Hawker Pacific Aerospace 10-Q 2002 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2002
OR
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________________ to __________________.

Commission File Number: 0-29490

HAWKER PACIFIC AEROSPACE

(Exact name of registrant as specified in its charter)

California	95-3528840
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11240 Sherman Way, Sun Valley, California	91352
(Address of principal executive offices)	(Zip Code)

(818) 765-6201

(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  [X]    NO  [  ]

     The number of shares of the registrant’s common stock outstanding on August 9, 2002, was one share.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 99.1

Hawker Pacific Aerospace

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

			March 31,			December 31,
			2002			2001
			(unaudited)
ASSETS
Current assets
	Cash		$	1,411		$	1,558
	Accounts receivable, less allowance for doubtful accounts of $230 and $520 at March 31, 2002 and December 31, 2001, respectively			12,132			14,927
	Inventories			30,057			31,390
	Prepaid expenses			1,481			1,088
	Deferred income taxes			3,822			3,810
		Total current assets		48,903			52,773
Equipment and leasehold improvements, net				12,313			12,591
Exchange assets, net				30,238			31,193
		Total fixed assets		42,551			43,784
Other assets				1,897			2,026
		Total assets	$	93,351		$	98,583
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
	Line of credit — related party		$	7,134		$	7,207
	Accounts payable			10,833			10,125
	Deferred revenue			5,634			7,423
	Accrued payroll and employee benefits			1,968			2,298
	Accrued expenses and other liabilities			4,225			5,800
	Current portion of note payable to related party			2,009			1,509
		Total current liabilities		31,803			34,362
Long-term debt
	Bank note			62,998			63,856
Deferred income taxes				4,700			4,625
Commitments and contingencies
Shareholders’ deficit
	Common stock: 20,000,000 shares authorized; 10,196,257 issued and outstanding at March 31, 2002, and December 31, 2001			35,977			35,977
	Accumulated deficit			(36,622	)		(34,830	)
	Accumulated other comprehensive loss			(5,505	)		(5,407	)
		Total shareholders’ deficit		(6,150	)		(4,260	)
Total liabilities and shareholders’ deficit			$	93,351		$	98,583

See accompanying Notes to Condensed Consolidated Financial Statements

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Hawker Pacific Aerospace

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

(unaudited)

	Three months ended
	March 31
	2002			2001
Revenue	$	20,687		$	18,920
Cost of revenue		18,514			14,911
Gross margin		2,173			4,009
Selling, general and administrative expense		2,680			3,074
Income (loss) from operations		(507	)		935
Interest expense, net		(1,024	)		(2,010	)
Miscellaneous expense		(261	)		—
Loss before income taxes		(1,792	)		(1,075	)
Income tax benefit		—			—
Net loss	$	(1,792	)	$	(1,075	)
Loss per common share: basic and diluted	$	(0.18	)	$	(0.14	)
Number of shares: basic and diluted		10,196,257			7,580,772

See accompanying Notes to Condensed Consolidated Financial Statements

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Hawker Pacific Aerospace

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

(unaudited)

	Common Stock							Other
					Accumulated			Comprehensive
	# of Shares		Amount		Deficit			Loss			Total
Balances at December 31, 2001		10,196,257	$	35,977		$(34,830	)		$(5,407	)		$(4,260	)
Net loss						(1,792	)					(1,792	)
Foreign currency translation									(98	)		(98	)
Comprehensive loss												(1,890	)
Balances at March 31, 2002		10,196,257	$	35,977		$(36,622	)		$(5,505	)		$(6,150	)

See accompanying Notes to Condensed Consolidated Financial Statements

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Hawker Pacific Aerospace

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

(unaudited)

			Three months ended
			March 31
			2002			2001
Operating Activities
Net loss				$(1,792	)		$(1,075	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Deferred income taxes			(12	)		—
	Depreciation and amortization			1,072			1,128
	Amortization of loan discounts and costs			33			245
	Bad debt expense			15			15
Changes in operating assets and liabilities:
	Accounts receivable and other receivables			2,696			(397	)
	Inventory			1,165			(4,328	)
	Prepaid expenses and other current assets			(332	)		(350	)
	Accounts payable			764			937
	Deferred revenue			(1,713	)		2,376
	Accrued liabilities			(2,237	)		(248	)
Cash used in operating activities				(341	)		(1,697	)
Investing Activities
Purchases of equipment, leasehold improvements and landing gear				(280	)		(150	)
Deposits for construction in progress				—			(80	)
	Cash used in investing activities			(280	)		(230	)
Financing Activities
Principal payments on bank notes				(4	)		—
Borrowings on line of credit, net				478			—
	Cash provided from financing activities			474			—
Decrease in cash				(147	)		(1,927	)
Cash, beginning of period				1,558			3,349
Cash, end of period			$	1,411			1,422
Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest	$	518		$	1,484
Non-cash items
	Conversion of principal due on the LHT note payable into common stock		$	—		$	6,749
	Conversion of interest due on the LHT note payable into common stock		$	—		$	503

