounts
deferred under other plans or arrangements described in Code
Sections 401(k), 408(k), or 403(b), exceeds the limit imposed on
the Participant by Code Section 402(g) for the calendar year in
which the deferral occurred. A Participant is deemed to notify
the Committee of any Excess Deferral Amount that arises by
taking into account only those Elective Deferral Contributions
made to this Plan and any other plans of this Employer or an
Affiliate.
(e) The Excess Deferral Amount shall be adjusted for income or loss.
The income or loss allocable to the Excess Deferral Amount is
equal to the allocable income or loss for the taxable year of
the individual as follows:
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The income or loss allocable to the Excess Deferral Amount for
the taxable year of the individual is equal to the income or
loss for the taxable year of the individual allocable to the
Participant's Elective Deferral Contributions multiplied by a
fraction, the numerator of which is such Participant's Excess
Deferral Amount for the taxable year, and the denominator of
which is equal to the sum of the Participant's Elective Deferral
Account as of the beginning of the taxable year, plus the
Participant's Elective Deferral Contributions for the taxable
year.
(f) The Excess Deferral Amount, which may be distributed under
Section 4.01(b) with respect to an Employee for a taxable year,
shall be reduced by any Excess Contributions previously
distributed with respect to such Employee for the Plan Year
beginning with or within such taxable year. In the event of a
reduction under this Section 4.01(f), the amount of Excess
Contributions included in the gross income of the Employee and
reported by the Employer as a distribution of Excess
Contributions shall be reduced by the amount of the reduction
under this Section 4.01(f).
4.02 Elections Regarding Elective Deferral Contributions
(a) A Participant may elect to change his Elective Deferral
Contribution amount as often as four times a year by filing a
completed election form with the Committee. Any change a
Participant makes will be effective as of March 31, June 30,
September 30 or December 31 provided that the Participant files
his election form at least 15 days before such March 31, June
30, September 30 or December 31.
(b) A Participant may suspend further Elective Deferral
Contributions to the Plan at any time, provided the request for
such suspension is received by the Committee at least 15 days
from the first pay period for which the suspension applies. Any
Participant who suspends further Elective Deferral Contributions
may reinstate such Elective Deferral Contributions at the
beginning of the next calendar quarter by providing notice to
the Committee at least 15 days prior to the beginning of the
calendar quarter to which the reinstatement will apply.
4.03 Employer Contributions
(a) Employer Matching Contributions. Each Employer shall contribute
Employer Matching Contributions as provided for in this Section
4.03(a). Employer Matching Contributions will be made at the end
of each calendar quarter on behalf of any Participant for whom
an Employer makes Elective Deferral Contributions. A
Participant's Employer Matching Contributions is a percentage of
his Elective Deferral Contributions, as fixed by the Board of
Directors from time to time at its sole discretion. The Employer
Matching Contribution percentage may vary (a) among Participants
employed by different Employers; or (b) with the Participant's
14
rate of deferral, but must be uniform for Participants with
equal rates of Elective Deferral Contributions and may not
increase as the rate of Elective Deferral Contributions
increases.
(b) Equity Builder Contributions. Each Employer may contribute
Equity Builder Contributions as provided for in this Section
4.03(b). Each Participant's share of Equity Builder
Contributions for a Plan Year is determined by multiplying (a)
the total Equity Builder Contributions to be allocated among all
Participants' Accounts by (b) the Participant's Compensation for
the Plan Year and dividing the result by (c) the Compensation
paid for the Plan Year to all Participants eligible for an
allocation. Only Compensation paid by Employers on account of
service while a Participant is taken into account. A
Participant's share of Equity Builder Contributions shall be in
an amount as fixed by the Board of Directors from time to time
at its sole discretion.
(c) Eligibility to Receive Employer Matching Contributions and
Equity Builder Contributions. Employer Matching Contributions
and Equity Builder Contributions, if any, shall be allocated to
the Employer Accounts of Participants based on the following:
(1) Employer Matching Contributions shall be allocated among
and credited to the Employer Matching Contributions
Account of Participants who are credited with 1,000
Hours of Service during the Plan Year with an Employer
or who had a termination of employment during the Plan
Year because of death, Disability or the attainment of
Normal Retirement Age.
(2) Equity Builder Contributions shall be allocated among
and credited to the Equity Builder Contributions Account
of Participants who are credited with 1,000 Hours of
Service during the Plan Year with an Employer and is
employed on the last day of such Plan Year.
4.04 After-Tax Contributions.
Participants shall not be permitted to make after-tax contributions to
the Plan.
4.05 Rollover Contributions
An Eligible Employee may make a Rollover Contribution to this Plan,
provided, however, that the trust from which the funds are to be
transferred must permit the transfer to be made, and provided, further,
the Committee consents to such transfer and is reasonably satisfied that
such transfer will not jeopardize the tax exempt status of this Plan or
Trust. Rollover Contributions shall be made by delivery to the Trustee
for deposit in the Trust. All Rollover Contributions must be in cash or
property satisfactory to the Trustee, whose decision in this
15
regard shall be final. The Trustee will not accept rollovers of
accumulated deductible employee contributions from a simplified employee
pension plan. Upon approval by the Committee and the Trustee, the amount
transferred shall be deposited in the Trust and shall be credited to the
Participant's Rollover Account. A Rollover Contribution will not be
matched by Employer Contributions, and is not subject to the
restrictions provided in Section 4.01 or the limitations described in
Article 5 and Article 7.
4.06 Form and Timing of Contributions
(a) Elective Deferral Contributions shall be deducted by the
Employer from the Participant's Compensation and paid to the
Trustee as promptly as possible after the end of each regular
pay period but in no event later than 15 days after the end of
the month in which such Elective Deferral Contributions are
retained by the Employer.
(b) All Employer Contributions for the purpose of paying or
prepaying principal, interest or fees on Plan Indebtedness
related to Financed Stock, as defined in Article 12, must be
made in cash. All other Employer Contributions may be made in
cash, Company Stock or other property, in the contributing
Employer's discretion. All Employer Contributions, whether in
cash, Company Stock, or other property, are contingent upon
acceptance by the Trustee and a determination that the
contributions will not jeopardize the qualified status of this
Plan.
(c) All Employer Contributions shall be paid to the Trustee on or
before the time required by law for filing the Employer's
federal income tax return (including extensions) for its taxable
year in or with which the Plan Year with respect to which the
contribution is made ends.
4.07 Nondeductible contributions and contributions made by mistake of fact
Any contribution or portion of a contribution to the Plan that (a) is
determined to be nondeductible under Code Section 404 or (b) is made as
a result of a mistake of fact may be reclaimed by the appropriate
Employer within one year after the date of the disallowance of the
deduction or the making of the mistaken contribution.
4.08 Forfeitures.
(a) As of each December 31st any amounts, which became Forfeitures
since the last December 31st shall first be made available to
reinstate previously forfeited Account balances of Participants,
if any, in accordance with Section 8.03. The remaining
Forfeitures, if any, may be used to pay administrative expenses
of the Plan and the remainder, if any, may be used to reduce
Employer Matching Contributions and/or Equity Builder
Contributions that Employers would otherwise make on behalf of
their Participants in the next Plan Year and each succeeding
Plan Year.
16
(b) The term "Forfeiture" shall mean the amount of a Participant's
nonvested Account balance which is forfeited as provided for in
Article 8, or any excess Employer Matching Contributions
forfeited in accordance with Article 7. The portion of a
Participant's Accounts that are not distributable to him by
reason of the provisions Article 7 or Article 8 shall be
credited to a Forfeiture Account. The value of the Forfeiture
Account shall be the market value as determined on each
Valuation Date.
4.09 Investment Funds
The Trustee will establish a Company Stock Fund for the investment of
Plan assets in Common Stock. The Committee may direct the Trustee to
establish other Investment Funds within the Trust and to permit
Participants to direct the allocation of their Account balances among
these Investment Funds in accordance with rules prescribed by the
Committee. The Committee may alter the available Investment Funds or the
procedures for allocating Account balances among them at any time.
4.10 Investment of Contributions
Contributions made by a Participant pursuant to Sections 4.01 and 4.05
shall be remitted to the Trustee for investment in the Investment Fund
selected by each Participant in accordance with rules prescribed by the
Committee. Such contributions shall not be invested in the Company Stock
Fund. Contributions, other than Elective Deferral Contributions, made by
the Employer on behalf of a Participant shall be invested in the Company
Stock Fund.
ARTICLE 5
MAXIMUM BENEFITS
5.01 Limitation on Annual Additions
(a) Notwithstanding any other provisions of the Plan, for Plan Years
beginning January 1, 1998, the sum of the Annual Additions to a
Participant's Accounts, when combined with Annual Additions to
the Participant's account under all other qualified plans
maintained by the Employer, for any Plan Year shall not exceed
the lesser of $30,000, or 25% of such Participant's compensation
(as such term is defined in Code Section 415(c)(3)). The term
Annual Additions to a Participant's Accounts for any Plan Year
means the sum of:
(1) such Participant's allocable share of the Employer
Contributions for the Plan Year;
(2) such Participant's Elective Deferral Contributions for
the Plan Year;
17
(3) forfeitures allocated to such Participant's account; and
(4) amounts described in Code Sections 415(l)(1) and
419A(d)(2).
The 25% limitation shall not apply to (i) any contribution for
medical benefits (within the meaning of Code Section 419A(f)(2))
after separation from service which is otherwise treated as an
Annual Addition, (ii) any amount otherwise treated as an Annual
Addition under Code Section 415(l)(1), or (iii) any amount
treated as a Rollover Contribution. Elective Deferral
Contributions, and Employer Contributions do not fail to be
Annual Additions merely because such contributions are Excess
Deferral Amounts, Excess Contributions or Excess Aggregate
Contributions or merely because such Excess Deferral Amounts,
Excess Contributions and Excess Aggregate Contributions are
corrected through distribution.
(b) If it is determined that, but for the limitations contained in
Section (a) of this Section 5.01, the Annual Additions to a
Participant's Accounts for any Plan Year would be in excess of
the limitations contained herein, such Annual Additions shall be
reduced to the extent necessary to bring such Annual Additions
within the limitations contained in Section (a) of this Section
5.01 in the following order:
(1) First, if the Participant's Annual Additions exceed the
maximum permissible amount as a result of (i) a
reasonable error in estimating the Participant's
Compensation, (ii) a reasonable error in estimating the
amount of Elective Deferral Contributions that the
Participant could make under Code Section 415, or (iii)
other facts and circumstances that the Internal Revenue
finds justifiable, the Committee may direct the Trustee
to return to the Participant his Elective Deferral
Contributions for such Plan year to the extent necessary
to reduce the excess amount. Such returned Elective
Deferral Contributions shall be ignored in performing
the discrimination tests of Article 7.
(2) Second, any excess annual additions still remaining
after the return of Elective Deferral Contributions
shall be reallocated as determined by the Committee
among the Participants whose Accounts have not exceeded
the limit in the same proportion that the Compensation
of each such Participant bears to the Compensation of
all such Participants. If such reallocation would result
in an addition to another Participant's Account, which
exceeds the permitted limit, that excess shall likewise
be reallocated among the Participants, whose Accounts do
not exceed the limit. However, if the allocation or
reallocation of the excess amounts pursuant to these
provisions causes the limitations of Code Section 415
18
to be exceeded with respect to each Participant for the
limitation year, then any such excess shall be held
unallocated in a 415 Suspense Account. If the 415
Suspense Account is in existence at any time during the
limitation year, other than the limitation year
described in the preceding sentence, all amounts in the
415 Suspense Account shall be allocated and reallocated
to Participant's Accounts (subject to the limitations of
Code Section 415) before any Contributions which would
constitute annual additions may be made to the Plan for
that limitation year.
(3) If a Participant is covered under another qualified
defined contribution plan maintained by an Employer
during any limitation year, the annual additions which
may be credited to a Participant's Account under this
Plan for any such limitation year shall not exceed the
maximum permissible amount reduced by the annual
additions credited to a Participant's account under all
such plans for the same limitation year. If a
Participant's annual additions under this Plan and such
other plans would result in an excess amount for a
limitation year, the excess amount will be deemed to
consist of the annual additions last allocated (and for
this purpose, Employer Contributions shall be deemed to
be allocated after Elective Deferral Contributions). In
an excess amount is allocated to a Participant on an
allocation date of this Plan which coincides with an
allocation date of another plan, the excess amount
attributed to this Plan will be the product of
(a) The total excess amount as of such date, times
(b) The ratio of (i) the annual additions allocated
to the Participant for the limitation year as of
such date under this Plan to (ii) the total
annual additions allocated to the Participant
for the limitation year as of such date under
this Plan and all the qualified defined
contribution plans maintained by the Employer.
Any excess amount attributed to this Plan will be
disposed in the manner described in this Section 5.01.
(c) Effective for Plan Years beginning prior to January 1, 2000, if
the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan, the
sum of the Participant's defined benefit fraction and defined
contribution fraction will not exceed 1.0 in any limitation
year. The Annual Additions which may be credited to the
Participant's Account under this Plan for any limitation year
are limited as follows: if the Participant's defined benefit
fraction and defined contribution fraction would otherwise
exceed 1.0, the
19
Participant's accruals under the defined benefit plan will be
reduced to the extent necessary to prevent such combined
fraction from exceeding 1.0 before any Annual Additions to this
Plan or any other defined contribution plan maintained by
Employer or its Affiliates are reduced.
(3) The term "defined benefit fraction" means a fraction,
the numerator of which is the sum of the Participant's
projected annual benefits under all the defined benefit
plans (whether or not terminated) maintained by the
Employer or its Affiliates, and the denominator of which
is the lesser of 125% of the dollar limitation
determined for the limitation year under Code Sections
415(b) and (d) or 140% of the highest average
compensation, including any adjustments under Code
Section 415(b).
(4) The term "defined contribution fraction" means a
fraction, the numerator of which is the sum of the
annual additions to the Participant's account under all
the defined contribution plans (whether or not
terminated) maintained by the Employer for the current
and all prior limitation years (including the annual
additions attributable to the Participant's
nondeductible employee contributions to all defined
benefit plans, whether or not terminated, maintained by
the Employer, and the annual additions attributable to
all welfare benefit funds, as defined in Code Section
419(e), individual medical accounts, as defined in Code
Section 415(l)(2), maintained by the Employer and
simplified employee pensions maintained by the
Employer), and the denominator of which is the sum of
the maximum aggregate amounts for the current and all
prior limitation years of service with the Employer
(regardless of whether a defined contribution plan was
maintained by the Employer). The maximum aggregate
amount in any limitation year is the lesser of 125% of
the dollar limitation determined under Code Sections
415(b) and (d) in effect under Code Section 415(c)(1)(A)
or 35% of the Participant's compensation for such year.
(d) For purposes of this Article, Employer shall mean the employer
that adopts this Plan, and all members of a controlled group of
corporations (as defined in Code Section 414(b) as modified by
Code Section 415(h)), all commonly controlled trades or
businesses (as defined in Code Section 414(c) as modified by
Code section 415(h), or affiliated service groups (as defined in
Code Section 414(m)) of which the adopting Employer is a part,
and any other entity required to be aggregated with the Employer
pursuant to regulations under Code Section 414(o).
20
5.02 Increase in Limitations on Annual Additions
Notwithstanding anything contained in Section 5.01 to the contrary,
effective for Plan Years beginning January 1, 2002, the Annual Addition
that may be contributed or allocated to a Participant's Account under
the Plan for any limitation year shall not exceed the lesser of:
(a) $40,000, as adjusted for increases in the cost-of-living under
Code Section 415(d), or
(b) 100 percent of the Participant's compensation, within the
meaning of Code section 415(c)(3), for the limitation year. The
compensation limit referred to in (b) shall not apply to any
contribution for medical benefits after separation from service
(within the meaning of Code Section 401(h) or 419(f)(2)) that is
otherwise treated as an Annual Addition.
ARTICLE 6
ACCOUNTS AND ALLOCATIONS
6.01 Participant Accounts
(a) A separate Account shall be maintained for each Participant, or
Beneficiary, so long as he has an interest in the Trust Fund.
(b) Sub-Accounts. Each Account shall be divided (as appropriate)
into the following parts and sub-parts:
(1) The Elective Deferral Contributions Account, which shall
reflect Elective Deferral Contributions contributed to
this Plan and any Adjustments thereto.
(2) The Matching Contributions Account, which shall reflect
Matching Contributions contributed to this Plan and any
Adjustments thereto.
(3) The Equity Builder Contributions Account, which shall
reflect Equity Builder Contributions contributed to this
Plan and any Adjustments thereto.
(4) The Prior Employer Account, as defined in Appendix B,
which shall reflect assets transferred to this Plan
directly from a trustee of another Qualified plan to the
Trustee of this Plan (and Adjustments thereto).
21
(5) The Rollover Account, which shall reflect the value of
all investments derived from the Participant's Rollover
Contributions under this Plan and any Adjustments
thereto.
In addition, the Committee may divide such sub-accounts into such
additional sub-portions as the Committee deems to be necessary or
advisable under the circumstances or to establish other accounts or
sub-accounts as needed.
