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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
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 (I.R.S. Employer
incorporation or organization) 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 registrant's common stock held by non-
affiliates of the registrant as of April 6, 2000, was approximately
$46,582,000. The number of shares of common stock outstanding on April 6,
2000, was 5,822,722 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part II incorporate information by reference to certain portions of
registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1999.
Part III incorporates information by reference to the registrant's definitive
Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year.
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HAWKER PACIFIC AEROSPACE
AMENDMENT CHANGES
This Amendment No. 1 principally includes two technical changes: (i) the
manner in which the conversion and redemption features of the Company's recently
issued preferred stock is recorded, and (ii) the reclassification of landing
gear asset sales from Investing Activities to Operating Activities on the
Consolidated Statement of Cash Flows. No changes have been made to Net Income
(Loss) for any period presented. The remainder of the Form 10-K has been
reprinted in its entirety.
Preferred Stock
In December 1999 the Company raised $3,000,000 through the issuance of
redeemable convertible preferred stock. This preferred stock has a multiple-step
beneficial conversion feature, and the Company is required to currently record
a discount in the amount of the maximum potential benefit the investor may
receive, over the shortest possible time period, without regard to whether the
investor has actually converted any preferred shares. Accordingly, the Company
has recognized in this Amendment a decrease of $750,000 to the balance of
preferred shares, and an increase of $750,000 to common shares, at December 31,
1999. We have also valued the warrant issued to the preferred shareholder at
$286,000. This amount has also been recorded as a decrease to the balance of
preferred shares, and an increase in the value of common shares.
In addition, the Company may be required to redeem the shares in certain
circumstances, and the redemption premium may be as high as $750,000. Because
the preferred stock has a mandatory redemption feature, we have reclassified the
preferred stock outside of the equity section on the Consolidated Balance Sheet.
The amounts related to these redemption and conversion features, along with
the costs of issuance and the value of the warrant issued to the preferred
shareholder, will be accreted over a 180 day period from December 1999 through
June 2000. The monthly accretion attributable to December 1999 was $273,000,
which amount increases the balance of preferred shares and decreases retained
earnings (deficit) at December 31, 1999. This amount is also used in the
calculation of all earnings (loss) per common share amounts. While the $273,000
equity adjustment does not affect net income (loss) for fiscal year 1999, it did
increase the loss per common share amounts for the year and quarter by ($0.05)
to ($0.44) and ($0.02), respectively. For additional detail, see Note 10 and the
Earnings (Loss) per Share section in Note 1 to the Consolidated Financial
Statements.
Landing Gear Asset Sales
This Amendment reclassifies the proceeds and book gain from landing gear
asset sales from Investing Activities to Operating Activities on the
Consolidated Statement of Cash Flows, page 31. No change has been recorded to
the total amount of cash provided and used during 1999. The net effect of this
change is as follows.
As Originally Filed As Amended
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Cash provided by (used in) operating activities ($ 1,899,000) $1,187,000
Cash used in investing activities (9,810,000) (12,896,000)
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HAWKER PACIFIC AEROSPACE
TABLE OF CONTENTS
Page
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PART I
Item 1 Business............................................................................ 4
Item 2 Properties.......................................................................... 12
Item 3 Legal Proceedings................................................................... 12
Item 4 Submission of Matters to a Vote of
Security Holders................................................................ 12
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters................................................. 13
Item 6. Selected Financial Data............................................................. 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 16
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk............................................................... 21
Item 8. Financial Statements and Supplementary Data......................................... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................... 21
PART III Omitted - (Incorporated by reference to Proxy
statement to be filed no later than May 1, 2000).................................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................................... 22
FINANCIAL STATEMENTS
Index to Financial Statements....................................................... 22
Report of Independent Auditors...................................................... 26
Consolidated Balance Sheets......................................................... 27
Consolidated Statements of Operations............................................... 29
Consolidated Statement of Changes in
Shareholders' Equity................................................................ 30
Consolidated Statement of Cash Flows................................................ 31
Notes to Consolidated Financial Statements.......................................... 33
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PART I
ITEM 1 - BUSINESS
General
Hawker Pacific Aerospace ("Hawker Pacific" or the "Company") repairs and
overhauls fixed wing and helicopter landing gear, hydromechanical components and
wheels, brakes and braking system components for a diverse international
customer base, including commercial airlines, air cargo operators, domestic
government agencies, aircraft leasing companies, aircraft parts distributors and
original equipment manufacturers ("OEMs"). The Company is a certified Federal
Aviation Administration ("FAA") and Joint Airworthiness Authority ("JAA")
approved repair station, and has also been granted Parts Manufacturer Approvals
by the FAA.