See accompanying Notes to Condensed Consolidated Financial Statements

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Hawker Pacific Aerospace

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

(unaudited)

1. BASIS OF PRESENTATION

Interim Condensed Financial Statements

During interim periods, Hawker Pacific Aerospace (the “Company”) follows the accounting policies set forth in its Annual Report on Form 10-K and applies appropriate interim financial reporting standards, as indicated below. Users of financial information produced for interim periods are encouraged to refer to the notes contained in the Annual Report on Form 10-K for fiscal year 2001 when reviewing interim financial results.

The preparation of interim financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Significant estimates and assumptions include the accounts receivable allowance for doubtful accounts, a provision for potentially excess or slow-moving inventory, warranty accruals, deferred tax asset valuation allowances, and a provision for anticipated losses on future work covered by contracts performed at the Company’s UK operation (“Hawker UK”). Actual results may differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the Securities and Exchange Commission’s requirements and contain all adjustments of a normal and recurring nature that are necessary to present fairly the financial position of the Company as of March 31, 2002 and December 31, 2001, and the results of its operations and cash flows for the three-month periods ended March 31, 2002 and 2001, respectively.

Contingencies

The Company is from time to time involved in various lawsuits, claims and inquiries, which the Company believes are routine to the nature of its business. The Company is not, however, currently involved in any litigation, or subject to any claim that has not been provided for, or that would have a material adverse effect on the financial position, results of operation or cash flow of the Company.

There are various environmental remediation actions that have involved the area surrounding the Company’s Sun Valley facility. The Company has the right to be indemnified by its former parent company, BTR plc, for certain asserted claims against the Company.

On October 1, 2001, First Union Securities Inc. was awarded $989 in an arbitrated claim against the Company. First Union provided investment banking services to the Company, and the claim sought payment of their fee for those services. Pursuant to an indemnification agreement, the Company ceded control of the First Union claim to a group of individual shareholders associated with Unique Investment Corporation (the “Unique Sellers”), and the Unique Sellers agreed to indemnify the Company for any costs related to the claim in excess of $250. The Company paid First Union the $989 award in October 2001 and has since incurred additional expenses related to this matter. As of October 22, 2001, the Unique Sellers had not honored their indemnification agreement, and the Company filed an arbitration claim to enforce the terms of the agreement, which include recovery of the award, expenses in excess of $250, and certain other expenses. As of December 31, 2001, the Company recorded an account receivable in the amount of $1,000 related to this matter. On June 21, 2002, the Company entered into a settlement agreement with the Unique Sellers under which the Unique Sellers agreed to pay the Company a total of $1,000 plus interest of 10% per annum commencing on or about September 19, 2002, in installments of $250 each in June, August, October and December 2002.

On April 3, 2002 in conjunction with the tender offer commenced by Lufthansa Technik AG (“LHT”), two complaints were filed in the Superior Court of the State of California, Los Angeles County, North Central District, against the Company and its directors. The complaints alleged, inter alia, breaches of fiduciary duty to Company shareholders in connection with the LHT tender offer. In June 2002, the plaintiffs voluntarily dismissed the complaints. On July 15, 2002, the Company was officially notified of the court’s dismissal of one of the complaints, with the other dismissal pending.

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Hawker Pacific Aerospace

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

(unaudited)

Loss per Share

Basic and diluted loss per common share is computed based upon the weighted average number of common shares outstanding for the period. The number of shares used in the calculation of basic and diluted loss per share for the three months ended March 31, 2002 and 2001 was 10,196,257 and 7,580,772, respectively.

The effect of dilutive securities was not included in the computation of diluted loss per share for the three months ended March 31, 2002 and 2001 because the effect would have been antidilutive. Options to purchase 690,122 shares of common stock and 814,004 shares of common stock at exercise prices between $6.88 and $9.88 were outstanding during 2002 and 2001, respectively, and were excluded from the computation of diluted loss per share as the exercise price was greater than the average market price of the common shares. Accordingly, basic loss per share is the same as diluted loss per share for all periods presented.