6.02 Value of Account as of Valuation Date
As of each Valuation Date, each Participant's Account shall equal:
(1) His total Account as determined on the immediately preceding
Valuation Date, plus
(2) His Elective Deferral Contributions added to his Account since
the immediately preceding Valuation Date, plus
(3) His Employer Contributions added to his Account since the
immediately preceding Valuation Date, plus
(4) His Rollover Contributions which were added to his Account since
the immediately preceding Valuation Date, minus
(5) His Distributions, if any, since the immediately preceding
Valuation Date, plus or minus
(6) His allocable share of Adjustments.
6.03 Allocation of Adjustments
On each Valuation Date during the Plan Year (and prior to the allocation
of Employer Contributions), the Committee shall establish new Account
balances that shall reflect each Account's Adjustment since the
preceding Valuation Date. In determining such new Account balances, the
Committee shall (i) credit the portion of each Participant's Account
invested in each of the Investment Funds with interest in a manner
consistent with the method used to credit interest by the institution in
which the Investment Funds are invested or (ii) adjust the portion of
each Participant's Account based on the actual investment return
experience by the applicable fund. For purpose of such Adjustment, all
assets of the Trust Fund shall be valued at their fair market value as
of each Valuation Date.
22
ARTICLE 7
SPECIAL DISCRIMINATION RULES
7.01 Average Actual Deferral Percentage Limitation
(a) The Average Actual Deferral Percentage for Eligible Employees
who are Highly Compensated Employees may not exceed the greater
of:
(1) the Average Actual Deferral Percentage for all Eligible
Employees who are Non-Highly Compensated Employees for
the prior Plan Year multiplied by 1.25, or
(2) the Average Actual Deferral Percentage for all Eligible
Employees who are Non-Highly Compensated Employees for
the prior Plan Year multiplied by two, but not more than
two percentage points in excess of the Average Actual
Deferral Percentage of Eligible Employees who are
Non-Highly Compensated Employees.
This method of testing is referred to as the "Prior Year Testing
Method," and is effective for Plan Years beginning after 1996,
unless otherwise specifically provided in the Plan.
If any Highly Compensated Employee is eligible to make Elective
Deferral Contributions or to receive Matching Contributions, the
disparities between the Average Actual Deferral Percentages of
the respective groups shall be reduced as described in Section
7.03.
(b) Should neither limitation (1) nor (2) in Section 7.01(a) be met
with respect to a Plan Year, the Committee, subject to
applicable law and regulations, shall:
(1) Cause Excess Contributions and income allocable thereto
to be distributed in accordance with Section 7.01(d) no
later than 2 1/2 months following the end of any Plan
Year to Participants on whose behalf such Excess
Contributions were made for the preceding Plan Year.
A distribution of Excess Contributions and income, gains and
losses allocable thereto shall be made without regard to any
consent otherwise required under Section 10.01(c) or any other
provision of the Plan. A distribution pursuant to Section
7.01(b)(1) of Excess Contributions and income, gains and losses
allocable thereto shall not be treated as a distribution for
purposes of determining whether the distribution required by
Section 10.06 is satisfied. Any distribution under Section
7.01(b)(1) of less than the entire Excess Contribution
23
and income, gains and losses allocable thereto shall be treated
as a pro rata distribution of Excess Contributions and income,
gains and losses allocable thereto. In no event shall Excess
Contributions for a Plan Year remain unallocated or be allocated
to a suspense account for allocation to one or more employees in
any future Plan Year.
(c) The Actual Deferral Percentage for any Eligible Employee who is
a Highly Compensated Employee for the Plan Year and who is
eligible to have Elective Deferral Contributions allocated to
his account under two or more plans or arrangements described in
Code Section 401(k) that are maintained by the Employer or an
Affiliate shall be determined as if all such Elective Deferral
Contributions were made under a single arrangement.
(d) Elective Deferral Contributions exceeding the limitations of
Section 7.01 (a) ("Excess Contributions") and any income or loss
allocable to such Excess Contribution shall be designated by the
Committee as Excess Contributions and shall be distributed to
Highly Compensated Employees whose Accounts were credited with
Excess Contributions in the preceding Plan Year to determine the
aggregate amount of Excess Contributions to be distributed, the
Committee shall first determine the aggregate dollar amount of
the distribution as follows:
(1) Determine the dollar amount by which the Elective
Deferral Contributions of the Highly Compensated
Employee(s) with the highest ADP must be reduced to
equal the second highest ADP(s) under the Plan; then
(2) Determine the dollar amount by which the Elective
Deferral Contributions for the two (or more) Highly
Compensated Employees with the highest ADP(s) under the
Plan must be reduced to equal the third highest ADP(s)
under the Plan; then
(3) Repeat the steps described in (1) and (2) above with
respect to the third and successive highest ADP levels
under the Plan until the Average Actual Deferral
Percentage does not exceed the amount allowable under
Section 7.01(a); then
(4) Add the dollar amounts determined in each of steps (1),
(2), and (3) above.
The aggregate dollar amount of Excess Contributions determined under
steps (1) through (4) above shall be distributed as follows:
(1) First to those Highly Compensated Employee(s) with the
highest amount of Elective Deferral Contributions until
each such Employee's
24
Elective Deferral Contributions equals the second
highest Elective Deferral Contributions under the Plan;
(2) Second, to the two (or more) Highly Compensated
Employees with the next highest dollar amount of
Elective Deferral Contributions under the Plan, until
each such Participant's Elective Deferral Contributions
equals the third highest amount of Elective Deferral
Contributions under the Plan; and
(3) Third, the steps described in (1) and (2) above shall be
repeated with respect to the third and successive Highly
Compensated Employees with the highest amount of
Elective Deferral Contributions until all Excess
Contributions have been distributed.
(e) The income, gains and losses allocable to distributed Excess
Contributions for purposes of Section 4.01(b) is equal to the
sum of the allocable gain or loss for the Plan Year described in
Section (e)(1) below, and the allocable gain or loss for the
period between the end of the Plan Year and the date of
distribution described in Section (e)(2) below.
(1) The gain or loss allocable to distributed Excess
Contributions for the Plan Year is determined by
multiplying the income for the Plan Year allocable to
Elective Deferral Contributions by a fraction. The
numerator of the fraction is the Excess Contribution
distributed to the Employee for the Plan Year. The
denominator of the fraction is the total Account Balance
of the Employee attributable to Elective Deferral
Contributions as of the end of the Plan Year, reduced by
the gain allocable to such total amount for the Plan
Year and increased by the loss allocable to such total
amount for the Plan Year.
(2) The gain or loss allocable to Excess Contributions for
the period between the end of the Plan Year and the
distribution date is equal to 10% of the income
allocable to Excess Contributions for the Plan Year (as
calculated under Section (e)(1) above) multiplied by the
number of calendar months that have elapsed since the
end of the Plan Year. For purposes of determining the
number of calendar months that have elapsed, a
distribution occurring on or before the 15th day of the
month will be treated as having been made on the last
day of the preceding month, and a distribution occurring
after such 15th day will be treated as having been made
on the first day of the next month.
(f) Coordination of Excess Contributions with Distribution of Excess
Deferrals.
25
The determination of the amount of aggregate Excess
Contributions to be distributed under Section 4.01(b) with
respect to an Employee for a taxable year shall be reduced by
any Excess Contributions previously distributed with respect to
such Employee for the Plan Year beginning with or within such
taxable year.
(g) To the extent administratively possible, the Committee shall
distribute all Excess Contributions and any income or loss
allocable thereto prior to 2 1/2 months following the end of the
Plan Year in which the Excess Contributions arose. In any event,
however, the Excess Contributions and any income or loss
allocable thereto shall be distributed prior to the end of the
Plan Year following the Plan Year in which the Excess
Contributions arose.
(h) Notwithstanding anything contained herein to the contrary,
effective for Plan Years beginning January 1, 2000, the Employer
may, in determining whether the Plan satisfies Section 7.01,
exclude from consideration all Eligible Employees (other than
Highly Compensated Employees) who have not attained age 21 and
is credited with one Year of Service, as described in Code
Section 410(a)(1)(A).
7.02 Average Contribution Percentage Limitation
(a) The Average Contribution Percentage for Eligible Employees who
are Highly Compensated Employees may not exceed the greater of:
(1) the Average Contribution Percentage for all Eligible
Employees who are Non-Highly Compensated Employees for
the prior Plan Year multiplied by 1.25, or
(2) the Average Contribution Percentage for all Eligible
Employees who are Non-Highly Compensated Employees for
the prior Plan Year multiplied by two, but not more than
two percentage points in excess of the Average
Contribution Percentage for Eligible Employees who are
Non-Highly Compensated Employees.
This method of testing is referred to as the "Prior Year Testing
Method," and is effective for Plan Years beginning after 1996,
unless otherwise specifically provided in the Plan.
If any Highly Compensated Employee is eligible to make Elective
Deferral Contributions and to receive Employer Matching
Contributions, the disparities between the Average Contribution
Percentages of the respective groups will be reduced in
accordance with Section 7.03.
26
(b) The Contribution Percentage for any Eligible Employee who is a
Highly Compensated Employee for the Plan Year and who is
eligible to receive Employer Matching Contributions allocated to
his account under two or more plans to which contributions to
which Code Section 401(m) applies that are maintained by the
Employer or an Affiliate shall be determined as if all such
Employer Matching Contributions were made under a single plan
for purposes of this Section 7.02.
(c) In the event this Plan satisfies the requirements of Code
Section 410(b) only if aggregated with one or more other plans,
or if one or more other plans satisfy the requirements of Code
Section 410(b) only if aggregated with this Plan, then this
Section 7.02 shall be applied by determining the Contribution
Percentage of Eligible Employees as if all such plans were a
single plan.
(d) Excess Aggregate Contributions and income allocable thereto
shall be forfeited, if otherwise forfeitable under the terms of
this Plan, or if not forfeitable, shall be distributed no later
than 2 1/2months after the first day of each Plan Year as set
forth below. A distribution of Excess Aggregate Contributions
and income, gains and losses allocable thereto shall be made
without regard to any consent otherwise required under Section
10.01(c) or any other provision of the Plan. A distribution
pursuant to this Section 7.02(d) of Excess Aggregate
Contributions and income, gains and losses allocable thereto
shall not be treated as a distribution for purposes of
determining whether the distribution required by Section 10.09
is satisfied.
(e) For purposes of this Plan, "Excess Aggregate Contributions"
shall mean, with respect to a Plan Year, the excess of the
aggregate amount of the Employer contributions actually made on
behalf of Highly Compensated Employees for such Plan Year, over
the maximum amount of such contributions permitted under the
limitations of Section 7.02(a). To determine the aggregate
amount of Excess Aggregate Contributions to be distributed, the
Committee shall first determine the aggregate dollar amount of
the distribution as follows:
(1) Determine the dollar amount by which the Excess
Aggregate Contributions of the Highly Compensated
Employee(s) with the highest Contribution Percentage
must be reduced to equal the second highest Contribution
Percentage (s) under the Plan; then
(2) Determine the dollar amount by which the Excess
Aggregate Contributions for the two (or more) Highly
Compensated Employees with the highest Contribution
Percentage (s) under the Plan must be reduced to equal
the third highest Contribution Percentage (s) under the
Plan; then
(3) Repeat the steps described in (1) and (2) above with
respect to the third
27
and successive highest Contribution Percentage levels
under the Plan until the Average Actual Contribution
Percentage does not exceed the amount allowable under
Subsection 7.02(a); then
(4) Add the dollar amounts determined in each of steps (1),
(2), and (3) above.
The aggregate dollar amount of Excess Aggregate Contributions
determined under steps (1) through (4) above shall be
distributed as follows:
(1) First to those Highly Compensated Employee(s) with the
highest amount of Excess Aggregate Contributions until
the sum of each such Employee's Matching Contributions
equals the sum of the second highest Matching
Contributions under the Plan; then
(2) Second to the two (or more) Highly Compensated Employees
with the next highest dollar amount of Excess Aggregate
Contributions under the Plan, until the sum of each such
Employee's Matching Contributions equals the sum of the
third highest Matching Contributions under the Plan; and
(3) Then, the steps described in (1) and (2) above shall be
repeated with respect to the third and successive Highly
Compensated Employees with the highest amount of Excess
Aggregate Contributions until all Excess Aggregate
Contributions have been distributed.
(f) The income, gains and losses allocable to distributed Excess
Aggregate Contributions is equal to the sum of the allocable
gain or loss for the Plan Year described in Section 7.02(f)(1)
below and the allocable gain or loss for the period between the
end of the Plan Year and the date of distribution described in
Section 7.02(f)(2) below.
(1) The gain or loss allocable to Excess Aggregate
Contributions for the Plan Year is determined by
multiplying the income for the Plan Year allocable to
Matching Contributions, by a fraction. The numerator of
the fraction is the amount of Excess Aggregate
Contributions made on behalf of the Employee for the
Plan Year. The denominator of the fraction is the total
Account Balance of the Employee attributable to Matching
Contributions as of the end of the Plan Year, reduced by
the gain allocable to such total amount for the Plan
Year and increased by the loss allocable to such total
amount for the Plan Year.
(2) The gain or loss allocable for the period between the
end of the Plan Year and the distribution is equal to
10% of the income or loss allocable to
28
Excess Aggregate Contributions for the Plan Year (as
calculated under Section 7.02(f)(1)) multiplied by the
number of calendar months that have elapsed since the
end of the Plan Year. For purposes of determining the
number of calendar months that have elapsed, a
distribution occurring on or before the 15th day of the
month will be treated as having been made on the last
day of the preceding month, and a distribution occurring
after such 15th day will be treated as having been made
on the first day of the next month.
(g) The determination and correction of Excess Aggregation
Contributions of a Highly Compensated Employee shall be
calculated in accordance with Proposed Treasury Regulation
Section 1.401(m)-1(e)(4)(iii) and Section
1.401(m)-1(f)(13)(iii).
(h) Excess Aggregate Contributions shall be distributed from the
After Tax Account and forfeited if otherwise forfeitable under
the terms of the Plan (or if not forfeitable, distributed) from
the Company Account of the Participant in proportion to the
Matching Contributions for the Plan Year.
(i) Amounts forfeited by Highly Compensated Employees under this
Section 7.02 shall be treated as Annual Additions and applied to
reduce subsequent Employer Contributions to the Plan.
(j) Notwithstanding the foregoing, no forfeitures arising under this
Section 7.02 shall be allocated to the Account of any Highly
Compensated Employee.
7.03 Multiple Use of Alternative Limitation
(a) The Average Actual Deferral Percentage or Average Contribution
Percentage of Highly Compensated Employees shall be corrected as
described in Section 7.03(b) below if all of the conditions of
this Section 7.03(a) are satisfied:
(1) one or more Highly Compensated Employees of the Employer
or an Affiliated Company are eligible both in a Code
Section 401(k) arrangement and in a plan maintained by
such Employer subject to Code Section 401(m),
(2) the sum of the Average Actual Deferral Percentage of the
entire group of Eligible Employees who are Highly
Compensated Employees and the Average Contribution
Percentage of the entire group of Eligible Employees who
are Highly Compensated Employees exceeds the Aggregate
Limit described in Section 7.03(e),
29
(3) the Average Actual Deferral Percentage of the entire
group of Eligible Employees who are Highly Compensated
Employees exceeds the amount described in Section
7.01(a)(1), and
(4) the Average Contribution Percentage of the entire group
of Eligible Employees who are Highly Compensated
Employees exceeds the amount described in Section
7.02(a)(1).
(b) The Committee shall elect to reduce either the Average Actual
Deferral Percentage or the Average Contribution Percentage of
the entire group of Eligible Employees who are Highly
Compensated Employees in accordance with this Section 7.03(b).
The amount of the reduction to the Average Actual Deferral
Percentage of the entire group of Eligible Employees who are
Highly Compensated Employees shall, if elected, be calculated
and accomplished in the manner described in Section 7.01(e) or
the amount of the reduction to the Average Contribution
Percentage of the entire group of Eligible Employees who are
Highly Compensated Employees shall, if elected, be calculated
and accomplished in the manner described in Section 7.02(f), so
that in either case the Aggregate Limit described in Section
7.03 (e) shall not be exceeded. the Committee may elect to
reduce the Actual Deferral Percentage or the Contribution
Percentage either for all Highly Compensated Employees under the
Plan who are subject to reduction or for only those Highly
Compensated Employees who are eligible in both the arrangements
subject to Code Section 401(k) and the plan subject to Code
Section 401(m).
(c) The required reduction described in Section 7.03(b) shall be
treated as an Excess Contribution or Excess Aggregate
Contribution under the Plan as the case may be.
(d) For purposes of applying Section 7.03(a), the Average Actual
Deferral Percentage and Average Contribution Percentage of the
group of Eligible Employees who are Highly Compensated Employees
shall be determined after any corrective distribution of Excess
Deferral Amounts pursuant to Section 4.01(b), Excess
Contributions pursuant to Section 7.01(b)(2), or Excess
Aggregate Contributions pursuant to Section 7.02(e) and after
any recharacterization of Excess Contributions pursuant to
Section 7.01(b)(1), if applicable, required without regard to
this Section 7.03. Only plans and arrangements maintained by the
same Employer or an Participating Employer shall be taken into
account under this Section 7.03.