In addition, the Company distributes, manufactures and sells new and
overhauled spare parts and components for both fixed wing aircraft and
helicopters. The Company has long-term service contracts with many customers,
including Federal Express Corporation ("Federal Express"), American Airlines,
Inc. ("American Airlines"), the United States Coast Guard, British Airways, US
Airways, Inc. ("US Airways"), EVA Airways, UPS, China Southern and Shanghai
Airlines.
On February 4, 1998, the Company completed its acquisition (the "BA
Acquisition") of substantially all of the assets of the landing gear repair and
overhaul operations (the "BA Assets") of British Airways plc ("British
Airways"). The Company believes the BA Acquisition will provide it with a base
in the United Kingdom from which to significantly expand its international
repair and overhaul operations, and position itself to become a global leader in
its market.
The Company believes it is well situated to benefit from the following
aviation industry trends that are driving increased demand for third-party
repair, overhaul and spare parts inventory management services: (i) the increase
in worldwide air traffic associated with the addition of new aircraft and more
frequent use of existing aircraft; (ii) the outsourcing by aircraft operators of
services previously handled internally; (iii) the break-up of monopolistic
aircraft maintenance consortiums; and (iv) an increase in regulatory pressure
and customer emphasis on the traceability of aircraft parts and overhaul
processes.
The Company traces its origins back to a hydraulics company formed in 1958.
Hawker Pacific was first incorporated in 1980 in California as a distributor of
aircraft parts and certain other consumer products, and began providing aircraft
repair and overhaul services in 1977. In November 1996, BTR Dunlop, Inc. sold
all of the outstanding capital stock of the Company to certain of the Company's
current shareholders. Unless the context otherwise requires, all references
herein to the "Company" or "Hawker Pacific" shall also include Hawker Pacific
Aerospace Limited, a wholly-owned United Kingdom subsidiary formed in November
1997. The Company's principal executive offices are located at 11240 Sherman
Way, Sun Valley, California 91352, and its telephone number is (818) 765-6201.
Recent Developments
Initial Public Offering. On February 3, 1998, the Company completed an
initial public offering (the "Offering") of 2,766,667 shares of the Company's
common stock through several underwriters represented by EVEREN Securities, Inc.
and The Seidler Companies Incorporated. Of the 2,766,667 shares of common stock
sold in the Offering, 2,600,000 shares were sold by the Company and 166,667
shares were sold by a principal shareholder of the Company. The principal
shareholder sold 415,000 additional shares of common stock pursuant to the
exercise of an over-allotment option granted to the underwriters by the
principal shareholder. The Registration Statement for the Offering (Registration
No. 333-40295) was declared effective by the Securities and Exchange Commission
(the "SEC") on January 29, 1998. The Company received net proceeds of
approximately $18.1 million net of expenses of approximately $2.7 million. The
Company used approximately $9.2 million of the net proceeds to fund a portion of
the purchase price for the BA Assets and approximately $7.6 million to repay a
portion of the revolving and term debt previously outstanding under the
Company's credit facility. The Company used the remaining net proceeds for
working capital and general corporate purposes.
Acquisition of Certain Assets of British Airways. On February 4, 1998, the
Company completed the acquisition of certain assets ("BA Assets") of the British
Airways plc landing gear operation for a purchase price of approximately $19.5
million (including acquisition related expenses) excluding a 747-400 landing
gear
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rotable asset that was acquired during the second quarter of fiscal 1998 for
approximately $2.9 million. The BA Assets consisted of $1.9 million of
inventory, $4.0 million of machinery and equipment and $13.6 million of landing
gear rotable assets. As part of the BA Acquisition, the Company and British
Airways entered into a seven-year exclusive service agreement for the Company to
provide landing gear and related repair and overhaul services to substantially
all of the aircraft currently operated by British Airways.
Market and Industry Overview
The aviation aftermarket consists principally of the servicing and support
of commercial passenger and cargo aircraft. The Company provides aftermarket
landing gear repair and overhaul services and related spare parts to a variety
of customers in the aviation industry.