2. INVENTORIES

     Inventories are comprised of the following:

	March 31,		December 31,
	2002		2001
Purchased parts and assemblies	$	22,230	$	22,672
Work in process		7,827		8,718
	$	30,057	$	31,390

3. RELATED PARTY TRANSACTIONS

On April 5, 2002, LHT and LHT Acquisition Corporation, a wholly owned subsidiary of LHT, completed a successful tender offer of the outstanding common shares of the Company not previously owned by LHT. As a result of the tender offer, LHT and LHT Acquisition Corporation collectively owned approximately 96.5% of the outstanding common shares of the Company. On April 12, 2002, LHT contributed all of its common shares of the Company to LHT Acquisition Corporation. On April 15, 2002, LHT Acquisition Corporation merged with and into the Company. Pursuant to the merger, all outstanding shares of common stock of the Company not tendered in the tender offer and not held by LHT or LHT Acquisition Corporation were converted into the right to receive $3.25 per share in cash. Upon the merger becoming effective, the one (1) outstanding share of common stock of LHT Acquisition Corporation owned by LHT was converted into one (1) outstanding share of common stock of the Company. LHT holds the one outstanding share of common stock of the Company. No other shares of common stock are outstanding.

On June 8, 2001, LHT, provided a revolving line of credit to Hawker UK. The facility, which may be drawn up to an aggregate amount of 5,200 British pounds sterling ($7,963 at August 9, 2002) and must be repaid within 364 days. On October 10, 2001 LHT agreed to extend the term of the revolving line of credit for another 365 days if Hawker UK does not have sufficient funds at its disposal to pay the loan balance in full or in part, as of the repayment date. Amounts advanced under the facility bear interest, payable monthly, at a daily average rate based on the London Sterling Overnight Index Average (“SONIA”), plus 270 basis points (approximately 6% as of March 31, 2002). Proceeds from the facility are being used for capital investment and additional working capital at Hawker UK. As of August 9, 2002, the credit line is fully utilized.

During the first quarter of 2002, the Company received $1,100 from LHT for overhaul services rendered, and purchased $1,145 of spare parts from LHT.

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Hawker Pacific Aerospace

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

(unaudited)

4. PROVISION FOR ANTICIPATED LOSSES ON CONTRACTS

The Company records a current charge to cost of revenue whenever it is anticipated that the total estimated costs will exceed the total estimated revenue over the life of a contract. The amount of the provision is the excess of cost over revenue for every overhaul event for which the Company anticipates a loss during the contract term. As each overhaul event is completed in the future, the specific portion of the provision previously accrued for that overhaul is utilized.

This provision has been recorded for certain contracts performed at Hawker UK, and includes anticipated losses on overhaul events based on management’s estimates. During the three months ended March 31, 2002, $1,100 was utilized from the provision, and no additions were made to the provision.

5. SEGMENT INFORMATION

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” sets forth standards for public companies relating to the reporting of financial and descriptive information about business segments and enterprise-wide operations. The Company operates in one segment. The following table sets forth certain geographic information related to the Company’s operations.

	United States					United Kingdom						Consolidated
As of March 31	2002			2001		2002			2001			2002			2001
Total assets	$	52,316		$	50,456	$	41,035		$	47,227		$	93,351		$	97,683
Total fixed assets (net of depreciation and amortization)		16,139			17,141		26,412			28,399			42,551			45,540
For the quarter ended March 31
Revenue by location of operations		12,716	��		14,189		7,971			4,731			20,687			18,920
Income (loss) before income taxes		(570	)		210		(1,222	)		(1,285	)		(1,792	)		(1,075	)

The Company generated revenue from customers located outside of the United States of $9,991 and $7,106 for the quarters ended March 31, 2002 and 2001, respectively.

6. SUBSEQUENT EVENTS

On April 5, 2002, LHT and LHT Acquisition Corporation, a wholly owned subsidiary of LHT, completed a successful tender offer of the outstanding common shares of the Company not previously owned by LHT. As a result of the tender offer LHT and LHT Acquisition Corporation collectively owned approximately 96.5% of the outstanding common shares of the Company. On April 12, 2002, LHT contributed all its common shares of the Company to LHT Acquisition Corporation. On April 15, 2002, LHT Acquisition Corporation merged with and into the Company. Pursuant to the merger, all outstanding shares of common stock of the Company not tendered in the tender offer and not held by LHT or LHT Acquisition Corporation were converted into the right to receive $3.25 per share in cash. Upon the merger becoming effective, the one (1) outstanding share of common stock of LHT Acquisition Corporation owned by LHT was converted into one (1) outstanding share of common stock of the Company. LHT holds the one outstanding share of common stock of the Company. No other shares of common stock are outstanding.