(e) For purposes of this Section 7.03, the "Aggregate Limit" shall
mean the greater of:
(1) the sum of:
(A) 125% of the greater of (i) the Average Actual
Deferral Percentage of the group of Eligible
Employees who are Non-Highly
30
Compensated Employees for the Plan Year, or (ii)
the Average Contribution Percentage of the group
of Eligible Employees who are Non-Highly
Compensated Employees for the Plan Year, and
(B) two percentage points plus the lesser of
Sections 7.03(e)(1)(A)(i) or 7.03(e)(1)(A)(ii)
above. In no event, however, shall the amount
described in this Section 7.03(e)(1)(B) exceed
200% of the lesser of Sections 7.03(e)(1)(A)(i)
or 7.03(e)(1)(A)(ii) above; or
(2) the sum of:
(A) 125% of the lesser of (i) the Average Actual
Deferral Percentage of the group of Eligible
Employees who are Non-Highly Compensated
Employees for the Plan Year, or (ii) the Average
Contribution Percentage of the group of Eligible
Employees who are Non-Highly Compensated
Employees for the Plan Year, and
(B) two percentage points plus the greater of
Sections 7.03(e)(2)(A)(i) or 7.03(e)(2)(A)(ii)
above. In no event, however, shall the amount
described in this Section 7.03(e)(2)(B) exceed
200% of the greater of Sections 7.03(e)(2)(A)(i)
or 7.03(e)(2)(A)(ii) above.
7.04 Repeal of Multiple Use Test
The multiple use test described in Treasury Regulation section
1.401(m)-2 and Section 7.03 of the Plan shall not apply for Plan Years
beginning after December 31, 2001.
ARTICLE 8
VESTING
8.01 Vested Percentage of Accounts
Except as provided for in Section 12.09(d), a Participant shall be
vested in the following percentages of his Accounts:
(a) 100% of his Elective Deferral Contribution Account , Rollover
Account and Prior Employer Accounts, if any, plus
(b) a percentage of his Employer Accounts determined in accordance
with the following schedule:
31
Years of Vested
Vesting Service Percentage
less than 3 0%
3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
(c) Notwithstanding the above, effective for Plan Years beginning
after December 31, 2001, a Participant's percentage of his
Employer Accounts shall vest in accordance with the following
schedule:
Years of Vested
Vesting Service Percentage
less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
(d) Notwithstanding the above, a Participant's shall become fully
(100%) vested upon (i) his Early Retirement Date or Normal
Retirement Date, if he is then an Employee, (ii) his death, if
he was an Employee immediately before his death, or (iii) the
determination that he is unable to continue his previous
employment on account of Disability.
8.02 Amount Subject to Distribution Upon Termination of Employment
Upon Termination of Employment, a Participant may request a distribution
of the vested percentage of his Accounts as described in Section 8.01
hereof. Such distribution shall be distributed in accordance with
Article 10. The portion of a Participant's Employer Account that is not
vested shall be forfeited in accordance with Section 8.03.
8.03 Forfeitures
(a) When a Participant has a Termination of Employment but does not
receive a distribution of his vested Employer Account prior to
incurring five consecutive One Year Break in Service, the
Employer Account shall continue to be credited with
32
investment gains and losses until distribution of the vested
percentage of the Employer Account commences. Upon incurring
five consecutive One Year Breaks in Service, the Participant's
non-vested Account balance shall be forfeited.
(b) If a Participant has a Termination of Employment and receives a
distribution of his entire vested Employer Account prior to
incurring five consecutive One Year Breaks in Service, the
non-vested portion of the Employer Account, will be forfeited.
(c) A Participant is eligible to have a previous Forfeiture
restored, if (i) he previously incurred a Forfeiture under this
Article, (ii) he again becomes an Employee before he has five
(5) consecutive One Year Breaks in Service, and (iii) he repays
any distribution that he previously received, in the manner
specified in Section 8.03(e).
(d) Any repayment in accordance with (c) above must be made no later
than the earlier of (i) the end of the Plan Year in which the
individual incurs a five (5) consecutive One Year Breaks in
Service, counting from the Plan Year beginning immediately after
distribution or deemed distribution that resulted in his
Forfeiture or (ii) the fifth (5th) anniversary of his
reemployment.
(e) In order to exercise his right of repayment, the Participant
must repay to the Trust, without interest (i) an amount equal to
any cash he received as part of the distribution that resulted
in his Forfeiture, plus (ii) all Company Stock that was then
distributed to him. Cash or other property may not be restored
to the Trust in lieu of Company Stock, but the shares restored
need not be the same ones that were originally distributed. A
Participant who had no vested interest in his Accounts at the
time of his Forfeiture is automatically deemed to have complied
with the terms of this Section as of the date on which he
becomes eligible to make a repayment.
(f) If a Participant complies with the conditions of the applicable
provisions of this Section 8.03, his Accounts will be credited
with both the cash and Company Stock that he has repaid and the
interest in his Accounts that he had previously forfeited,
unadjusted for any income, expenses, gains or losses since the
time of forfeiture. This restoration is to be made, first, out
of Forfeitures arising in the Plan Year of repayment, and,
second, out of employer contributions and shares of Company
Stock released from the Unallocated Stock Account in the Plan
Year of repayment. The Participant's Employer is required to
make any contributions necessary to make a complete restoration.
33
ARTICLE 9
IN-SERVICE WITHDRAWALS
9.01 Hardship Withdrawals
A Participant may apply in writing to the Committee for a hardship
withdrawal of part or all of his Elective Deferral Contributions Account
(other than earnings credited to his Elective Deferral Contribution
Account on or after January 1, 1989). The Committee, in its discretion,
and in accordance with the provisions of this Section 9.01, shall
determine whether a withdrawal of part or all of such account is
necessary to alleviate the hardship. For purposes of Section 9.01(a), a
distribution is on account of hardship only if the distribution both is
made on account of an immediate and heavy financial need of the
participant as determined in accordance with Section 9.01(a) below, and
is necessary to satisfy such financial need as determined in accordance
with Section 9.01(b) below. The determination by the Committee of the
existence of an immediate and heavy financial need and of the amount
necessary to meet the need shall be made in a non-discriminatory and
consistent manner. The determination of hardship by the Committee shall
be final and binding.
(a) a distribution will be deemed to be made on account of an
immediate and heavy financial need of the participant only if
the distribution is on account of the financial needs described
in this Section 9.01(a), in which case the Committee may
reasonably rely upon the participant's representation that the
financial need is on account of:
(1) medical expenses incurred by or necessary for the
medical care, as described in Code Section 213(d), of
the Participant, the Participant's spouse, or any other
dependents of the Participant,
(2) the purchase (excluding mortgage payments) of a
principal residence of a Participant,
(3) tuition and other educational related fees for the next
twelve months of post-secondary education for the
Participant, his spouse, children, or dependents of the
Participant, or
(4) the need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage
of the Participant's principal residence.
A financial need shall not fail to qualify as immediate and
heavy merely because such need was reasonably foreseeable or
voluntarily incurred by the Participant.
34
(b) A distribution will be deemed to be necessary to satisfy an
immediate and heavy financial need of a Participant if all of
the following requirements are satisfied:
(1) the distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant,
including any amounts necessary to satisfy applicable
federal, state and local income taxes, excise taxes and
penalty taxes which may be reasonably anticipated to
result from the distribution;
(2) the Participant has obtained all distributions
(including distributions currently available to the
Participant as provided for in Section 12.09), other
than hardship distributions, and all non-taxable loans
currently available under all plans maintained by the
Employer, and
(3) the Participant does not make a contribution to this
Plan or to any other plan of deferred compensation
contrary to the provisions of Section 9.02.
9.02 Suspension of Contributions Due to Hardship Withdrawal
If a Participant receives a hardship withdrawal, such Participant shall
not be permitted to make--
(a) Elective Deferral for the 12 month period following the date of
receipt of the hardship withdrawal; and
(b) contributions to any other qualified or nonqualified plan of
deferred compensation maintained by the Employer including, but
not limited to, stock option plans and stock purchase plans for
the 12-month period following the date of receipt of the
hardship withdrawal.
ARTICLE 10
PAYMENTS TO PARTICIPANTS AND THEIR BENEFICIARIES
10.01 Commencement of Distribution
The Participant's Account shall be distributed at the earliest of the
following dates:
(a) Termination of Employment. If a Participant has a Termination
Date other than on account of death, the Participant's Account
shall be distributed as soon as administratively feasible
following the Participant's Termination Date and receipt by the
Committee of the Participant's request for a distribution.
35
(b) Death. If a Participant has a Termination Date on account of
death, the Participant's Account shall be distributed within
ninety (90) days after the Participant's death unless the
particular facts and circumstances require a longer wait.
(c) Consent of Participant. A Participant's consent to a
distribution of his Account shall be subject to the following:
(1) If the value of a Participant's Accounts to be
distributed is less than or equal to $5,000, computed on
the Participant's Termination Date, the Participant's
Accounts shall be distributed in a lump sum payment as
soon as administratively feasible after his Termination
Date.
(2) If the lump sum value of a Participant's vested Accounts
as of his Termination Date is greater than $5,000, the
Participant's consent to a distribution shall be
required; provided that, notwithstanding the lack of
consent, distribution shall be made no later than the
date established under Section 10.06 for mandatory
distributions.
(3) Notwithstanding the above, effective for Plan Years
beginning after December 31, 2001, the value of a
Participant's nonforfeitable Account balance shall be
determined without regard to that portion of the Account
balance that is attributable to Rollover Contributions
(and earnings allocable thereto) within the meaning of
sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii),
and 457(e)(16) of the Code. If the value of the
participant's nonforfeitable account balance as so
determined is $5,000 or less, the Plan shall immediately
distribute the Participant's entire nonforfeitable
Account balance.
(d) Retirement After Age 65. Notwithstanding any other provision of
the Plan, unless the Participant otherwise elects, the payment
of benefits under this Plan shall begin not later than the 60th
day after the latest of the close of the Plan Year in which
occurs (i) the Participant's Normal Retirement Age; or (iii) the
Participant's Termination Date.
10.02 Forms of Payments
Except as provided for in Section 10.03, a Participant may elect to
receive a distribution in the form of a single lump sum payment of his
entire vested Account. However, with respect to his Accounts invested in
the Company Stock Fund, a Participant may elect a distribution in the
form of cash, or full shares of Common Stock and cash in lieu of
fractional shares.
36
10.03 Prior Employer Accounts
(a) If a Participant has a Termination Date, payments to
Participants attributable to Prior Employer Accounts whose
employment is terminated by reason of Retirement, death or
Disability shall be made in accordance with Section 10.03 (b)
and Appendix C. Except as provided for in Section 10.01(c), the
Participant shall elect the method of payment from those
described in Section 10.05(b). However, any such election may be
amended by the Committee, taking into account the election, if
any, made by the Participant or the Participant's Beneficiary,
to comply with the requirements of Section 10.06.
(b) A Participant may elect the following methods of payment for his
Prior Employer Accounts: (1) a lump sum to be paid as soon as is
administratively practicable after termination of employment; or
(2) in monthly, quarterly, semi-annual or annual cash
installments over a period certain that does not extend beyond
the Participant's life, or beyond the lives of the Participant
and a designated Beneficiary (or beyond the life expectancy of
the Participant or the joint and last survivor expectancy of the
Participant and a designated Beneficiary), in which event the
lump sum value of the benefit will either be segregated and
separately invested by the Trustee, or it will be invested in a
nontransferable annuity providing for installment payments.
(c) Notwithstanding the above, effective January 1, 2002, a
Participant's Prior Employer Account shall be distributed in the
form of a single lump sum payment of the Participant's entire
vested Prior Employer Account. No distribution shall be made in
the form of an annuity or cash installment.
10.04 Valuation Upon Distribution
Valuation for purposes of payment to a Participant or his Beneficiary
shall be made shall be determined as of the Valuation Date coincident
with or next following his Termination Date. If Company Stock is
distributed in the form of cash, the Participant shall receive cash
equal to the amount of the "fair market value" of the Company Stock as
of the Valuation Date coincident with or immediately following his
application for a distribution.
10.05 Payments When a Loan is Outstanding
Payments to Participants who have borrowed from their Accounts pursuant
to Article 11 will also be governed by Section 11.03(b).
37
10.06 Special Distributions
(a) All distributions required under this Section shall be
determined and made in accordance with the minimum distribution
requirements of Code Section 401(a)(9) and the regulations
thereunder. Notwithstanding any provision to the contrary, the
entire interest of a Participant must be distributed or begin to
be distributed no later than the Participant's "required
beginning date." For purposes of this Section:
(i) The term "required beginning date" of a Participant is
the later of the first day of April of the calendar year
following: (i) the calendar year in which the
Participant attains age 70-1/2, or (ii) the calendar
year in which the Participant retires if the Participant
is not a 5-percent owner of the Employer.
(ii) The "required beginning date" for a Participant who is a
5-percent Owner (as defined in Code Section 401(a)(9))
shall not be later than April 1 of the calendar year
following the calendar year in which the participant
attains age 70 1/2.
(iii) Once distributions have begun to a 5-percent owner under
this Section, they must continue to be distributed, even
if the Participant ceases to be a 5-percent owner in a
subsequent year.
(iv) The provisions of this Section 10.06 shall be effective
for Plan Years beginning January 1, 1997.
(b) Where the distribution of a Participant's Account has begun in
accordance with Section (a) above and the Participant dies
before his entire Account has been distributed to him or her,
the remaining portion of such interest will be distributed at
least as rapidly as under the method of distribution being used
under Section (a) above as of the date of his death.
(c) Where the distribution to a Participant has not begun at the
time of his death, the Participant's entire Account must be
distributed within five years after the death of such
Participant; provided, however, that if any portion of the
Participant's Account is payable to a Beneficiary, such portion
is to be distributed over the life of such Beneficiary (or over
a period not extending beyond the life of such Beneficiary), and
such distributions begin on or before December 31 of the
calendar year immediately following the calendar year in which
the Participant died (or such later date as the Secretary may by
regulations prescribe), that portion so payable shall be treated
as distributed on the date on which such distributions begin.
(d) Notwithstanding the foregoing provisions of this Section 10.06,
if the value of a Participant's Accounts to be distributed is
less than or equal to $5,000, computed on the date of the
Participant's termination of employment, the Participant's
38
Accounts shall be distributed in a lump sum payment as soon as
practicable after his termination of employment.
10.07 Qualified Domestic Relations Orders
Notwithstanding any other provisions of Article 10, any Account of a
Participant may be apportioned between the Participant and an alternate
payee (as defined in Code Section 414(p)(8)) either through separate
Accounts or by providing the alternate payee a percentage of the
Participant's Account. The Committee shall notify the affected
Participant and each alternate payee of the order and determine that the
order is a qualified domestic relations order as defined in Code Section
414(p)(1)(A).
10.08 Payment to Minors and Incapacitated Persons
In the event that any amount is payable to a minor or to any person who,
in the judgment of the Committee, is incapable of making proper
disposition thereof, such payment shall be made for the benefit of such
minor or such person in any of the following ways as the Committee, in
its sole discretion, shall determine:
(a) By payment to the legal representative of such minor or such
person;
(b) By payment directly to such minor or such person;
(c) By payment in discharge of bills incurred by or for the benefit
of such minor or such person. The Trustee shall make such
payments as directed by the Committee without the necessary
intervention of any guardian or like fiduciary and without any
obligation to require bond or to see the further application of
such payment. Any payment so made shall be in complete discharge
of the Plan's obligation to the Participant and his
Beneficiaries.
10.09 Notices to Participants
The Committee shall distribute or cause to be distributed to each
Participant who has requested a withdrawal or distribution a notice,
containing the information described in Code Section 402(f). Such notice
shall be provided within a reasonable time, not in excess of 90 days,
prior to the date of such withdrawal or distribution. Such notice shall
clearly inform the Participant that the Participant has a right to a
period of at least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution or withdrawal (or, if
applicable, a particular distribution option). Distribution or
withdrawal shall not be made within such 30-day period, unless the
Participant affirmatively elects otherwise. A Participant shall be
permitted to revoke his election at any time prior to the annuity
starting date, or, if later, the end of the seven-day period beginning
on the date the above described notice was provided.
39
10.10 Eligible Rollover Distributions
(a) A Participant may elect, at a time and in the manner prescribed
by Committee, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan
specified by the Participant in a direct rollover. An eligible
rollover distribution shall be a distribution of all or any
portion of the balance to the credit of a Participant, except
that an eligible rollover distribution shall not include any
distribution which is part of a series of installment payments
over a period of ten years or more, any distribution to the
extent such distribution is required under Code Section
401(a)(9), and the portion of any distribution that is not
includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
employer securities). An eligible individual retirement plan is
an individual retirement account as described in Code Section
408(a), an individual retirement annuity as described in Code
Section 408(b), or a qualified trust described in Code Section
401 which accepts the Participant's eligible rollover
distribution. This Section shall also apply to distributions to
the surviving spouse of a deceased Participant, or to the
alternate payee of a Participant under a Qualified Domestic
Relations Order, provided that, in the case of a distribution to
a surviving spouse, eligible retirement plan shall include only
an individual retirement account or an individual retirement
annuity.
(b) Notwithstanding the above, for distributions made after December
31, 2001, an eligible retirement plan shall also mean an annuity
contract described in section 403(b) of the Code and an eligible
plan under section 457(b) of the Code which is maintained by a
state, political subdivision of a state, or any agency or
instrumentality of a state or political subdivision of a state
and which agrees to separately account for amounts transferred
into such plan from this plan. The definition of eligible
retirement plan shall also apply in the case of a distribution
to a surviving spouse, or to a spouse or former spouse who is
the alternate payee under a qualified domestic relation order,
as defined in section 414(p) of the Code.