Increased Aviation Activity. Boeing's 1999 Current Market Outlook (the
"Boeing Outlook") projects that global air travel will increase by 47% through
the year 2008, with cargo traffic growth projected to increase by 60% through
2008. Average passenger seat miles flown are also expected to increase
significantly over the next few years. Further, many new airlines are expected
to commence operations in the United States and abroad, especially in China and
other Asian nations where only a small percentage of the population has flown to
date. Airports in Europe are also expected to increase capacity to handle the
additional traffic. In order to accommodate growing demand, aircraft operators
will be required to increase the size of their aircraft fleets. The Boeing
Outlook projects that the global fleet of aircraft will grow from 12,600
aircraft at the end of 1998 to 19,100 aircraft in 2008, and 28,400 aircraft in
2018.
Increases in passenger travel, air cargo services and the number of
aircraft in service increase the demand for repair and overhaul services. In
addition, the Federal Aviation Administration (the "FAA") requires aircraft
landing gear to be overhauled every seven to ten years. As a result, the growth
in the number of aircraft over the past 15 years is expected to create increased
demand for landing gear repair and overhaul services, which will most likely
continue as the number of new aircraft in service grows. Further, because start-
up airlines generally do not invest in the infrastructure necessary to service
their aircraft, such airlines typically outsource all or most of their repair
and overhaul services.
Outsourcing of Repair and Overhaul Services. While the overall air
transportation industry has grown significantly over the past decade, commercial
airlines have not experienced consistent earnings growth over the same period.
As a result, many aircraft operators have recognized outsourcing as an
opportunity to reduce operating costs, working capital investment and turnaround
time. Outsourcing allows aircraft operators to benefit from the expertise of
service providers like Hawker Pacific who have developed specialized repair
techniques and achieved economies of scale unavailable to individual operators.
Additionally, outsourcing allows aircraft operators to limit their capital
investment in infrastructure and personnel by eliminating the need for the
equipment, sophisticated information systems technology and inventory required
to repair and overhaul landing gear and hydromechanical components. The
increasing number of long-term service contracts in recent years from airlines
outsourcing their repair and overhaul services exemplifies this growing trend.
As aircraft operators continue to become more cost and value conscious, the
Company expects the trend toward outsourcing to continue.
Break-Up of Monopolistic Aircraft Maintenance Consortiums. Until recently,
European aircraft operators attempted to realize cost savings by forming repair
consortiums to provide maintenance, repair and overhaul services for their
aircraft. Within these repair consortiums, each member was responsible for
providing the consortium's other members with maintenance, repair and overhaul
services for certain specified aircraft components. Over time, these members
have begun subcontracting their maintenance, repair and overhaul services to
independent service providers through a competitive bidding process. The Company
believes that this trend will provide it with opportunities to expand its
European customer base.
Greater Emphasis on Traceability. As a result of concerns regarding
unapproved aircraft spare parts, regulatory authorities have focused on the
level of documentation which must be maintained on aircraft spare parts.
Accordingly, aircraft operators increasingly demand that third party service
providers provide complete traceability of all parts used in the repair and
overhaul process. The sophistication required to track the parts histories of an
inventory consisting of thousands of aircraft spare parts is considerable. For
example, overhaul of a 747 aircraft landing gear shipset requires the handling
and tracking of over 2,500 parts. This has required companies to invest heavily
in information systems technology. The Company has developed and maintains a
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proprietary management information system that enables it to comply with its
customer's contract specifications and enables its customers to comply with
governmental regulations concerning traceability of spare parts. The Company's
proprietary system is well-regarded in the industry, and the Company considers
it to be a competitive advantage.
Company Operations
Repair and Overhaul. The primary reasons for removing landing gear or
hydromechanical components from an aircraft for servicing are: (i) the number of
takeoffs and landings, or years since a landing gear's last overhaul, has
reached the `time between overhaul' limit, or (ii) the landing gear or
hydromechanical component has been damaged or is not performing optimally. The
cost of servicing landing gear or hydromechanical components that have been
removed varies depending upon the age and type of aircraft and the extent of
repairs required.