On April 3, 2002, in conjunction with the tender offer commenced by LHT, two complaints were filed in the Superior Court of the State of California, Los Angeles County, North Central District, against the Company and its directors. The complaints alleged, inter alia, breaches of fiduciary duty to Company shareholders in connection with the LHT tender offer. In June 2002, the plaintiffs voluntarily dismissed the complaints. On July 15, 2002, the Company was officially notified of the court's dismissal of one of the complaints, with the other dismissal pending.

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Hawker Pacific Aerospace

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following analysis compares the Company’s results of operations for the quarter ended March 31, 2002, with the quarter ended March 31, 2001:

Revenue for the quarter increased by 9.3% to $20.7 million from $18.9 million for the comparable period in 2001. This increase occurred primarily in landing gear sales at Hawker UK. Total UK revenue increased $3.2 million versus the prior year quarter while total Sun Valley revenue decreased $1.5 million.

Cost of revenue increased by 24.2% to $18.5 million from $14.9 million in the first quarter of 2001. Sun Valley cost of revenue increased by 5.0%, or $0.5 million, from the prior comparable quarter, and UK cost of revenue increased by 64.5%, or $3.1 million on increased revenue of $3.2 million. The first quarter of 2002 included higher overhead costs due to reduced manhours and higher overhead rates incurred.

Gross margin for the first quarter decreased from $4.0 million in 2001 or 45.8% to $2.2 million in 2002 due to the increased cost of revenue in both facilities.

Selling, general and administrative expense for the first quarter decreased by $0.4 million or 12.8% from $3.1 million in 2001 to $2.7 million in 2002 primarily due to cost containment initiatives implemented by the Company.

Interest expense for the quarter decreased by $1.0 million or 49.0% from $2.0 million in 2001 to $1.0 million in 2002. The reduction was primarily due to the fact that first quarter 2001 included $0.5 of interest and amortization of discount related to the Company’s loan from LHT, which was converted to equity on March 16, 2001, and lower interest rates.

As a result of the increased cost of revenue and margin, partially offset by the decreases in selling, general and administrative expense and interest, the Company recorded a net loss for the quarter of $1.8 million, or $0.18 as compared with a net loss of $1.1 million or $0.14 per share in the first quarter of 2001.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 1 to the consolidated financial

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Hawker Pacific Aerospace

statements). The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

Revenue Recognition.The Company generates revenue primarily from repair and overhaul services. In some cases, overhaul revenue includes exchange fees that compensate the Company for the carrying cost of its exchange assets. The Company also generates revenue from the sale and distribution of spare parts, and the manufacturing of certain aircraft components. The revenue derived from spare parts sales and manufacturing are each individually less than 10% of total revenue.

Revenue for repair and overhaul services involving an exchange is recognized when the job is complete. Exchange fees are recognized upon the shipment of the Company’s exchange asset to the customer. Revenue for repair and overhaul services not involving an exchange is recognized when the completed item is shipped to the customer.

The Company is allowed under certain of its contracts to invoice customers prior to the completion of the overhaul. Such invoices are credited to deferred revenue until the overhaul is complete. Revenue from spare parts sales and manufacturing is recognized at the time of shipment.

Provision for Anticipated Losses on Contracts.The Company records a current charge to cost of revenue when it is anticipated that the total estimated costs will exceed the total estimated revenue over the life of the contract. The amount of the provision is the excess of cost over revenue for every overhaul event anticipated during the contract term.

Inventories.Inventories are stated at the lower of cost or market. Purchased parts and assemblies are valued based on their weighted average cost. Work-in-process inventory includes purchased parts, direct labor and factory overhead. Provisions for potentially obsolete or slow-moving inventory are made based on management’s analysis of inventory levels, turnover and future usage forecasts.

Exchange Assets.Landing gear and other exchange assets are accounted for as fixed assets at cost and are depreciated over their estimated useful lives to their respective salvage values. These exchange assets principally include various large commercial jet landing gear shipsets, and flap tracks and carriages. Exchange assets are held for the purpose of exchanging the asset with a customer to allow the customer’s aircraft to return to service in the shortest possible time. Certain of the Company’s contracts could not have been obtained without sufficient exchange assets to meet the customer’s requirements.

After the landing gear shipset is exchanged and the customer is billed for the established cost of the overhaul, the landing gear shipset from the customer is overhauled and returned to the Company’s exchange asset pool. The estimated useful lives of these exchange assets range from 10 to 15 years depending on the age of the aircraft type, and the Company’s estimate of how many years of overhaul demand remain. Depreciation expense is recorded as a cost of revenue using the straight-line depreciation method.