(c) For purposes of this Section 10.10, any amount that is
distributed on account of hardship shall not be an eligible
rollover distribution and the distributee may not elect to have
any portion of such a distribution paid directly to an eligible
retirement plan.
10.11 Age 59 1/2 Withdrawals
A Participant who has attained age 59 1/2 may withdraw any portion of
any Account in which he is fully (100%) vested, as of any Valuation Date
giving written notice to the Committee, in such form as the Committee
may require, at least fifteen (15) days before the date as of
40
which the withdrawal is to be made. A Participant may make no more than
two withdrawals under this Section 10.11 in any Plan Year. The amount he
elects to withdraw will be distributed to him as soon as
administratively feasible after the appropriate Valuation Date.
ARTICLE 11
LOANS
11.01 Availability of Loans
Loans shall be permitted to Participants under this Plan, as established
by the policy of the Committee. Any such loan shall be subject to such
conditions and limitations (including such loan guidelines as may, from
time to time, be established by the Committee) as the Committee deems
necessary for administrative convenience and to preserve the
tax-qualified status of the Plan. Notwithstanding the foregoing, except
to the extent otherwise required under the Code or ERISA, loans shall
not be permitted under this Plan to (a) any Beneficiary or (b) any
Participant after the Participant has terminated employment with the
Employer and its Affiliates.
11.02 Amount of Loans
Subject to the limitations contained in this Article 11, any Participant
may borrow from his Accounts an amount not exceeding the lesser of the
following:
(a) 50% of the combined current value of the Participant's Elective
Deferral Account, Rollover Account and vested Company Account,
determined on the date of such Participant's request for a loan,
reduced by the outstanding balance of all other loans from the
Plan, or
(b) the vested portion of his Accounts up to $50,000, reduced by the
greater of (i) the highest outstanding balance of loans from the
Plan during the one-year period ending on the day before the
date on which such loan is made, or (ii) the outstanding balance
of loans from the Plan on the date on which such loan is made.
11.03 Conditions of the Loan
The loan shall be subject to the following conditions:
(a) The interest rate on all loans shall be commercially reasonable
at the time the Committee approves the loan. All loans shall be
evidenced by a note and shall be adequately secured as to
principal and interest. No more than 50% of the Participant's
vested portion of his Accounts valued immediately after the
origination of each loan shall serve as security for his
outstanding loan, provided, however, that the terms of any loan
may be adjusted at anytime, in the sole and absolute discretion
of the Committee to ensure that there is adequate security for
the loan. No loan may have
41
a term in excess of five years, with the term of the loan being
at least one year or, if greater than one year, a multiple of
six months as determined by the Participant in his application.
(b) The Committee shall be responsible for the collection of all
loans. Upon default of any loan, the entire unpaid balance
shall, if the immediate distribution of the Participant's
Account is to be made, be offset against that portion of the
Participant's Account which serve as security for his loan, upon
his first becoming entitled to received a distribution in
accordance with the relevant portion of Article 10 of the Plan,
whether or not the Participant elects to have his payments
commence at that time.
11.04 Loan Policy
The Committee is authorized and directed to administer the loan program
in accordance with the regulations and rulings of the Internal Revenue
Service and the Department of Labor. The Committee may establish such
additional guidelines and rules as it deems necessary. Such guidelines
and rules shall be set forth in the loan policy and the terms specified
in such loan policy are hereby incorporated by reference in the Plan.
The Committee may amend or modify the loan policy as it deems necessary
to carry out the provisions of this Article 11.
ARTICLE 12
LEVERAGED EMPLOYEE STOCK
OWNERSHIP PLAN PROVISIONS
12.01 Effect of Article
Notwithstanding anything to the contrary contained in the Plan, the
provisions of this Article 12 shall control the interpretation and
administration of the Plan where applicable.
12.02 Definitions
The following terms when used in this Article 12 shall have the
designated meaning unless a different meaning is plainly required by the
context in which the term is used:
(a) "Disqualified Person" shall mean a person defined in Code
Section 4975(e)(2) and shall mean a party in interest as defined
in ERISA Section 3(14).
(b) "Diversification Election Period" shall mean the Plan Year
period beginning with the first Plan Year in which the
Participant has both completed 10 years of participation in the
Leveraged ESOP and attained the age of 55.
(c) "Exempt Loan" shall mean any loan made to the Leveraged ESOP, by
a Disqualified Person or guaranteed by a Disqualified Person,
pursuant to the
42
provisions of Section 12.04.
(d) "Financed Stock" shall mean Common Stock acquired with the
proceeds of an Exempt Loan.
(e) "Indebtedness" shall mean the principal amount of any
indebtedness incurred by the Plan in connection with the
acquisition of Financed Stock.
(f) "Interest" shall mean interest payable by the Plan with respect
to Indebtedness.
(g) "Leveraged ESOP" shall mean the portion of the Plan described in
this Article 12.
(h) "Release Date" shall mean each date specified in Section
12.05(c) for the release of shares of Common Stock from the
Stock Suspense Account for allocation to Participants' Employer
Accounts.
(i) "Stock Suspense Account" shall mean an account credited with the
Financed Stock prior to the release there from in accordance
with Section 12.05(d).
(j) "Unallocated Financed Stock" shall mean shares of Financed Stock
that remain in the Stock Suspense Account prior to the release
of such shares from the Stock Suspense Account and the
allocation of such shares to Participants' Employer Accounts.
12.03 Purpose and Nature of the Leveraged ESOP
(a) The primary purpose of the Leveraged ESOP is to enable
Participants to share in the growth and prosperity of HEICO
Corporation and its Affiliates by enabling Participants to
acquire stock ownership interests in the form of Common Stock.
Accordingly, the Leveraged ESOP is an employee stock ownership
plan within the meaning of Code Section 4975(e)(7) which is
designed to invest primarily in Common Stock. The Leveraged ESOP
may engage in loans (or other extensions of credit) to finance
its acquisition of Common Stock, including such loans (or
extensions of credit) from or secured primarily by a guarantee
of the Company or an Affiliated Company or the expectation that
the Company and its Affiliated Companies will make contributions
to the Leveraged ESOP in amounts sufficient to enable the
Leveraged ESOP to amortize such loans (or extensions of credit).
(b) The Leveraged ESOP is intended to be and shall be a stock bonus
plan within the meaning of Treasury Regulation Section
1.401-1(b)(1)(iii) that is qualified under Code Section 401(a).
It is designed to meet the requirements for an employee stock
ownership plan within the meaning of Code Section 4975(e)(7) and
ERISA Section 407(d)(6) and regulations thereunder and may enter
into one or more Exempt Loans
43
pursuant to this Article 12. Separate accounting shall be
maintained with respect to the Leveraged ESOP, any Exempt Loan
and Financed Stock acquired with the proceeds of such Exempt
Loan.
(c) The terms of any Exempt Loan shall comply with all the
requirements necessary to constitute an "exempt loan" within the
meaning of Treasury Regulation Section 54.4975-7(b).
12.04 Requirements as to Exempt Loans
No loan shall be entered into on behalf of the Leveraged ESOP which is a
loan made or guaranteed by a Disqualified Person unless the Committee
determines that all of the requirements of this Section including each
of the following requirements are met:
(a) the terms shall be as favorable to the Plan as the terms of a
comparable loan from arms-length negotiations between
independent parties;
(b) the interest rate shall be no more than a reasonable interest
rate considering all relevant factors including the amount and
duration of the loan, the security and guarantee involved, the
credit standing of the Plan and the guarantor of the loan, and
the interest rate prevailing for comparable loans;
(c) the loan shall be without recourse against the Plan;
(d) the loan must be for a specific term under which the number of
years to maturity is definitely ascertainable at all times;
(e) the loan may not be payable at the demand of any person except
in the case of default;
(f) the only assets of the Plan that may be given as collateral on
the loan are Common Stock acquired with the proceeds of the
Exempt Loan or Common Stock used as collateral on a prior Exempt
Loan repaid with the proceeds of the Exempt Loan;
(g) no person entitled to payment under the loan shall have any
right to assets of the Plan other than collateral given for the
loan, contributions made to the Plan to enable it to meet its
obligations under the loan, and earnings attributable to such
collateral and such contributions;
(h) the value of Plan assets transferred in satisfaction of the loan
upon an event of default shall not exceed the amount of the
default;
(i) if the lender is a Disqualified Person, Plan assets may only be
transferred
44
upon default only upon and to the extent of the failure of the
Plan to meet the payment schedule of the loan;
(j) upon payment of any portion of the balance due on the loan, the
assets pledged as collateral for such portion shall be released
from encumbrance;
(k) the loan shall be repaid only from proceeds of an Exempt Loan,
amounts contributed to the Plan by the Company or its Affiliated
Companies to enable the Plan to repay such loan, earnings on
such contributions, and earnings on Financed Stock acquired with
the proceeds of such loan (including dividends and proceeds of
sale of such Financed Stock, so long as such use of proceeds
complies with applicable requirements of the Code and
regulations thereunder); and
(l) the loan must be primarily for the benefit of Participants and
their beneficiaries.
12.05 Use of Exempt Loan Proceeds
(a) The proceeds of any Exempt Loan shall be used within a
reasonable time after receipt thereof to acquire Common Stock,
to repay such loan, or to repay a prior Exempt Loan as
determined by the Committee in its sole discretion. Except as
required by law, Common Stock acquired with the proceeds of an
Exempt Loan may not at that time or at any time thereafter be
subject to any put, call, option, buy-sell or other similar
arrangement.
(b) All shares of Common Stock acquired by the Trustee with the
proceeds of an Exempt Loan shall be allocated to a separate
Stock Suspense Account within the Trust and be held therein
until allocated to the Employer Accounts of Participants
pursuant to the provisions of Section (d) below.
(c) As of the last day of any Plan Year (each date being referred to
as a "Release Date"), there shall be released from the Stock
Suspense Account and allocated to Participants' Company Accounts
in accordance with the provisions of Section 12.06(c) below a
number of shares of Financed Stock, as determined in a
reasonable and nondiscriminatory manner by the Committee and
subject to the provisions of Sections (d) and (e) below.
(d) If the conditions of this Section 12.05 (d) are satisfied, the
percentage of Financed Stock to be released on each Release Date
equals the Indebtedness repaid during the current Plan Year
divided by the Indebtedness originally incurred.
(1) The formula set forth in this Section 12.05(d) may be
used if (a) the Board elects its use no later than the
time when stock
45
acquired under a particular Loan Agreement is first
released, (b) the term of the Loan Agreement does not
exceed ten (10) years, and (c) the Loan Agreement
provides for the repayment of Indebtedness on a basis
that results in the amortization of Indebtedness no less
rapidly than under standard amortization tables.
(e) If the formula set forth in Section 12.05(d) is not used, the
percentage of shares of Financed Stock so released from the
Stock Suspense Account, as of each Release Date shall not be
less than the total number of shares of Financed Stock in the
Stock Suspense Account immediately prior to the first day of
such Plan Year multiplied by a fraction, the numerator of which
is equal to the total dollar amount of Indebtedness and Interest
actually paid by the Trustee with respect to such Plan Year to
amortize the Exempt Loan and the denominator of which is the sum
of the numerator plus the total dollar amount of Indebtedness
and Interest due for all future periods of such Exempt Loan
after the end of such Plan Year.
12.06 Allocations and Accounting
(a) The provisions of this Section 12.06 shall govern the allocation
of Employer Contributions that are used to make payments on an
Exempt Loan.
(b) Any Financed Stock acquired by the Leveraged ESOP shall be
allocated initially to the Stock Suspense Account. Each
Participant's Employer Account shall reflect such Participant's
interest in the Leveraged ESOP.
(c) (1) Each Participant's Employer Account shall be credited
with its allocated share of Common Stock released from
the Stock Suspense Account pursuant to Sections 12.05(d)
and 12.05(e). Each Participant's Employer Account will
be credited with its allocable share of cash dividends
on Common Stock allocated to such Participant's Employer
Account and proceeds from the sale of such shares of
Common Stock.
(2) Each Participant's Employer Account shall be debited for
Common Stock distributed to said Participant from such
Employer Account pursuant to applicable Plan provisions,
or for its allocable share of Common Stock sold by the
Trustee or otherwise removed from such Employer Account
in accordance with any applicable provisions of the
Plan. Each Participant's Employer Account shall be
debited for cash payments which are distributed to said
Participant from such Account pursuant to applicable
Plan provisions.
(d) All Common Stock released from the Stock Suspense Account as of
any Release Date are allocated among the Participants' Employer
Matching Contribution
46
Account, to the extent that Employer Matching Contributions made
on their behalf were utilized to pay Interest or repay
Indebtedness. Common Stock not so allocated is allocated to the
Equity Builder Contributions Account of active Participants in
accordance with the provisions of Section 4.03(b).
(e) As of each Release Date in each Plan Year, the Financed Stock
that is released from the Stock Suspense Account, if any,
pursuant to the provisions of Sections 12.05(d) and 12.05(e)
shall be allocated to the Employer Accounts of Participants.
Each Participant's allocable share of Financed Stock shall be
calculated by multiplying the aggregate number of shares of
Financed Stock released on such Release Date by a fraction, the
numerator of which is the Contribution made for such Plan Year
by the Employer on behalf of such Participant pursuant to
Section 4.03, and the denominator of which is the aggregate
contribution to be made by the Employer on behalf of all
Participants pursuant to Section 4.03 for such Plan Year.
12.07 Use of Cash Dividends on Common Stock
(a) All dividends received with respect to Financed Stock are used
to pay Interest or repay Indebtedness. If, however, dividends
that would otherwise be allocated to Participants' Accounts or
distributed to them in accordance with Section 12.08 are used to
pay Interest or repay Indebtedness, Company Stock equal in value
to the dividends so applied must be allocated to each
Participant's Equity Builder Account, in addition to any other
allocations under this Plan.
(b) Except as otherwise provided for in Section 12.09, after a loan
has been repaid, dividends on stock acquired with the proceeds
of the loan are distributed or allocated in accordance with
Section 12.08. The refinancing of a loan through a new loan
transaction is not deemed to be repayment for purposes of this
Section 12.07.
12.08 Pass-Through of Dividends on Company Stock
Effective for Plan Years beginning before January 1, 2002, and except as
otherwise provided for in Section 12.07, all dividends received with
respect to Company Stock held by the Plan must, in the discretion of the
Committee, either be (a) distributed to Participants no later than 90
days after the end of the Plan Year in which they are received, or (b)
allocated to Participants' Equity Builder Accounts; or (c) allocated to
Participants' Matching Contribution Accounts. This distribution or
allocation shall equal in amount the value of dividends received by the
Trust with respect to that number of shares of Common Stock which
represents such Participant's proportional interest in the Company Stock
Fund.
12.09 Common Stock Dividends
47
(a) Dividends Paid on or after November 1, 2002
(1) Notwithstanding any other provision of Article 12 to the
contrary each Participant may elect to:
(i) receive a distribution in cash equal to the
value of any dividends paid by the Company on or
after November 1, 2002 and received by the Trust
with respect to shares of Common Stock allocated
to his Employer Accounts at the close of
business on the ex-dividend date established for
the payment of such dividends; or
(ii) reinvest in the Company Stock Fund any dividends
paid by the Company on or after November 1, 2002
and received by the Trust with respect to shares
of Common Stock allocated to his Employer
Accounts at the close of business on the
ex-dividend date established for the payment of
such dividends.
(2) Any distribution pursuant to Section 12.09(a)(1)(i)
shall be made as soon as is administratively feasible
following receipt of the dividends by the Trust, but in
no event later than 90 days after the close of the Plan
Year in which such dividends were paid by the Company.
(3) If a Participant fails to make an election pursuant to
Section 12.09(a)(1)(i), he shall be deemed to have made
an election pursuant to Section 12.09(a)(1)(ii).
(b) Dividends Paid From November 1, 2001 to October 31, 2002
A Participant may make an election, as provided for in Section
12.09(a)(1), with respect to any dividends paid by the Company
to the Trust during the Company's tax year ending October 31,
2002.
(c) Elections
The Committee shall specify the manner in which Participants
will be required to make their elections subject to the
following conditions:
(1) The Committee shall provide no less than annually each
Participant an opportunity to make an election.
(2) A Participant's election shall take effect immediately
following receipt by the Committee and shall remain in
effect until an election to the
48
contrary is filed by such Participant.
(3) A Participant's election shall become irrevocable the
latter of (i) the date on which the dividends
attributable to such election are paid to the Trust, or
(ii) the date established by the Committee for revoking
such an election.
(4) The rules established by the Committee for making an
election shall be applied in a uniform and
nondiscriminatory manner.
(d) Vesting
Notwithstanding anything in the Plan to the contrary, a
Participant shall become fully vested in all dividends received
by the Trust for which an election pursuant to Section
12.09(a)(1) is offered.
12.10 Diversification Election
(a) If a Participant attains age 55 and has 10 years of
participation, the Participant shall be entitled to elect each
Plan Year in the Election Period, as defined below, to transfer
to other investment options a percentage of the shares of Common
Stock allocated to his Employer Account. The percentage of the
shares of Common Stock allocated to a Participant's Employer
Account as to which he may elect to so transfer shall be: 25% as
to the first Plan Year for which an election may be made
pursuant to this Section (a); 25% reduced by the number of
shares of Common Stock with respect to which an election was
previously made pursuant to this Section (a) as to each of the
second, third, fourth, and fifth Plan Years for which an
election may be made pursuant to this Section (a); and 50%
reduced by the number of shares of Common Stock with respect to
which an election was previously made pursuant to this Section
(a) as to the last Plan Year for which an election may be made
pursuant to this Section (a). The term "Election Period" shall
mean a period of six (6) Plan Years beginning with the first
Plan Year that the Participant becomes eligible to make an
election.