Each landing gear overhaul can involve numerous separate parts and work
orders. For example, the Boeing 737 nose landing gear calls for over 290 parts
and related work orders while the Boeing 747-200 nose gear calls for over 650
parts and related work orders. Generally, the Company performs these overhauls
in approximately four to eight weeks. Hydromechanical component overhauls can
involve 200 or more parts and over 25 separate work orders, and are generally
performed in approximately two to four weeks. In order to achieve this
throughput, the Company must perform many parallel processes and integrate
numerous components just before final assembly. Completing this complex overhaul
work within the time constraints set by aircraft operators has led the Company
to develop a highly managed systems-driven process, which is facilitated by its
highly specialized management information system. See "Management Information
Systems and Quality Assurance" below. The stages of the overhaul process include
the following:
Disassembly, Cleaning and Inspection. Upon receiving a landing gear
shipset or a hydromechanical component, the Company's technicians disassemble
the unit, a process which requires special tooling and expertise. Each part is
completely cleaned to allow for comprehensive inspection, testing and evaluation
of part size, structural integrity and material tolerances.
The Company uses a detailed checklist and reporting procedure to create a
work order which documents the state of each part inspected, and indicates the
extent of repair or overhaul to be performed. Technicians tag all parts which
need to be replaced or reworked and electronically prepare bills of material and
requisitions to the Company's parts and production departments for inventory and
scheduling purposes. An internal sales order is created concurrently with the
work order for shipping, pricing, billing and delivery purposes. The Company
utilizes its management information system throughout this process to reduce the
amount of detailed inspection time required.
The disassembly and inspection process enables the Company to obtain
detailed information concerning which parts can be reused or repaired and which
must be replaced, as well as the approximate amount of labor needed to complete
the job. The Company's computer system identifies and tracks the parts and
associated work orders from each landing gear or hydromechanical component
throughout the overhaul process in order to maintain the integrity of the
landing gear or hydromechanical component being serviced. Shop travelers provide
a complete, detailed listing of all repair and overhaul work steps and
processes. Once a landing gear is disassembled, the individual parts are washed,
visually inspected for obvious damage and permanently identified using the
internal work order number assigned to that delivery order. Major and minor
parts are then processed for engineering evaluation and disposition of required
repair work steps.
Parts Rework, Replacement and Reassembly. The next phase of an overhaul
involves reworking existing parts to specifications set by the Company's
customers. This entails a combination of machining, plating, heat treatment,
metal reshaping, surface finishing and restoration of organic finish. At this
phase, each part is accompanied by the customized bar-coded traveler which
facilitates the computerized prioritization and tracking of a part through the
rework phase. Tight control is maintained over scheduling for each part,
enabling the Company to remain within its required turnaround time. The Company
performs the majority of the repair and overhaul procedures in its facilities
using proprietary or specialized repair techniques. In addition, the Company
utilizes in-house manufacturing capabilities to fabricate certain parts used in
the overhaul process that are otherwise difficult to obtain. If a part cannot be
reclaimed, the Company may install either a new part or a previously-reworked
part from inventory. The Company maintains an inventory of serviceable parts
that it has reworked for this purpose. Overhauling parts or using serviceable
parts from inventory in lieu of new parts generally lowers customer costs and
increases the Company's margins in comparison to an overhaul that consists
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of exclusively new spare parts. In addition, these manufacturing and service
capabilities are integral to the Company's competitive position because they
enable the Company to maintain or increase the quality of work performed and
reduce cost and turnaround time relative to its competitors.
Inspection and Shipping. After completing the rework phase of the
overhaul/repair process, each part is delivered to the assembly area where the
end unit is assembled, tested and final inspection is completed. Once the end
unit assembly has been accepted through final inspection it is moved to
shipping, where it is packaged and prepared for dispatch.
Pricing. The Company offers its customers different pricing arrangements
for its repair and overhaul services. Pricing generally depends on the volume
and complexity of the work performed, the kind and number of new or
remanufactured spare parts used in the repair or overhaul, and the required
turnaround time. For many of its customers, the Company exchanges a previously
overhauled shipset from its inventory for an as-removed shipset from the
customer's aircraft. The Company charges the customer a fixed overhaul fee, and
upon completing the overhaul of the as-removed shipset, the Company charges the
customer an additional fee for spare parts or extra services required to
overhaul the landing gear to the customer's specifications. The Company
typically bills a substantial portion of the repair and overhaul fee to the
customer up-front upon receiving its as-removed shipset and generally receives
payment for this portion of the overhaul fee before completing the overhaul.