The Company reviews the carrying value of an exchange asset for impairment whenever events and circumstances indicate that the carrying value of such asset may not be recoverable from the estimated future cash flows expected from its use and eventual disposition. If the undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the fair value of the asset.

Deferred Income Taxes.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. The Company has established a valuation allowance for its deferred tax asset, which was previously recorded for the tax benefit related to future utilization of the Company’s net operating loss carryforward.

Related Party Information

In July 2001, the Company entered into a Cooperation Agreement and General Supporting Contract with LHT. The Cooperation Agreement establishes areas of cooperation between the Company and LHT related to aircraft component and landing gear services jointly provided by both companies to their combined customer base. The General Supporting Contract describes the procedures, terms and conditions under which the Company and LHT shall together perform the services contemplated under the Cooperation Agreement. The Cooperation Agreement does not specify the amount of work that will be done at the Company’s London facility or the amounts to be charged.

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Hawker Pacific Aerospace

Liquidity and Capital Resources

The following analysis compares material changes in the Company’s financial position from December 31, 2001, to March 31, 2002:

Inventories decreased by $1.3 million during the first quarter of 2002, primarily as a result of higher revenue during the quarter. The increase in revenue generated an decrease in deferred revenue of $1.8 million. As a result of the net loss for the period, the Company’s operating activities used cash of $0.3 million during the first quarter of 2002.

The Company expects that its cash liquidity will remain tight but manageable over the next few quarters. In order to maintain liquidity, the Company has made full use of the LHT credit line. As a wholly-owned subsidiary of LHT, the Company also expects to have access to liquidity from LHT, subject to certain limits LHT is expected to impose. The Company may also consider asset sales if necessary. The Company believes that these limits will be at such a level that together with potential asset sales, the Company will have sufficient funds to meet its cash requirements for the next twelve months.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, such as statements of the Company’s plans, objectives, expectations and intentions, that involve risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements. The forward-looking statements contained in this section and elsewhere in this document involve risks and uncertainties that may affect the Company’s operations, markets, services, prices and other factors, as more fully discussed elsewhere and in other Company filings with the U.S. Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, legal, governmental, environmental and technological factors, the impact of the September 11th terrorist attacks on the airline industry, the economy and insurance rates, the potential for additional adverse impact from terrorist attacks and/or war, as well as competitive pricing and market conditions, customer concentration, foreign currency risk, and the Company’s continuing ability to acquire adequate and reasonably priced inventory, meet increasing requirements for capital, and successfully develop its UK subsidiary into a profitable operation. There can be no assurance that future developments affecting the Company will be those anticipated by management. Because of the factors listed above, as well as other factors beyond the control of the Company, actual results may differ from those in the forward-looking statements. The Company disclaims any intent or obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the potential effects of unfavorable changes in certain prices and rates on the Company’s financial results and condition, primarily foreign currency exchange rates and interest rates on borrowings. The Company does not utilize derivative instruments in managing its exposure to such changes.

Foreign Currency Risk. The Company has operations in the UK and the Netherlands, and also conducts business with customers in many other countries worldwide. These activities may generate gains and losses as a result of currency fluctuations, and may require translation adjustments to the value of certain assets in the Company’s foreign operations. Foreign currency exchange rates could also cause the Company’s services to become relatively more expensive in particular countries, leading to a reduction in revenue in that country.

The Company reduces foreign currency risk by generally requiring that customers pay for the services of the Company’s foreign operating units in the currency of the country where the operating unit is located. The Company also does not routinely exchange material sums of money between the operating units.

If the US dollar continues to strengthen against the British pound, sales from the Company’s UK subsidiary will provide less consolidated revenue. A strong dollar also increases material costs for the Company’s UK operation, which purchases a significant portion of its materials from US suppliers. In addition, the value of the Company’s intercompany receivables from the UK operation will become less valuable.

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Hawker Pacific Aerospace

Interest Rate Risk. The Company’s debt facilities carry interest rates that vary in accordance with the US and UK LIBOR. The Company is subject to potentially material fluctuations in its debt service as the LIBOR changes. The extent of this risk is not quantifiable or predictable however, a hypothetical 1% change in the interest rate would result in a $0.2 million change in interest expense.

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Hawker Pacific Aerospace

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

            99.1    Section 906 Certification

     (b)  Form 8-K

            No reports were filed on Form 8-K during the quarter ended March 31, 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HAWKER PACIFIC AEROSPACE
Date: August 13, 2002	By	/s/ James R. Bennett James R. Bennett Chief Financial Officer (Principal Financial and Accounting Officer)

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