(b) A Participant's election to transfer pursuant to Section (a)
above as to a Plan Year may be made at any time during the
ninety day period immediately following the close of such Plan
Year by filing a written election with the Committee. The
Committee shall direct the Trustee in writing to liquidate,
including a specific direction as to the manner in which to
liquidate, the shares of Common Stock as to which a Participant
has made a transfer election and to transfer such cash proceeds
to the other investment option or options elected as soon as
administratively feasible and not later than the expiration of
the 90 day period immediately following the close of the
election period as to which the Participant's transfer election
is made.
49
(c) The Committee may determine with respect to any Plan Year that
in lieu of the investment diversification alternative required
to be provided pursuant to Sections 12.10 (a) and (b), all
Participants to whom the diversification election provided in
Section 12.10(a) must be offered shall be given a 90 day
election following the end of the Plan Year, with respect to the
percentage of Common Stock specified in Section 12.10 (a), to
have such stock distributed to him, or to have such stock sold
and the proceeds distributed to him. The Committee shall direct
the Trustee in writing, to liquidate, including a specific
direction as to the manner in which to liquidate, the shares of
Common Stock as to which a Participant has made a distribution
election and to distribute such cash proceeds, or to distribute
the shares of Common Stock, as applicable, as soon as
administratively feasible following the end of the 90 day
election period.
12.11 Voting and Tendering of Company Stock
The Trustee shall vote each share of Common Stock held under the Plan.
Each Participant shall be entitled to direct the Trustee as to the
manner in which the voting rights attributable to the shares of Common
Stock allocated to his Employer Accounts as of the relevant record date
are to be exercised. The Trustee shall vote all shares of Common Stock
as to which it receives timely voting instructions solely in accordance
with such instructions, provided that the Trustee may vote the shares as
it determines is reasonably necessary to fulfill its fiduciary duties
under ERISA. If a Participant does not, with respect to any matter, give
instructions concerning the voting of stock allocated to his Employer
Accounts, the Trustee shall vote that Participant's Employer Accounts
Common Stock in the same proportions as Common Stock for which
instructions have been received, subject to its fiduciary duties under
ERISA.
Except as otherwise required by the fiduciary standards of ERISA Section
404, the Trustee shall vote Common Stock held in the Stock Suspense
Account in the same proportions as Common Stock that has been allocated
to Participants' Employer Accounts.
ARTICLE 13
TOP-HEAVY PROVISIONS
13.01 Top-Heavy
The following provisions shall become effective in any Plan Year in
which the Plan is determined to be a Top-Heavy Plan.
(a) The following terms when used in this Article 13 shall have the
designated meaning unless a different meaning is plainly
required by the context in which the term is used:
(1) "Key Employee" shall mean any individual who meets the
criteria of a Key
50
Employee as defined in Code Section 416(i)(1).
(2) "Determination Date" shall mean, with respect to any
Plan Year, the last day of the immediately preceding
Plan Year.
(3) "Permissive Aggregation Group" means any grouping of
plans of the Employer which includes the Required
Aggregation Group, plus any other plans of the Employer
that allow, when aggregated, the resulting group of
plans to meet the requirements of Code Sections
401(a)(4) and 410.
(4) "Required Aggregation Group" means each plan of the
Employer in which a Key Employee is a participant, and
each other plan of the Employer which enables any plan
in which a Key Employee participates to meet the
requirements of Code Sections 401(a)(4) or 410.
(5) "Non-Key Employee" shall mean any individual who is not
a Key Employee.
(b) The Plan will be considered a Top-Heavy Plan for the Plan Year,
if, as of the last Determination Date:
(1) the aggregate of the Accounts of Participants who are
Key Employees exceeds 60% of the aggregate of the
accounts of all Participants (the "60% Test"), or
(2) the Plan is part of a Required Aggregation Group and the
Required Aggregation Group meets the requirements of
Section 13.01(b)(1).
However, and notwithstanding the results of the 60% Test, the Plan shall
not be considered a Top-Heavy Plan for any Plan Year in which the Plan
is a part of a Required or Permissive Aggregation Group which is not
top-heavy. Distributions made with respect to Employees within the
five-year period ending on the Determination Date shall be included for
purposes of making the 60% Test. If any employee has not performed
services for the Employer at any time during the five-year period ending
on the Determination Date, any Account of such employee shall not be
taken into account for purposes of the foregoing determination. If any
Employee is a Non-Key Employee for any Plan Year, but was a Key Employee
for any prior Plan Year, the Non-Key Employee's Account shall not be
taken into account for purposes of the foregoing determination for any
Plan Year following the last Plan Year for which the Employee was
treated as a Key Employee.
Solely for the purpose of determining if the Plan, or any other plan
included in a required aggregation group of which this Plan is a part,
is top-heavy (within the meaning of Code Section 416(g)) the accounts of
an Employee other than a Key Employee shall be determined under (1) the
method, if any, that uniformly applies for accrual purposes under all
plans
51
maintained by the Employer, or (2) if there is no such method, as if
such benefit accrued not more rapidly than the slowest accrual rate
permitted under the fractional accrual rate of Code Section
411(b)(1)(C). Rollover Contributions or transfers initiated by the
Employee and made from another qualified plan within the meaning of Code
Section 401(a) maintained by an employer (other than the Employer or an
Affiliated Company), shall not be taken into account with respect to
this Plan for purposes of determining whether this Plan is top-heavy (or
whether any aggregation group which includes this Plan is top-heavy).
(c) The minimum annual contribution for a Non-Key Employee shall be
equal to the lesser of:
(1) 3% of his compensation (within the meaning of Code
Section 415), or
(2) the percentage at which contributions are made (or
required to be made) under the Plan, including Elective
Deferral Contributions, for the plan year for the Key
Employee for whom such percentage is the highest.
Each Participant who is a Non-Key Employee and who is also a
Participant in a defined benefit plan maintain by the Employer
shall receive a minimum benefit accrual under the defined
benefit plan to the extent provided therein, and, to the extent
that the minimum benefits provided thereunder are not sufficient
to satisfy the requirements of Code Section 416, shall receive a
minimum contribution under this Plan. The minimum contribution
under this Plan shall in no event be greater than that which is
necessary, when combined with the benefits provided to the
Participant under the defined benefit plan (including the
minimum benefit provisions therein), to satisfy the requirements
of Code Section 416.
(d) If the Plan is top-heavy for any Plan Year, a Participant's
Account shall be vested in accordance with the following table.
However, in no event shall the vested percentage of any
Participant Account be less than that provided in Section 8.01
of the Plan if the Plan were not top-heavy for such Plan Year.
Years of Vested
Vesting Service Percentage
less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
(e) If the Plan becomes a Top-Heavy Plan and subsequently ceases to
be such, the vesting schedule in Section (d) of this Section
13.01 shall continue to apply in
52
determining the deferred vested benefit of any Participant who
had a least three years of vesting service (five years of
vesting service for Plan Years beginning before January 1, 1989)
as of December 31 in the last Plan Year of top-heaviness. For
other Participants, said schedule shall apply only to their
Account balances as of such December 31.
13.02 Modification of Top-Heavy Rules
Notwithstanding anything contained in this Plan to the contrary, for
purposes of determining whether the plan is a top-heavy plan under
section 416(g) of the Code for Plan Years beginning after December 31,
2001, and whether the plan satisfies the minimum benefits requirements
of section 416(c) of the Code for such years the following shall apply:
(a) Determination of top-heavy status.
(1) Key employee. Key employee means any employee or former
employee (including any deceased employee) who at any
time during the plan year that includes the
determination date was an officer of the employer having
annual compensation greater than $130,000 (as adjusted
under section 416(i)(1) of the Code for plan years
beginning after December 31, 2002), a 5-percent owner of
the employer, or a 1-percent owner of the employer
having annual compensation of more than $150,000. For
this purpose, annual compensation means compensation
within the meaning of section 415(c)(3) of the Code. The
determination of who is a key employee will be made in
accordance with section 416(i)(1) of the Code and the
applicable regulations and other guidance of general
applicability issued thereunder.
(2) Determination of present values and amounts. This
Section 13.02(a)(2) shall apply for purposes of
determining the present values of accrued benefits and
the amounts of account balances of employees as of the
determination date.
(3) Distributions during year ending on the determination
date. The present values of accrued benefits and the
amounts of account balances of an employee as of the
determination date shall be increased by the
distributions made with respect to the employee under
the plan and any plan aggregated with the plan under
section 416(g)(2) of the Code during the 1-year period
ending on the determination date. The preceding sentence
shall also apply to distributions under a terminated
plan which, had it not been
53
terminated, would have been aggregated with the plan
under section 416(g)(2)(A)(i) of the Code. In the case
of a distribution made for a reason other than
separation from service, death, or disability, this
provision shall be applied by substituting "5-year
period" for "1-year period."
(4) Employees not performing services during year ending on
the determination date. The accrued benefits and
accounts of any individual who has not performed
services for the employer during the 1-year period
ending on the determination date shall not be taken into
account.
(b) Minimum benefits.
(1) Matching contributions. Employer matching contributions
shall be taken into account for purposes of satisfying
the minimum contribution requirements of section
416(c)(2) of the Code and the plan. The preceding
sentence shall apply with respect to matching
contributions under the plan or, if the plan provides
that the minimum contribution requirement shall be met
in another plan, such other plan. Employer matching
contributions that are used to satisfy the minimum
contribution requirements shall be treated as matching
contributions for purposes of the actual contribution
percentage test and other requirements of section 401(m)
of the Code.
(2) Contributions under other plans. The employer may
provide in the adoption agreement that the minimum
benefit requirement shall be met in another plan
(including another plan that consists solely of a cash
or deferred arrangement which meets the requirements of
section 401(k)(12) of the Code and matching
contributions with respect to which the requirements of
section 401(m)(11) of the Code are met.
ARTICLE 14
PLAN ADMINISTRATION
14.01 Committee
The day-to-day operations of the Plan are administered by one or more
persons appointed by the Board of Directors, who are referred to in this
Plan as the "Committee". The Board may remove any member of the
Committee at any time with or without cause. The Board will fill
54
vacancies in the Committee as soon as is reasonably possible after the
vacancy occurs. Until a new appointment is made, the remaining member or
members of the Committee have full authority to act. The Board is
responsible for transmitting to the Trustee the names and authorized
signatures of the members of the Committee and, as changes take place in
membership, the names and signatures of new members. Any member of the
Committee may resign by delivering his written resignation to the Board,
the Trustee and the Committee. Any such resignation becomes effective
upon its receipt by the Board or on such other date as is agreed to by
the Board and the resigning member. The Committee acts by a majority of
its members at the time in office, and such action may be taken either
by vote at a meeting or by consent in writing without a meeting. The
Committee may adopt such rules and appoint such subcommittees as it
deems desirable for the conduct of its affairs and the administration of
the Plan.
14.02 Powers of the Committee
In carrying out its duties with respect to the general administration of
the Plan, the Committee has, in addition to any other powers conferred
by the Plan or by law, the following powers:
(a) to determine all questions relating to eligibility to
participate in the Plan;
(b) to compute and certify to the Trustee the amount and kind of
distributions payable to Participants and their Beneficiaries;
(c) to maintain all records necessary for the administration of the
Plan except for those maintained by the Company or Trustee;
(d) to interpret the provisions of the Plan and to make and publish
such rules for the administration of the Plan not inconsistent
with the terms thereof;
(e) to establish and modify the method of accounting for the Plan or
the Trust;
(f) to employ counsel, accountants and other consultants to aid in
exercising its powers and carrying out its duties hereunder;
(g) to appoint, at the direction of the Company, an Investment
Manager (as defined in ERISA Section 3(38)), who shall have
responsibility for investment of the Trust Fund; and
55
(h) to perform any other acts necessary and proper for the
administration of the Plan, except such acts that are to be
performed by the Company or the Trustee.
14.03 Indemnification of Members of the Committee.
The Company agrees to indemnify and hold harmless each member of the
Committee against any and all expenses and liabilities arising out of
his action or failure to act in such capacity, excepting only expenses
and liabilities arising out of his own willful misconduct or gross
negligence. This right of indemnification is in addition to any other
rights to which any member of the Committee may be entitled.
14.04 Liabilities for which Members of the Committee are Indemnified
Liabilities and expenses against which a member of the Committee is
indemnified hereunder include, without limitation, the amount of any
settlement or judgment, costs, counsel fees and related charges
reasonably incurred in connection with a claim asserted or a proceeding
brought against him or her or the settlement thereof.
14.05 Company's Right to Settle Claims
The Company may, at its own expense, settle any claim asserted or
proceeding brought against any member of the Committee when such
settlement appears to be in the best interests of the Company.
14.06 Fiduciary Liability Insurance
If the Company obtains fiduciary liability insurance to protect the
Committee, the provisions of this Section 14.6 will apply only to the
extent that such insurance coverage is not sufficient.
14.07 Designation of Members of the Committee as Named Fiduciaries
The members of the Committee are hereby designated as "named
fiduciaries", within the meaning of section 402(a) of ERISA, with
respect to the operation and administration of the
56
Plan and are, except to the extent provided by Section 14.8, jointly
responsible for administering the Plan in accordance with its terms.
14.08 Procedures for Allocating or Delegating Fiduciary Responsibilities
The Committee may establish procedures for (a) the allocation of
fiduciary responsibilities (other than "trustee responsibilities" as
defined in section 405(c) of ERISA) under the Plan among its members,
and (b) the designation of persons other than named fiduciaries to carry
out fiduciary responsibilities (other than trustee responsibilities)
under the Plan.
If any fiduciary responsibility is allocated or delegated to any person,
no named fiduciary is liable for any act or omission of such person,
except as provided in section 405(c) of ERISA.
The Company shall be empowered to appoint and remove the Trustee and
Committee from time to time as it deems necessary for the proper
administration of the Plan to assure that the Plan is being operated for
the exclusive benefit of the Participants and their Beneficiaries in
accordance with the terms of the Plan, the Code, and the Act.
14.09 Filing of Claim
If a dispute arises between the Committee and a Participant or
Beneficiary over the amount of benefits payable under the Plan, the
Participant or Beneficiary may file a claim for benefits by notifying
the Committee in writing of his claim. Such notification may be in any
form adequate to give reasonable notice to the Committee, must set forth
the basis of the claim and must authorize the Committee to conduct such
investigations as may be necessary to determine the validity of the
claim and to take such steps as may be necessary to facilitate the
payment of any benefits to which the claimant may be entitled under the
Plan.
14.10 Time for Initial Decision
The Committee is required to decide whether to grant a claim within 90
days after the date on which the claim is filed, unless special
circumstances require a longer period for adjudication and the claimant
is notified in writing of the reasons for an extension of time. No
extensions, however, are permitted beyond 90 days after the date on
which the claimant received notice of the extension of time from the
Committee. If the Committee fails to notify
57
the claimant of its decision to grant or deny the claim within the time
specified by this Section, the claim will be deemed to have been denied,
and the review procedure described in Section 14.12 will become
available to the claimant.
14.11 Notice of Denial
Whenever a claim for benefits is denied, written notice prepared in a
manner calculated to be understood by the claimant, will be provided to
him, setting forth the specific reasons for the denial and explaining
the procedure for reconsideration of the decision made by the Committee.
If the denial is based upon submission of information insufficient to
support a decision, the Committee will specify the information necessary
to perfect the claim and its reasons for requiring such additional
information.
14.12 Manner of Reconsideration
Any claimant whose claim is denied may, within 60 days after his receipt
of written notice of denial, request in writing a reconsideration of its
decision by the Committee. The claimant or his representative may
examine any Plan documents relevant to his claim and may submit issues
and comments in writing.
14.13 Time for Reconsideration
The Committee is required to review and reconsider its decision within
60 days after its receipt of the claimant's written request, unless
special circumstances require a longer period for adjudication and the
claimant is notified in writing of the reasons for an extension of time.
A decision must, however, be made no later than 120 days after the
Committee's receipt of the claimant's written request. If the Committee
fails to notify the claimant of its decision within the time specified
by this Section, the claim will be deemed to have been denied on
reconsideration.
14.14 Notice of Adverse Decision on Reconsideration
The Committee's decision to deny a claimant's request for
reconsideration must be in writing, must state specifically the reasons
for the decision, must be written in a manner calculated to be
understood by the claimant and must make specific reference to the
pertinent Plan provisions upon which it is based.
58
14.15 Expenses of the Committee
The members of the Committee serve without compensation for services as
such. All expenses of the Committee are paid out of the Trust Fund,
unless paid by the Employers. Expenses payable from the Trust include
any expenses incidental to the functioning of the Committee, including,
but not limited to, fees of legal counsel, accountants and other
specialists.
14.16 Conduct of Committee Business
The Committee may select one of its members as secretary to keep minutes
of its proceedings and to have custody of all data, records and
documents pertaining to the administration of the Plan. The Committee
may authorize one or more of its members to execute any document or
documents on behalf of the Committee, in which event the Committee must
notify the Trustee in writing of such action and the name or names of
those designated. The Trustee thereafter may accept and rely
conclusively upon any direction or document executed by such member or
members as representing action by the Committee until such time as the
Committee files with the Trustee a written revocation of the
designation.