With certain of its customers for whom the Company regularly provides parts
and services on entire fleets or large numbers of aircraft, the Company utilizes
a flat fee fixed price arrangement which it typically sets forth in long-term
service agreements. Pursuant to the Company's service agreements, the Company
performs repair and overhaul services on a scheduled or as-needed basis. Pricing
depends on the volume and type of aircraft landing gear or hydromechanical
component to be serviced and the required turnaround time. Under its long-term
service agreements, the Company is able to plan in advance for equipment and
inventory requirements and can achieve efficiencies in labor hours and materials
usage relative to the estimate on which the contract price was based.
Parts Distribution
General. Aircraft spare 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 manufacturers or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other distributors. An overhauled part has been
disassembled, inspected, repaired, reassembled and tested by a licensed repair
facility. An aircraft spare part is classified serviceable if it is repaired by
a licensed repair facility rather than completely disassembled as in an
overhaul. A part may also be classified serviceable if it is removed by the
operator from an aircraft or engine while operating under an approved
maintenance program and is functional 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
functional testing, repair or overhaul by a licensed facility prior to being
returned to service in an aircraft.
Parts Sales. The Company sells factory new, FAA-approved parts
manufactured by approximately 80 OEMs, including Dunlop Equipment Division,
Allied Signal, Beech Aircraft Corp.-Raytheon and Goodyear Tire & Rubber. The
Company also sells overhauled aircraft spare parts to a diverse base of
customers in the aviation industry. The Company believes that it provides
customers with value added parts distribution services by offering immediate
availability, broad product lines, technical assistance and additional services.
Customers
Commercial. The Company serves a broad base of domestic and international
customers in the aviation industry. The Company's customers include British
Airways, Federal Express, American Airlines, Air France, EVA Airways, US
Airways, Continental Express and many other national and regional passenger and
cargo airlines. Over 60% of the Company's landing gear business is derived from
long-term contracts, generally of five to ten years in duration, representing
one overhaul cycle for a customer's fleet. The Company believes that the long-
term relationships it has developed with many of its customers provide the
Company with a stable and ongoing base of business, as well as a source of new
business opportunities.
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Government Contracts. 1999 and 1998 sales to the United States government
and its agencies represented approximately 3.6% and 4.2%, respectively, of
consolidated revenue. The Company's largest government customer has been the
United States Coast Guard ("USCG"). The Company has an agreement with the USCG
to provide repair and overhaul services on an as-needed, fixed price basis for
Dauphin II helicopters. The agreement is for a one-year term which the USCG may
renew for additional one-year terms through the year 2000. Because government
sales are subject to competitive bidding and government funding, there can be no
assurance that such sales will continue at previous levels. Although the
Company's government contracts are subject to termination at the election of the
government, in the event of such a termination the Company would be entitled to
recover from the government all allowable costs incurred by the Company through
the date of termination.
Material Customers. Customers who have accounted for more than 10% of
sales during the last three years are: (i) in 1999, British Airways (19.2%) and
Federal Express (13.8%); (ii) in 1998, British Airways (22.3%) and Federal
Express (17.5%); and (iii) in 1997, Federal Express (19.3%).
Management Information System And Quality Assurance
The Company utilizes its management information system to shorten
turnaround times for customer orders, increase output, improve inventory
management and reduce costs by eliminating duplication of work and reducing
errors in ordering of parts. The system consists of an automated inspection and
routing system, a material resources planning module, a bar-coded shop floor
control module, an inventory control and parts tracing module, a tooling
calibration module and a general accounting module.
The system enables the Company to shorten lead times, increase output and
improve inventory management by allowing the Company to manage and control the
process of detailed parts inspection, materials requisitioning and work order
scheduling and release. The system's database contains much of the information
required to perform landing gear inspection activities, including illustrated
parts catalogues, parts specifications and other technical data. This has
largely eliminated the need to update parts catalogues manually and allows an
inspector using a personal computer located at his workstation to (i) refer to
computer based parts manuals and catalogues to identify needed parts, (ii)
access inventory to check on the availability of needed parts, (iii) requisition
needed parts from inventory, and (iv) create and record an audit trail for all
inspected parts and processes. These features of the system have substantially
reduced total detailed inspection time required in the overhaul process.