14.17 Agent for Service of Process
The Committee is hereby designated as the agent for service of process
in any action brought against the Plan or Trust.
ARTICLE 15
AMENDMENT AND TERMINATION
15.01 Right to Amend
The Company intends for the Plan to be permanent so long as the Company
exists; however, it reserves (through action of either the Committee or
the Board) the right to modify, alter, or amend this Plan or the Trust
Agreement, from time to time, to any extent that it may deem advisable,
including, but not limited to any amendment deemed necessary to insure
the continued qualification of the Plan under Code Sections 401(a) and
401(k) or to insure compliance with ERISA; provided, however, that the
Company shall not have the authority to amend this Agreement in any
manner which will:
(a) Permit any part of the Trust Fund (other than such part as is
required to pay taxes and administrative expenses) to be used
for or diverted to purposes other than for the exclusive benefit
of the Participant or their Beneficiaries;
59
(b) Cause or permit any portion of the Trust Fund to revert to or
become the property of the Employer;
(c) Change the duties, liabilities, or responsibilities of the
Trustee without its prior written consent.
15.02 Termination and Discontinuance of Contributions
The Company (through action of either the Committee or the Board) shall
have the right at any time and for any reason to terminate this Plan
(hereinafter referred to as "Plan Termination"). Upon Plan Termination,
the Committee shall direct the Trustee with reference to the disposition
of the Trust Fund, after payment of any expenses properly chargeable
against the Trust Fund. The Trustee shall distribute all amounts held in
Trust to the Participants and others entitled to distributions based on
each Participant's Account balance in the Plan. In the event that this
Plan is partially terminated, then the provisions of this Section 15.02
shall apply, but solely with respect to the Employees Participating
Employer and shall not affect the sponsorship of the Plan by the Company
or any other Participating Employer.
In the event the Plan is terminated, partially terminated or Employer
Contributions discontinued, the Employer Account shall be fully vested
in the Participants. Any distribution after termination of the Plan may
be made at any time, and from time to time, in whole or in part to the
extent that no discrimination in value results, in cash, in securities
or other assets in kind, or in annuity contracts (other than life
annuity contracts), if applicable, as the Committee in its discretion
may determine, or, if there shall be no Committee, as the Company in its
discretion may determine. In making such distribution any and all
determinations, divisions, appraisals, apportionments and allotments so
made shall be final and conclusive.
15.03 Supplements
In adopting the Plan or at any time thereafter, an Employer may adopt a
Supplement that modifies or adds to the Plan. Any Supplement shall be
effective only if approved by the Board. Upon its effective date, any
Supplement shall be deemed incorporated by reference into the Plan as
adopted by such Employer.
15.04 Merger of the Plan
In the event of any merger or consolidation of the Plan with or transfer
in whole or in part of the assets and liabilities of the Trust or
another trust fund held hereunder to any other plan of deferred
compensation maintained or to be established for the benefit of some or
all of the Participants of this Plan, the assets of the Trust applicable
to such Participants shall be transferred to the other trust fund only
if:
60
(a) Each Participant would (if either this Plan or the other plan
then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the
benefit, which he would have been entitled to receive
immediately before the merger, consolidation or transfer (if
this Plan had been terminated);
(b) Resolutions of the Boards of Directors of all Employers under
this Plan and of any new or successor employer of the affected
Participants shall authorize such transfer of assets; and
(c) Such other plan is qualified under Code Section 401(a) and the
related trust is exempt from tax under Code Section 501(a).
ARTICLE 16
PARTICIPATING EMPLOYERS
16.01 Participation by Participating Employers
A Participating Employer may adopt this Plan by a properly executed
document evidencing such adoption, with the consent of the Board. Each
Participating Employer delegates all fiduciary and administrative
responsibilities (including the appointment and removal of fiduciaries)
allocated under the Plan to the Company, the Committee and other
fiduciaries of the Plan. Provided, however, that this delegation of
fiduciary and administrative responsibilities may be altered by
agreement between the Company and a Participating Employer.
All Participating Employers shall be listed in Appendix A to the Plan.
16.02 Withdrawal of Participating Employers
Any Participating Employer (including a present or past Employer) may
discontinue or revoke its participation in the Plan at any time without
affecting the other Employees in the Plan by delivering to the Committee
a copy of resolutions to such effect. The Committee may, in its absolute
discretion, terminate the participation in the Plan of any Participating
Employer (including a present or past Affiliated Employer) at any time
such Employer fails to discharge its obligations under the Plan.
After any discontinuance of participation, the Trustee shall transfer,
deliver and assign contracts and any other Trust Fund assets allocable
to the Participants of such Participating Employer to such new Trustee
as shall have been designated by such Participating Employer, in the
event that it has established a separate qualified plan for its
Employees; provided, however, that no such transfer shall be made if the
result is the elimination or reduction of any
61
benefits protected under Code section 411(d)(6). If no successor trustee
is designated, the Trustee shall retain such assets for the Employees of
said Participating Employer pursuant to the provisions of the Trust. In
no event shall any part of the corpus or income of the Trust Fund as it
relates to such Participating Employer be used for or diverted to
purposes other than for the exclusive benefit of the Employees of such
Participating Employer.
16.03 Requirements of Participating Employers
Each Participating Employer shall be required to use the Trustee as
provided in this Plan. The Trustee may, but is not required to,
commingle, hold and invest as one Trust Fund all contributions made by
Participating Employers, as well as all increments thereof. However, the
assets of the Plan shall, on an ongoing basis, be available to pay
benefits to all Participants and Beneficiaries under the Plan without
regard to the Employer who contributed such assets.
16.04 Transfers between Participating Employers
If a Participant is transferred to or from a Participating Employer,
this transfer shall not affect the Participant's rights under the Plan,
and all amounts credited to such Participant's Accounts, as well as his
accumulated service for eligibility and vesting, shall continue to his
credit. An Employee transferred between Participating Employers shall be
credited with all accumulated service for eligibility and vesting. No
such transfer shall be considered a termination of employment hereunder,
and the Participating Employer to which the Employee is transferred
shall be obligated to the Employee under the Plan in the same manner as
was the Participating Employer from whom the Employee was transferred.
16.05 Participating Employer Contributions
All contributions made by a Participating Employer, as provided for in
this Plan, shall be determined separately by each Participating
Employer, and shall be allocated only among the Participants eligible to
a share of the contributions of the Employer or Participating Employer
making the contribution. On the basis of the information furnished by
each Participating Employer, the Committee shall keep separate books and
records concerning the affairs of each Participating Employer hereunder
and as to the accounts and credits of the Employees of each
Participating Employer.
ARTICLE 17
MISCELLANEOUS
17.01 Laws of Florida to Apply
62
Except to the extent superseded by ERISA, all questions pertaining to
the validity, construction, and operation of the Plan shall be
determined in accordance with the laws of the State of Florida.
17.02 Protected Benefits
Early retirement benefits, retirement-type subsidies, or optional forms
of benefits protected under Code Section 411(d)(6) ("Protected
Benefits") shall not be reduced or eliminated with respect to benefits
accrued under such Protected Benefits unless such reduction or
elimination is permitted under the Code, authority issued by the
Internal Revenue Service, or judicial authority.
17.03 Credit for Qualified Military Service
Notwithstanding any provision of this Plan to the contrary, effective as
required by USERRA (i.e., December 12, 1994), contributions, benefits
and service credit with respect to qualified military service will be
provided in accordance with Code section 414(u).
17.04 No Rights under the Plan except as Set Forth Herein
Nothing in this Plan, express or implied, is intended to confer upon or
give to any person, firm, association, or corporation, other than the
parties hereto and their successors in interest, any right, remedy, or
claim under or by reason of this Plan or any covenant, condition, or
stipulation hereof, and all covenants, conditions and stipulations in
this Plan, by or on behalf of any party, are for the sole and exclusive
benefit of the parties hereto.
17.05 Undefined Terms
Unless the context clearly requires another meaning, any term not
specifically defined in this Plan is used in the sense given to it by
ERISA and the Code.
17.06 Number and Gender
When appropriate the singular as used in this Plan shall include the
plural and vice versa; and the masculine shall include the feminine.
IN WITNESS WHEREOF, HEICO Corporation has caused this instrument,
approved as of the 17TH day of December 2001, to be executed by its duly
authorized officer.
63
HEICO CORPORATION
By: _______________________
Title: ____________________
64
APPENDIX A
PARTICIPATING EMPLOYERS IN THE
HEICO SAVINGS AND INVESTMENT PLAN
Participating Employer EIN Effective Date
HEICO Corporation 65-0341002 January 1, 1985
Jet Avion Corporation 59-2699111 July 1, 1985
LPI Industries, Corporation 65-0054782 April 1, 1989
HEICO Aerospace Corporation 59-0791770 April 27, 1993
Aircraft Technologies, Inc 65-0233725 October 1, 1998
Radiant Power Corporation 65-0892651 February 1, 1999
McClain International, Inc. 58-0876596 October 1, 1998
Rogers-Dierks, Inc. 58-2428936 October 1, 1999
Turbine Kinetics, Inc. 65-0845883 October 1,1999
Air Radio & Instrument Corp. 65-0335132 October 1, 1999
Thermal Structures, Inc. 95-3168207 August 1, 1999
Santa Barbara Infrared, Inc. 77-0111325 January 1, 2000
Northwings Accessories Corp. 65-0312802 January 1, 2000
Associated Composite, Inc. 65-0705168 January 1, 2000
Leader Tech, Inc. 04-2667972 April 1, 2000
Future Aviation, Inc. 65-1011336 April 1, 2001
Analog Modules, Inc. 59-2074349 May 1, 2001
Avitech Engineering Corp. 65-1132101 January 1, 2002
Jetseal, Inc. 91-1433851 January 1, 2002
Inertial Airline Services, Inc. 34-1823836 January 1, 2002
65
APPENDIX B
PRIOR EMPLOYER ACCOUNTS
The term "Prior Employer Account" shall mean the Accounts established to hold
assets attributable to the following plans merged with or had assets transferred
to this Plan:
(1) Air Radio & Instrument Corp. Profit Sharing Plan as in existence prior
to its merger with and into this Plan as of June 30, 2000.
(2) California Manufacturing Enterprises and Affiliates 401(k) Profit
Sharing Plan as in existence prior to the transfer of assets into this
Plan as of March 15, 2000.
(3) Santa Barbara Infrared, Inc. 401(k) Profit Sharing Plan as in existence
prior to its merger with and into this Plan as of December 31, 2001.
66
APPENDIX C
SPECIAL RULES FOR PARTICIPANTS WITH PRIOR EMPLOYER ACCOUNTS
The provisions of this Appendix C shall apply only in the case of each
Participant who has a Prior Employer Account and elects an annuity as a form of
distribution from the Plan. The following provisions of this Appendix C shall
apply notwithstanding any other provision of the Plan to the contrary:
(a) If the value of a Participant's vested account balance derived from employer
and employee contributions exceeds (or at the time of any prior distribution
exceeded) $5,000, and the account balance is immediately distributable, the
Participant (or where the Participant has died, his Beneficiary) must consent to
any distribution of such account balance. The consent of the Participant shall
be obtained in writing within the 30-day period before distribution.
Notwithstanding the foregoing, the consent of the Participant shall not be
required to the extent that a distribution is required to satisfy Code Section
401(a)(9) or Code Section 415. In addition, upon termination of the Plan, if the
Employer or any Affiliate does not maintain another defined contribution plan
(other than an employee stock ownership plan as defined in Code Section
4975(e)(7), the Participant's account balance will, without the Participant's
consent, be distributed to the Participant.
(b) If distributions are made in installments, then the amount of the
installment to be distributed each year must be at least an amount equal to the
quotient obtained by dividing the Participant's entire interest by the life
expectancy of the Participant or the joint and last survivor expectancy of the
Participant and his designated Beneficiary. Life expectancy and joint and last
survivor expectancy are computed by the use of the return multiples contained in
Treasury Regulations Section 1.72-9, Table V and VI or, in the case of payments
under a contract issued by an insurance company, by use of the life expectancy
tables of the insurance company. For purposes of this computation, a
Participant's life expectancy may be recalculated no more frequently than
annually, but the life expectancy of a nonspouse Beneficiary may not be
recalculated. If the Participant's spouse is not the designated Beneficiary, the
method of distribution selected must assure that at least 50% of the present
value of the amount available for distribution is paid within the life
expectancy of the Participant.
(c) If a distribution is made as a life annuity term certain, the annuity shall
provide equal monthly payments for the life of the Participant, with the
condition that if the Participant dies before he has received all the guaranteed
monthly payments, the Participant's designated Beneficiary shall receive monthly
payments in the same amount as the Participant until the total guaranteed
monthly payments have been made to the Participant and his Beneficiary combines.
Guaranteed monthly payments shall not extend beyond 20 years.
(d) Any annuity distributed from the Plan must be nontransferable. The terms of
any annuity contract purchased and distributed by the Plan to a Participant or
spouse shall comply with the
67
requirements of this Plan.
(e) The provisions of this paragraph (e) shall apply to any Participant who
elects to receive his Account Balance in the form of an annuity.
(i) Qualified Joint and Survivor Annuity. Unless an optional form of
benefit is selected pursuant to a qualified election within the 90-day
period ending on the annuity starting date, the Account balance of a
married Participant's who elects to receive an annuity will be paid in
the form of a Qualified Joint and Survivor Annuity and the Account
balance of an unmarried Participant who elects to receive an annuity
will be paid in the form of a life annuity.
(ii) Qualified Pre-Retirement Survivor Annuity. Unless an optional form
of benefit has been selected within the election period pursuant to a
qualified election, if a Participant dies before the annuity starting
date, then the Participant's vested account balance shall be applied
toward the purchase of an annuity for the life of the surviving spouse.
The surviving spouse may elect to have such annuity distributed within a
reasonable period after the Participant's death.
Definitions
(A) "Election period." The period which begins on the first day of the
Plan Year in which the Participant attains age 35 and ends on the date of the
Participant's death. If a Participant separated from service prior to the first
day of the Plan Year in which age 35 is attained, with respect to the account
balance as of the date of separation, the election period shall begin on the
date of separation.
(B) "Earliest retirement age." The earliest date on which, under the
Plan, the Participant could elect to receive retirement benefits.
(C) "Qualified election." A waiver of a Qualified Joint and Survivor
Annuity or a Qualified Pre-Retirement Survivor Annuity. Any waiver of a
Qualified Joint and Survivor Annuity or a Qualified Pre-Retirement Survivor
Annuity shall not be effected unless: (1) the Participant's spouse consents in
writing to the election; (2) the election designates a specific beneficiary
including any class of beneficiaries or any contingent beneficiaries, which may
not be changed without spousal consent (or the souse expressly permits
designations by the Participant without any further spousal consent); (3) the
spouse's consent acknowledges the effect of the election; and (4) the spouse's
consent is witnessed by a Plan representative or notary public. Additionally, a
Participant's waiver of the Qualified Joint and Survivor Annuity shall no be
effective unless the election designates a form of benefit payment which may not
be changed without spousal consent (or the spouse expressly permits designations
by the Participant without any further spousal consent). If it is established to
the satisfaction of a Plan representative that there is no spouse or that the
spouse cannot be located, a waiver will be deemed a qualified election.
Any consent by a spouse obtained under this provision (or establishment
that the consent of
68
a spouse may not be obtained) shall be effective only with respect to such
spouse. A consent that permits designations by the Participant without any
requirement of further consent by such spouse must acknowledge that the spouse
has the right to limit consent to a specific beneficiary, and a specific form of
benefit where applicable, and that the spouse voluntarily elects to relinquish
either or both of such rights. A revocation of a prior waiver may be made by a
Participant without the consent of the spouse at any time before the
commencement of benefits. The number of revocations shall not be limited. No
consent obtained under this provision shall be valid unless the Participant has
received notice as provided in Subsection (e) below.
(D) "Qualified Pre-Retirement Survivor Annuity." A survivor annuity for
the life of the surviving spouse of the Participant which is the actuarial
equivalent of the vested Account Balance of the Participant.
(E) "Qualified Pre-Retirement Survivor Annuity." A Survivor annuity for
the life of the surviving spouse of the Participant which is the actuarial
equivalent of the vested Account Balance of the Participant.
(F) "Spouse (surviving spouse)." The spouse or surviving spouse of the
Participant, provided that a former spouse will be treated as the spouse or
surviving spouse and a current spouse will not be treated as the spouse or
surviving spouse to the extent provided under a qualified domestic relations
order as described in Code Section 414(p).
(G) "Annuity starting date." The first day of the first period for which
an amount is paid as an annuity or any other form.
(H) "Vested account balance." The aggregate value of the Participant's
vested account balances derived from employer and employee contributions
(including rollovers), whether vested before or upon death, including the
proceeds of insurance contracts, if any, on the Participant's life. The
provisions of this Section shall apply to a Participant who is vested in amounts
attributable to employer contributions, employee contributions (or both) at the
time of death or distribution.
Notice Requirements.
(A) In the case of a Qualified Joint and Survivor Annuity, the Plan
Administrator shall no less than 30 days and no more than 90 days prior to the
annuity starting date provide each Participant a written explanation of: (1) the
terms and conditions of a Qualified Joint and Survivor Annuity; (2) the
Participant's right to make and the effect of an election to waive the Qualified
Joint and Survivor Annuity form of benefit; (3) the rights of Participant's
spouse; and (4) the right to make, and the effect of, a revocation of a previous
election to waive the Qualified Joint and Survivor Annuity.
(B) In the case of a Qualified Pre-Retirement Survivor Annuity as
described in paragraph (e)(ii), above, the Plan Administrator shall provide each
Participant within the applicable period for such Participant a written
explanation of the Qualified Pre-Retirement Survivor Annuity in
69
such terms and in such manner as would be comparable to the explanation provided
for meeting the requirements of paragraph (e)(i) applicable to a Qualified Joint
and Survivor Annuity.
The applicable period for a Participant is whichever of the following
periods ends at last: (1) the period beginning with the first day of the Plan
Year in which the Participant attains age 32 and ending with the close to the
Plan Year preceding the Plan Year in which the Participant attains age 35; (2) a
reasonable period ending after the individual becomes a Participant; (3) a
reasonable period ending after (iv)(C) ceases to apply to the Participant; (4) a
reasonable period ending after this subsection first applies to the Participant.
Notwithstanding the foregoing, notice must be provided within a reasonable
period ending after separation from service in the case of a Participant who
separates from service before attaining age 35.
For purposes of applying the preceding paragraph, a reasonable period
ending after the enumerated events described in (2), (3) and (4) of the
preceding paragraph is the end of the two-year period beginning one year prior
to the date the applicable event occurs, and ending one year after that date. In
the case of a Participant who separates from service before the Plan Year in
which age 35 is attained, notice shall be provided within the two-year period
beginning one year prior to separation and ending one year after separation. Is
such a Participant thereafter returns to employment with the employer, the
applicable period of such Participant shall be redetermined.
(C) Notwithstanding the other requirements of this paragraph (iv), the
respective notices prescribed by this paragraph (iv) need not be given to a
Participant if (1) the Plan "fully subsidizes" the costs of a Qualified Joint
and Survivor Annuity or Qualified Pre-Retirement Survivor Annuity, and (2) the
Plan does not allow the Participant to waive the Qualified Joint and Survivor
Annuity or Qualified Pre-Retirement Survivor Annuity and does not allow a
married Participant to designate a nonspouse beneficiary. For purposes of this
paragraph (iv)(C), a plan fully subsidizes the costs of a benefit if no increase
in cost, or decrease in benefits to the Participant may result from the
Participant's failure to elect another benefit.
(h) Distribution After Death of Participant. In the event of the death of a
Participant after installment payments have begun, but prior to completion of
such payments, the full amount of such unpaid benefits shall continue to be paid
in the form of the previously established installments except that the
Beneficiary may request that the remaining Account Balance be paid in a lump
sum.
In the event of the death of the Participant prior to the start of any
payment of his Account Balance, distributions shall be made in the form and at
the time or times selected by the Beneficiary pursuant to this Appendix C.
70
HEICO CORPORATION
EXHIBIT 10.10
TO THE FORM 10-K
FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION FILE NUMBER 1-4604
Exhibit 10.10
_______________________________________
HEICO CORPORATION
2002 STOCK OPTION PLAN
_______________________________________
1. Purpose. The purpose of this Plan is to advance the interests of HEICO
Corporation, a Florida corporation (the "Company"), and its Related Entities by
providing an additional incentive to attract and retain qualified and competent
persons who provide services to the Company and its Related Entities, and upon
whose efforts and judgment the success of the Company and its Related Entities
is largely dependent, through the encouragement of stock ownership in the
Company by such persons.
2. Definitions. As used herein, the following terms shall have the meanings
indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Cause" shall mean a "Cause" as defined in the Optionee's employment
agreement with the Company or a Related Entity or in the absence of an
employment agreement, willful misconduct or gross negligence.
(c) "Class A Common Stock" shall mean the shares of Class A Common Stock
of the Company, par value $.01.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(e) "Committee" shall mean the committee appointed by the Board pursuant
to Section 13(a) hereof, or, if such committee is not appointed, the Board.
(f) "Common Stock" shall mean the shares of Common Stock of the Company,
par value $.01.
(g) "Company" shall mean HEICO Corporation, a Florida corporation.
(h) "Consultant" shall mean any person (other than an Employee or a
Director, solely with respect to rendering services in such person's capacity as
a Director) who is engaged by the Company or any Related Entity to render
consulting or advisory services to the Company or such Related Entity.
(i) "Continuous Service" shall mean the continuous service to the
Company or Related Entity, without interruption or termination, in any capacity
of Employee, Director or Consultant. Continuous Service shall not be considered
interrupted in the case of (i) any approved leave of absence, (ii) transfers
among the Company, any Related Entity, or any successor, in any capacity of
Employee, Director or Consultant, or (iii) any change in status as long as the
individual remains in the service of the Company or a Related Entity in any
capacity of Employee, Director or Consultant (except as otherwise provided in
the Option Agreement). An approved leave of absence shall include sick leave,
military leave, or any other authorized personal leave.
(j) "Director" shall mean a member of the Board or the board of
directors of any Related Entity.
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(k) "Effective Date" shall mean March 19, 2002.
(l) "Employee" shall mean any person, including an Officer or Director,
who is an employee of the Company or any Related Entity. The payment of a
Director's normal compensation and fee (as applicable to all Directors or
Committee members, as the case may be) by the Company or a Related Entity shall
not be sufficient to constitute "employment" by the Company.
(m) "Fair Market Value" of a Share on any date of reference shall mean
the "Closing Price" (as defined below) of the Shares on the trading day
immediately preceding the date of reference, unless the Committee or the Board
in its sole discretion shall determine otherwise in a fair and uniform manner.
For the purpose of determining Fair Market Value, the "Closing Price" of the
shares on any business day shall be (i) if the Shares are listed or admitted for
trading on any United States national securities exchange, or if actual
transactions are otherwise reported on a consolidated transaction reporting
system, the last reported sale price of the Shares on such exchange or reporting
system, as reported in any newspaper of general circulation, (ii) if the Shares
are quoted on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ"), or any similar system of automated dissemination
of quotations of securities prices in common use, the last reported sale price
of the Shares on such system or, if sales prices are not reported, the mean
between the closing high bid and low asked quotations for such day of the Shares
on such system, as reported in any newspaper of general circulation or (iii) if
neither clause (i) or (ii) is applicable, the mean between the high bid and low
asked quotations for the Shares as reported by the National Quotation Bureau,
Incorporated if at least two securities dealers have inserted both bid and asked
quotations for the Shares on at least five of the ten preceding days. If neither
(i), (ii), or (iii) above is applicable, then Fair Market Value shall be
determined by the Committee or the Board in a fair and uniform manner.
(n) "Incentive Stock Option" shall mean an incentive stock option as
defined in Section 422 of the Code.
(o) "Non-Qualified Stock Option" shall mean an Option that is not an
Incentive Stock Option.
(p) "Officer" shall mean the Company's Chairman of the Board, President,
Chief Executive Officer, principal financial officer, principal accounting
officer, any vice-president of the Company in charge of a principal business
unit, division or function (such as sales, administration or finance), any other
officer who performs a policy-making function, or any other person who performs
similar policy-making functions for the Company. Officers of Subsidiaries shall
be deemed Officers of the Company if they perform such policy-making functions
for the Company. As used in this paragraph, the phrase "policy-making function"
does not include policy-making functions that are not significant. If pursuant
to Item 401(b) of Regulation S-K (17 C.F.R. ss. 229.401(b)) the Company
identifies a person as an "executive officer," the person so identified shall be
deemed an "Officer" even though such person may not otherwise be an "Officer"
pursuant to the foregoing provisions of this paragraph.
(q) "Option" (when capitalized) shall mean any option granted under this
Plan.
(r) "Option Agreement" shall mean the agreement between the Company and
the Optionee for the grant of an option.
(s) "Optionee" shall mean a person to whom a stock option is granted
under this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death of such person.
(t) "Outside Director" shall mean a member of the Board who qualifies as
an "outside director" under Section 162(m) of the Code and the regulations
thereunder and as a "Non-Employee Director" under Rule 16b-3 promulgated under
the Securities Exchange Act.
(u) "Parent" shall mean any corporation (other than the Company),
whether now or hereafter existing, in an unbroken chain of corporations ending
with the Company, if each of the corporations in the chain (other than the
Company) owns stock possessing 50% or more of the combined voting power of all
classes of stock in one of the other corporations in the chain.
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(v) "Plan" shall mean this 2002 Stock Option Plan for the Company.
(w) "Related Entity" shall mean any Parent or Subsidiary, and any
business, corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds a substantial ownership
interest, directly or indirectly.
(x) "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(y) "Share" or "Shares" shall mean a share of Common Stock or Class A
Common Stock.
(z) "Subsidiary" shall mean any corporation (other than the Company),
whether now or hereafter existing, in an unbroken chain of corporations
beginning with the Company, if each of the corporations other that the last
corporation in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
3. Shares Available for Option Grants. The Committee or the Board may grant
to Optionees from time to time Options to purchase an aggregate number of Shares
in an amount up to 520,000 Shares from the Company's authorized and unissued
Shares. The Options granted pursuant to this Plan may be with respect to Common
Stock and/or Class A Common Stock, in such proportions as shall be determined by
the Board or the Committee in its sole discretion. The aggregate number of
Shares available for the grant of Incentive Stock Options shall be 520,000
Shares. If any Option granted under the Plan shall terminate, expire, or be
canceled or surrendered as to any Shares, new Options may thereafter be granted
covering such Shares.
4. Incentive and Non-Qualified Options.
(a) An Option granted hereunder shall be either an Incentive Stock
Option or a Non-Qualified Stock Option as determined by the Committee or the
Board at the time of grant of the Option and shall clearly state whether it is
an Incentive Stock Option or a Non-Qualified Stock Option. All Incentive Stock
Options shall be granted within 10 years from the Effective Date. Incentive
Stock Options may not be granted to any person who is not an Employee of the
Company, the Parent or a Subsidiary.
(b) Options otherwise qualifying as Incentive Stock Options hereunder
will not be treated as Incentive Stock Options to the extent that the aggregate
fair market value (determined at the time the Option is granted) of the Shares,
with respect to which Options meeting the requirements of Section 422(b) of the
Code are exercisable for the first time by any individual during any calendar
year (under all plans of the Company and its Parent and Subsidiaries), exceeds
$100,000.
5. Conditions for Grant of Options.
(a) Each Option shall be evidenced by an Option Agreement that may
contain any term deemed necessary or desirable by the Committee or the Board,
provided such terms are not inconsistent with this Plan or any applicable law.
Optionees shall be those persons who are selected by the Committee or the Board
from the class of all Employees, Directors and Consultants of the Company or any
Related Entity.
(b) In granting Options, the Committee or the Board shall take into
consideration the contribution the person has made to the success of the Company
or any Related Entities and such other factors as the Committee or the Board
shall determine. The Committee or the Board shall also have the authority to
consult with and receive recommendations from officers and other personnel of
the Company and its Related Entities with regard to these matters. The Committee
or the Board may from time to time in granting Options under the Plan prescribe
such other terms and conditions concerning such Options as it deems appropriate,
including, without limitation, (i) prescribing the date or dates on which the
Option becomes exercisable, (ii) providing that the Option rights accrue or
become exercisable in installments over a period of years, or upon the
attainment of stated goals or both, (iii) prescribing pay back to the Company of
gains realized on the exercise of Options and forfeiture or expiration of
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Option rights, or (iv) relating an Option to the Continuous Service or continued
employment of the Optionee for a specified period of time, provided that such
terms and conditions are not more favorable to an Optionee than those expressly
permitted herein.
(c) The Options granted to Optionees under this Plan shall be in
addition to regular salaries, pension, life insurance or other benefits related
to their employment or Continuous Service with the Company or its Related
Entities. Neither the Plan nor any Option granted under the Plan shall confer
upon any person any right to employment or continuance of employment or
Continuous Service by the Company or its Related Entities.
(d) The Committee or the Board shall have the discretion to grant
Options that are exercisable for unvested Shares. Should the Optionee's
Continuous Service cease while holding such unvested Shares, the Company shall
have the right to repurchase, at the exercise price paid per share, any or all
of those unvested Shares. The terms upon which such repurchase right shall be
exercisable (including the period and procedure for exercise and the appropriate
vesting schedule for the purchased Shares) shall be established by the Committee
or the Board and set forth in the Option Agreement for the relevant Option.
(e) Notwithstanding any other provision of this Plan, an Incentive Stock
Option shall not be granted to any person owning directly or indirectly (through
attribution under Section 424(d) of the Code) at the date of grant, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (or of any Parent or Subsidiary of the Company at the date
of grant) unless the option price of such Option is at least 110% of the Fair
Market Value of the Shares subject to such Option on the date the Option is
granted, and such Option by its terms is not exercisable after the expiration of
five years from the date such Option is granted.
(f) Subject to the provision of Section 5(g) below, notwithstanding any
other provision of this Plan, and in addition to any other requirements of this
Plan, the aggregate number of Options granted to any one Optionee may not exceed
250,000 per fiscal year of the Company, subject to adjustment as provided in
Section 10 hereof. The aggregate number of Options granted to any one Optionee
may be increased from 250,000 per fiscal year to 400,000 (subject to adjustment
as provided in Section 10 hereof) as an initial one-time grant available only in
the fiscal year of the Company in which an Optionee is first employed by the
Company or one of its Related Entities.
(g) Upon the exercise of an option granted under the Plan or under any
other stock plan of the Company which may be designated by the Committee or the
Board from time to time, the Optionee, at the discretion of the Committee or the
Board, may receive a reload option on the terms, conditions and limitations
determined by the Committee or the Board, from time to time. A reload option
gives the Optionee the right to purchase a number of Shares equal to the number
of Shares surrendered to pay the exercise price and/or used to pay the
withholding taxes applicable to an Option exercise. Reload options do not
increase the net equity position of an Optionee. Their purpose is to facilitate
continued stock ownership in the Company by Optionees.
6. Option Price. The option price per Share of any Option shall be any
price determined by the Committee or the Board but shall not be less than the
par value per Share; provided, however, that in no event shall the option price
per Share of any Incentive Stock Option be less than the Fair Market Value of
the Shares underlying such Option on the date such Option is granted.
7. Exercise of Options.
(a) An Option shall be deemed exercised when (i) the Company has
received written notice of such exercise in accordance with the terms of the
Option, (ii) full payment of the aggregate option price of the Shares as to
which the Option is exercised has been made, and (iii) arrangements that are
satisfactory to the Committee or the Board in its sole discretion have been made
for the Optionee's payment to the Company of the amount that is necessary for
the Company or Related Entity employing the Optionee to withhold in accordance
with applicable Federal or state tax withholding requirements.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, as
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well as the method of payment of the option price and of any withholding and
employment taxes applicable thereto, shall be determined by the Committee or the
Board and may in the discretion of the Committee or the Board consist of: (1)
cash, (2) certified or official bank check, (3) money order, (4) Shares that
have been held by the Optionee for at least six (6) months (or such other Shares
as the Company determines will not cause the Company to recognize for financial
accounting purposes a charge for compensation expense), (5) the withholding of
Shares issuable upon exercise of the Option, (6) pursuant to a "cashless
exercise" procedure, by delivery of a properly executed exercise notice together
with such other documentation, and subject to such guidelines, as the Board or
the Committee shall require to effect an exercise of the Option and delivery to
the Company by a licensed broker acceptable to the Company of proceeds from the
sale of Shares or a margin loan sufficient to pay the exercise price and any
applicable income or employment taxes, or (7) such other consideration as the
Committee or the Board deems appropriate, or by a combination of the above. In
the case of an Incentive Stock Option, the permissible methods of payment shall
be specified at the time the Option is granted. The Committee or the Board in
its sole discretion may accept a personal check in full or partial payment of
any Shares. If the exercise price is paid, and/or the Optionee's tax withholding
obligation is satisfied, in whole or in part with Shares, or through the
withholding of Shares issuable upon exercise of the Option, the value of the
Shares surrendered or withheld shall be their Fair Market Value on the date the
Option is exercised.
(c) The Committee or the Board in its sole discretion may, on an
individual basis or pursuant to a general program established in connection with
this Plan, cause the Company to lend money to an Optionee, guarantee a loan to
an Optionee, or otherwise assist an Optionee to obtain the cash necessary to
exercise all or a portion of an Option granted hereunder or to pay any tax
liability of the Optionee attributable to such exercise. If the exercise price
is paid in whole or part with the Optionee's promissory note, such note shall
(i) provide for full recourse to the maker, (ii) be collateralized by the pledge
of the Shares that the Optionee purchases upon exercise of the Option, (iii)
bear interest at the prime rate of the Company's principal lender, and (iv)
contain such other terms as the Committee or the Board in its sole discretion
shall reasonably require.
(d) No Optionee shall be deemed to be a holder of any Shares subject to
an Option unless and until a stock certificate or certificates for those Shares
are issued to that person(s) under the terms of this Plan. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date is
prior to the date the stock certificate is issued, except as expressly provided
in Section 10 hereof.
8. Exercisability of Options. Any Option shall become exercisable in such
amounts, at such intervals and upon such terms and/or conditions as the
Committee or the Board shall provide in the Option Agreement for that Option,
except as otherwise provided in this Section 8:
(a) The expiration date of an Option Agreement shall be determined by
the Committee or the Board at the time of grant, but in no event shall an Option
be exercisable after the expiration of 10 years from the date of grant of the
Option.