Using the system, all materials utilized and labor performed in connection
with a work order are recorded using bar code scanners located throughout the
Company's facility. Work order travelers are generated upon commencement of a
repair or overhaul and accompany the separate parts of each landing gear or
hydromechanical component throughout the overhaul process. After each stage of
the process is completed, the employee who performed the work uses the bar code
system to record the date of completion, his or her employee identification
number, critical dimensions and the quantity processed, accepted or rejected.
For each repair or overhaul that it performs, the Company records: (i) all
essential operations and tests conducted; (ii) inspection data on all components
repaired, overhauled or exchanged for new components; and (iii) the sources of
all materials issued during the course of the work. This function allows the
Company to provide more accurate cost and timing estimates to customers,
facilitates faster and more accurate preparation of customer invoices and forms
the basis of the Company's comprehensive quality assurance program. In addition,
shoploading and material requisition personnel receive more accurate planning
data. Using the system, management can (i) plan for material requirements in
advance so that required materials for a specific unit are on hand in time to
facilitate on-time delivery, and (ii) optimize daily manpower and materials
utilization based upon sales forecasts and actual orders.
Equipment Maintenance and Tooling
The Company performs all of the maintenance and repair on the equipment
used in the repair and overhaul process. The Company's maintenance personnel
perform various regularly scheduled maintenance procedures on the Company's
equipment on a weekly, monthly and annual basis, and shift operators perform
daily preventive maintenance. Precision measurement accessories installed on
certain machines, which require periodic calibration, are maintained and
serviced by approved vendors and closely monitored by the Company.
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The Company invests significant material and resources to design and
construct tooling and fixtures to support its current product line and improve
the efficiency of the repair and overhaul process. Manufacturer-designed tooling
is typically limited to specialized tools to aid in the disassembly, assembly
and testing of landing gear components, such as spanner wrenches and seal
installation tools. From time to time, the Company's employees may develop
modifications to existing tooling or ideas for new tooling and fixtures in order
to accomplish a specific machining or testing operation or to improve the
performance of the overhaul process. Tooling and fixtures used in machining and
plating operations are conceived, designed and fabricated in-house by the
technical personnel involved in the Company's daily operations to improve the
labor efficiency of a process and reduce the cost of performing a repetitive
process. The Company believes that its ability to design and fabricate tooling
used in its operations allows it to maximize efficiencies and enables its
customers to realize cost savings and improved turnaround time.
Suppliers And Procurement Practices
The primary sources of parts and components for the Company's overhaul
operations and parts distribution business are domestic and foreign airlines,
OEMs and aircraft leasing companies. The supply of parts and components for the
Company's aftermarket sales is affected by the availability of excess
inventories that typically become available for purchase as a result of new
aircraft purchases by commercial airlines. These new aircraft purchases reduce
the airline's need for spares supporting the aircraft that have been replaced.
Aftermarket supply is also affected by the availability of new parts from OEMs
and the availability of older, surplus aircraft that can be purchased for the
value of the major parts and components.
Although the Company does not have fixed agreements with the majority of
its suppliers, it has frequently been able to obtain price discounts from
suppliers because of the volume and regularity of its purchases. The Company has
ten-year agreements with Dunlop Limited, Aviation Division and Dunlop Equipment
Division (collectively, "Dunlop") that enable it to purchase Dunlop parts at a
discount from list price for resale and for use in the repair and overhaul of a
variety of fixed wing aircraft and helicopters. These agreements each expire in
October 2006.
The Company's single largest materials supplier has consistently remained
Boeing, which accounted for 22% of total 1999 purchases. Dunlop Aviation and
Dunlop Equipment accounted for 8% and 4%, respectively, of total 1999 purchases.
No other supplier during 1999 exceeded 10% of total purchases.
Although the Company does not have agreements with many of its suppliers,
and competes with other parts distributors for production capacity, the Company
believes that its sources of supply and its relationships with its suppliers are
satisfactory.
The Company has developed procurement practices to ensure that all supplies
received conform to contract specifications. For cost, quality control and
efficiency reasons, the Company generally purchases supplies only from vendors
with whom the Company has an on-going relationship and/or whom the Company's
customers have previously approved. The Company has qualified second sources or
has identified alternate sources for all of its supplies. The Company chooses
its vendors primarily on the quality of the parts supplied and the vendor's
record for on-time performance. The Company regularly evaluates and audits the
performance of its approved vendors. Repeated failure to comply with the
Company's quality and delivery requirements may cause the Company to remove a
vendor from its approved vendor list.