(b) Unless otherwise provided in any Option, each outstanding Option
shall not become immediately fully exercisable in the event of a "Change in
Control" but shall become fully exercisable in the event that the Committee or
the Board exercises its discretion to provide a cancellation notice with respect
to the Option pursuant to Section 9(b) hereof. For this purpose, the term
"Change in Control" shall mean:
(i) Approval by the shareholders of the Company of a reorganization,
merger, consolidation or other form of corporate transaction or series of
transactions, in each case, with respect to which persons who were the
shareholders of the Company immediately prior to such reorganization, merger or
consolidation or other transaction do not, immediately thereafter, own more than
50% of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then outstanding
voting securities, in substantially the same proportions as their ownership
immediately prior to such reorganization, merger, consolidation or other
transaction, or a liquidation or dissolution of the Company or the sale of all
or substantially all of the assets of the Company (unless such reorganization,
merger, consolidation or other corporate transaction, liquidation, dissolution
or sale is subsequently abandoned); or
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(ii) Individuals who, as of the date on which the Option is granted,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board, provided that any person becoming a director
subsequent to the date on which the Option was granted whose election, or
nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board (other
than an election or nomination of an individual whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of the Directors of the Company) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; or
(iii) The acquisition (other than from the Company) by any person,
entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act, of beneficial ownership (within the meaning of Rule
13-d promulgated under the Securities Exchange Act) of 30% of either the then
outstanding Shares of the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the election of
directors (hereinafter referred to as the ownership of a "Controlling Interest")
excluding, for this purpose, any acquisitions by (1) the Company or its
Subsidiaries, (2) any person, entity or "group" that as of the date on which the
Option is granted owns beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act) of a Controlling Interest, (3)
any employee benefit plan of the Company or its Subsidiaries or (4) the
Mendelson Group. For this purpose, the term "Mendelson Group" shall mean Laurans
A. Mendelson and his immediate family, which shall include his spouse, parents,
descendants and spouses of descendants. The Mendelson Group shall also include
trusts, partnerships, limited liability companies, corporations, or other
entities in which a member or members of the Mendelson Group own, directly or
indirectly, more than fifty percent (50%) of the voting power or value.
(c) The Committee or the Board may in its sole discretion, accelerate
the date on which any Option may be exercised and may accelerate the vesting of
any Shares subject to any Option or previously acquired by the exercise of any
Option.
9. Termination of Option Period.
(a) Unless otherwise provided in any Option Agreement, the unexercised
portion of any Option shall automatically and without notice terminate and
become null and void at the time of the earliest to occur of the following:
(i) three months after the date on which the Optionee's Continuous
Service is terminated other than by reason of (A) "Cause", (B) a mental or
physical disability (within the meaning of Internal Revenue Code Section 22(e))
of the Optionee as determined by a medical doctor satisfactory to the Committee
or the Board, or (C) death of the Optionee;
(ii) immediately upon the termination of the Optionee's Continuous
Service for Cause;
(iii) twelve months after the date on which the Optionee's
Continuous Service is terminated by reason of a mental or physical disability
(within the meaning of Section 22(e) of the Code) as determined by a medical
doctor satisfactory to the Committee or the Board;
(iv) (A) twelve months after the date of termination of the
Optionee's Continuous Service by reason of the death of the Optionee, or, if
later, (B) three months after the date on which the Optionee shall die if such
death shall occur during the one year period specified in Subsection 9(a)(iii)
hereof.
(b) To the extent not previously exercised, (i) each Option shall
terminate immediately in the event of (1) the liquidation or dissolution of the
Company, or (2) any reorganization, merger, consolidation or other form of
corporate transaction (each a "Corporate Transaction") in which either the
Company does not survive or the Shares are exchanged for or converted into
securities issued by another entity, unless the successor or acquiring entity,
or an affiliate thereof, assumes the Option or substitutes an equivalent option
or right pursuant to Section
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10(c) hereof, and (ii) the Committee or the Board in its sole discretion may by
written notice ("cancellation notice") cancel, effective upon the consummation
of any Corporate Transaction, any Option that remains unexercised and would
otherwise not terminate on the effective date of that transaction. The Committee
or the Board shall give written notice of any proposed transaction referred to
in this Section 9(b) a reasonable period of time prior to the closing date for
such transaction (which notice may be given either before or after approval of
such transaction), in order that Optionees may have a reasonable period of time
prior to the closing date of such transaction within which to exercise any
Options that then are exercisable (including any Options that may become
exercisable upon the closing date of such transaction). An Optionee may
condition his exercise of any Option upon the consummation of a transaction
referred to in this Section 9(b).
10. Adjustment of Shares.
(a) If at any time while the Plan is in effect or unexercised Options
are outstanding, there shall be any increase or decrease in the number of issued
and outstanding Shares through the declaration of a stock dividend or through
any recapitalization resulting in a stock split-up, combination or exchange of
Shares, then and in that event, the Board or the Committee shall make:
(i) appropriate adjustment in the maximum number of Shares available
for grant under the Plan, or available for grant to any person under the Plan,
so that the same percentage of the Company's issued and outstanding Shares shall
continue to be subject to being so optioned; and
(ii) any adjustments it deems appropriate in the number of Shares
and the exercise price per Share thereof then subject to any outstanding Option,
so that the same percentage of the Company's issued and outstanding Shares shall
remain subject to purchase at the same aggregate option price.
(b) Unless otherwise provided in any Option Agreement, the Board or the
Committee may change the terms of Options outstanding under this Plan, with
respect to the option price or the number of Shares subject to the Options, or
both, when, in the sole discretion of the Board or the Committee, such
adjustments become appropriate so as to preserve benefits under the Plan.
(c) In the event of a proposed sale of all or substantially all of the
Company's assets or any reorganization, merger, consolidation or other form of
corporate transaction in which the Company does not survive, or in which the
Shares are exchanged for or converted into securities issued by another entity,
then the successor or acquiring entity or an affiliate thereof may, with the
consent of the Committee or the Board, assume each outstanding Option or
substitute an equivalent option or right. If the successor or acquiring entity,
or an affiliate thereof, does not cause such an assumption or substitution to
occur, or the Committee or the Board does not consent to such an assumption or
substitution, then each Option shall terminate pursuant to Section 9(b) hereof
upon consummation of the sale, merger, consolidation or other corporate
transaction.
(d) Except as otherwise expressly provided herein, the issuance by the
Company of Shares of its capital stock of any class, or securities convertible
into Shares of capital stock of any class, either in connection with a direct
sale or upon the exercise of rights or warrants to subscribe therefore, or upon
conversion of Shares or obligations of the Company convertible into such Shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made to, the number of or exercise price for Shares then subject to
outstanding Options granted under the Plan.
(e) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner the
right or power of the Company to make, authorize or consummate (i) any or all
adjustments, recapitalizations, reorganizations or other changes in the capital
structure or business of the Company or any Related Entity; (ii) any merger or
consolidation of the Company or any Related Entity; (iii) any issue by the
Company or any Related Entity of debt securities, or preferred or preference
stock that would rank above the Shares subject to outstanding Options; (iv) the
dissolution or liquidation of the Company or any Related Entity; (v) any sale,
transfer or assignment of all or any part of the assets or business of the
Company or any Related Entity; or (vi) any other corporate act or proceeding,
whether of a similar character or otherwise.
A-7
11. Transferability of Options and Shares.
(a) No Incentive Stock Option, and unless the prior written consent of
the Committee or the Board is obtained (which consent may be withheld for any
reason) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Securities Exchange Act no Non-Qualified Stock Option,
shall be subject to alienation, assignment, pledge, charge or other transfer
other than by the Optionee by will or the laws of descent and distribution, and
any attempt to make any such prohibited transfer shall be void. Each Option
shall be exercisable during the Optionee's lifetime only by the Optionee, or in
the case of a Non-Qualified Stock Option that has been assigned or transferred
with the prior written consent of the Committee or the Board, only by the
permitted assignee.
(b) No Shares acquired by an Officer or Director pursuant to the
exercise of an Option may be sold, assigned, pledged or otherwise transferred
prior to the expiration of the six-month period following the date on which the
Option was granted, unless the transaction does not violate the requirements of
Rule 16b-3 promulgated under the Securities Exchange Act.
12. Issuance of Shares.
(a) Notwithstanding any other provision of this Plan, the Company shall
not be obligated to issue any Shares unless it is advised by counsel of its
selection that it may do so without violation of the applicable Federal and
State laws pertaining to the issuance of securities, and may require any stock
so issued to bear a legend, may give its transfer agent instructions, and may
take such other steps, as in its judgment are reasonably required to prevent any
such violation.
(b) As a condition to any sale or issuance of Shares upon exercise of
any Option, the Committee or the Board may require such agreements or
undertakings as the Committee or the Board may deem necessary or advisable to
facilitate compliance with any applicable law or regulation including, but not
limited to, the following:
(i) a representation and warranty by the Optionee to the Company, at
the time any Option is exercised, that he is acquiring the Shares to be issued
to him for investment and not with a view to, or for sale in connection with,
the distribution of any such Shares; and
(ii) a representation, warranty and/or agreement to be bound by any
legends endorsed upon the certificate(s) for the Shares that are, in the opinion
of the Committee or the Board, necessary or appropriate to facilitate compliance
with the provisions of any securities laws deemed by the Committee or the Board
to be applicable to the issuance and transfer of those Shares.
13. Administration of the Plan.
(a) The Plan shall be administered by the Board or, at the discretion of
the Board, by a committee appointed by the Board (the "Committee") which shall
be composed of two or more Directors. The membership of the Committee shall be
constituted so as to comply at all times with the then applicable requirements
for Outside Directors of Rule 16b-3 promulgated under the Securities Exchange
Act and Section 162(m) of the Code. The Committee shall serve at the pleasure of
the Board and shall have the powers designated herein and such other powers as
the Board may from time to time confer upon it.
(b) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a meeting
or (ii) without a meeting by the unanimous written approval of the members of
the Committee.
(c) The Committee or the Board, from time to time, may adopt rules and
regulations for carrying out the purposes of the Plan.
A-8
(d) The determinations of the Committee, and its interpretation and
construction of any provision of the Plan or any Option Agreement, shall be
final and binding on all persons, unless determined otherwise by the Board. The
determinations of the Board, and its interpretation and construction of any
provision of the Plan or any Option Agreement, shall be final and binding on all
persons, including the Committee. In the event that any action taken by the
Board conflicts with any action taken by the Committee, the Board action shall
control.
14. Withholding or Deduction for Taxes. If at any time specified herein for
the making of any issuance or delivery of any Option or Shares to any Optionee,
any law or regulation of any governmental authority having jurisdiction in the
premises shall require the Company or a Related Entity to withhold, or to make
any deduction for, any taxes or to take any other action in connection with the
issuance or delivery then to be made, the issuance or delivery shall be deferred
until the withholding or deduction shall have been provided for by the Optionee
or beneficiary, or other appropriate action shall have been taken.
15. Interpretation.
(a) As it is the intent of the Company that the Plan shall comply in all
respects with Rule 16b-3 promulgated under the Securities Exchange Act ("Rule
16b-3"), any ambiguities or inconsistencies in construction of the Plan shall be
interpreted to give effect to such intention, and if any provision of the Plan
is found not to be in compliance with Rule 16b-3, such provision shall be deemed
null and void to the extent required to permit the Plan to comply with Rule
16b-3. The Committee or the Board may from time to time adopt rules and
regulations under, and amend, the Plan in furtherance of the intent of the
foregoing.
(b) The Plan and any Option Agreements entered into pursuant to the Plan
shall be administered and interpreted so that all Incentive Stock Options
granted under the Plan will qualify as Incentive Stock Options under Section 422
of the Code. If any provision of the Plan or any Option Agreement relating to an
Incentive Stock Option should be held invalid for the granting of Incentive
Stock Options or illegal for any reason, that determination shall not affect the
remaining provisions hereof, but instead the Plan and the Option Agreement shall
be construed and enforced as if such provision had never been included in the
Plan or the Option Agreement.
(c) This Plan shall be governed by the laws of the State of Florida.
(d) Headings contained in this Plan are for convenience only and shall
in no manner be construed as part of this Plan.
(e) Any reference to the masculine, feminine, or neuter gender shall be
a reference to such other gender as is appropriate.
16. Amendment and Discontinuation of the Plan. The Committee or the Board
may from time to time amend, suspend or terminate the Plan or any Option;
provided, however, that, any amendment to the Plan shall be subject to the
approval of the Company's shareholders if such shareholder approval is required
by any applicable federal or state law or regulation (including, without
limitation, Rule 16b-3 or to comply with Section 162(m) of the Code) or the
rules of any stock exchange or automated quotation system on which the Shares
may then be listed or granted. Except to the extent provided in Sections 9 and
10 hereof, no amendment, suspension or termination of the Plan or any Option
issued hereunder shall substantially impair the rights or benefits of any
Optionee pursuant to any Option previously granted without the consent of the
Optionee.
17. Effective Date and Termination Date. The Effective Date of the Plan is
March 19, 2002, and the Plan shall terminate on the 10th anniversary of the
Effective Date. This Plan shall be submitted to the shareholders of the Company
for their approval and adoption and Options hereunder may be granted prior to
such approval and adoption; provided, however, that any Incentive Stock Options
granted hereunder, and if but only to the extent otherwise required by law or
the rules of any stock exchange or automated quotation system on which the
Shares may be listed, any Non-Qualified Stock Options granted hereunder, prior
to such approval and adoption shall be contingent upon obtaining such approval
and adoption.
A-9
HEICO CORPORATION
EXHIBIT 21
TO THE FORM 10-K
FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION FILE NUMBER 1-4604
Exhibit 21
SUBSIDIARIES OF HEICO CORPORATION
NAME STATE OF INCORPORATION
HEICO Aerospace Holdings Corp. Florida
HEICO Aerospace Corporation Florida
Jet Avion Corporation Florida
LPI Industries Corporation Florida
Aircraft Technology, Inc. Florida
ATI Heat Treat Corporation (Inactive) Florida
Jet Avion Heat Treat Corporation (Inactive) Florida
N.A.C. Acquisition Corporation Florida
Northwings Accessories Corporation Florida
Kinetic Technologies, Inc. Florida
HNW Building Corp. Florida
McClain International, Inc. Georgia
McClain Property Corp. Florida
Associated Composite, Inc. Florida
Rogers-Dierks, Inc. Florida
Turbine Kinetics, Inc. Florida
Air Radio & Instruments Corp. Florida
Thermal Structures, Inc. California
TSI Quality Honeycomb Holdings Corp. (Inactive) California
Future Aviation, Inc. Florida
Avitech Engineering Corp., formerly California
known as Avitech Acquisition Corp.
ATK Acquisition Corp. Florida
Parts Advantage, LLC Delaware
Aviation Facilities, Inc., formerly Florida
known as AFI Acquisition Corp.
HEICO Aerospace Parts Corp., formerly Florida
known as Flight Specialties Acquisition Corp.
Jetseal, Inc. Delaware
HEICO Aerospace Controls and Accessories Corp. Florida
HT Parts, LLC Delaware
AD HEICO Acquisition Corp. Florida
Aero Design, Inc. Tennessee
Battery Shop, LLC Tennessee
HEICO Electronic Technologies Corp. Florida
Radiant Power Corp. Florida
Leader Tech, Inc. Florida
Santa Barbara Infrared, Inc. California
101 Lummis Road Corp (Inactive) Florida
Analog Modules, Inc. Florida
Inertial Airline Services, Inc. Florida
HEICO International Corporation U.S. Virgin Islands
HEICO East Corporation Florida
HEICO-NEWCO, Inc. (Inactive) Florida
HEICO Engineering Corp. (Inactive) Florida
HEICO--Jet Corporation (Inactive) Florida
HEICO Bearings Corp. (Inactive) Florida
Subsidiaries of the Company, all of which are directly or indirectly
wholly-owned (except for HEICO Aerospace Holdings Corp. and its subsidiaries,
which are 80%-owned, Parts Advantage, LLC, which is 84% owned and HT Parts, LLC,
which is 50% owned).
HEICO CORPORATION
EXHIBIT 23
TO THE FORM 10-K
FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION FILE NUMBER 1-4604
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-4945, 33-62156, 333-8063, 333-19667, 333-26059 and 333-81789 of HEICO
Corporation on Forms S-8 of our report dated December 18, 2002, appearing in
this Annual Report on Form 10-K of HEICO Corporation for the year ended October
31, 2002.
DELOITTE & TOUCHE LLP
Fort Lauderdale, Florida
January 22, 2003
HEICO CORPORATION
EXHIBIT 99.1
TO THE FORM 10-K
FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION FILE NUMBER 1-4604
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HEICO Corporation (the "Company") on
Form 10-K for the period ended October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Laurans A. Mendelson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: January 22, 2003 /S/ LAURANS A. MENDELSON
Laurans A. Mendelson
Chief Executive Officer
HEICO CORPORATION
EXHIBIT 99.2
TO THE FORM 10-K
FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION FILE NUMBER 1-4604
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HEICO Corporation (the "Company") on
Form 10-K for the period ended October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas S. Irwin, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: January 22, 2003 /S/ THOMAS S. IRWIN
Thomas S. Irwin
Chief Financial Officer