Sales And Marketing
The Company's sales and marketing strategy targets commercial and
government customers with large fleets of aircraft that require regular repair
and overhaul of landing gear parts and components. In recent years, the Company
has significantly expanded its direct sales efforts, with the dual goals of
increasing sales from the Company's existing customer base as well as attracting
new customers. In particular, the Company focuses its sales efforts on
encouraging its existing and prospective customers to enter into long-term
agreements with the Company for the repair and overhaul of landing gear on all
aircraft within a fleet, or alternatively, to engage the Company to perform
repair and overhaul services on several aircraft at one time. In its sales and
marketing efforts, the Company emphasizes its competitive strengths, including
its superior quality of service, competitive pricing, rapid turnaround time and
extensive industry experience.
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The Company markets and sells its products and services worldwide both
directly through an in-house sales staff and indirectly through a network of
independent sales representatives. Air Resources, Inc., an aviation sales
representative agency ("Air Resources"), markets and sells the Company's
products and services to a number of domestic airlines in return for a
commission on sales made through Air Resources' efforts. The Company's domestic
sales are conducted primarily by Air Resources, which focuses its efforts on
major domestic commercial carriers, as well as the Company's in-house sales
force.
The Company conducts its international sales and marketing through a number
of independent agencies based worldwide in such countries as France, Sweden,
Mexico and India. Additionally, senior management plays an active role in
marketing the Company's product lines. The Company's President and Chief
Executive Officer oversees all sales activities. The Company's Vice President of
Corporate Sales and Marketing is, however, directly responsible for the day to
day activity of the twenty-three in-house and outside sales and marketing
representatives. The Company's sales staff works closely with engineering and
customer support personnel to provide cost effective solutions to maintaining
landing gear and hydromechanical systems, stressing the Company's repair and
overhaul engineering expertise, turnaround times and component overhauling
capabilities.
In addition, the Company actively participates in many of the major
aviation industry gatherings and air shows and hosts groups of aircraft
operators at technical and other meetings. In certain instances, the Company
bids on government contracts through its government contracts department, which
coordinates with the Company's sales and marketing team.
Growth Strategy
Pursue Additional International Growth Opportunities. The Company believes
that the international aviation aftermarket presents the greatest potential for
substantial growth. With the large air transport repair and overhaul operations
that it has established through the recent BA Acquisition, and the
hydromechanical repair and overhaul services that it performs from its
Netherlands facility, the Company believes it will be able to provide customers
with a full range of repair and overhaul services in Europe. In addition, the
Company believes that the break-up of aircraft maintenance consortiums will
create opportunities for the Company to expand its European, Middle Eastern and
Asian customer bases. With facilities located in the United Kingdom, California
and the Netherlands, the Company believes that it is geographically positioned
to pursue additional growth opportunities in both the European and Asian
aviation aftermarkets.
Focus on Long-Term Service Agreements. Through increased sales and
marketing efforts, the Company is actively seeking to enter into long-term
service agreements with its existing and potential customers to provide its
services for all of their respective aircraft. A recent example of the Company's
success in this area includes the Company's five-year service agreement with EVA
Airways, based in Taiwan, Republic of China. The Company had previously entered
into a contract to provide overhaul services for all of EVA's B767 aircraft.
Based on the Company's performance in servicing this fleet, EVA recently awarded
the Company another contract for its entire fleet of B747-400's. The Company
believes that long-term service agreements provide it with a more predictable
and consistent flow of business. Over 60% of the Company's landing gear business
is currently derived from long-term service contracts.
Expand Existing Operations. Hawker Pacific seeks to increase sales and
operating income by marketing its landing gear repair and overhaul services to
new and existing customers, and by expanding its hydromechanical component
product lines. The Boeing Outlook projects that the global fleet of aircraft
will grow substantially during the next twenty years. The Company plans to
expand its landing gear repair and overhaul operations to capitalize on this
growth trend. Because the Company believes that improved profit margins in fixed
wing operations are primarily a function of increased volume, it plans to expand
its capacity to perform fixed wing landing gear repair and overhaul services.
The Company also intends to expand its hydromechanical component service
offerings. The Company recently began to offer repair and overhaul of constant
speed drive-integrated drive generators.
Accelerate Growth through Acquisition. At such times as its financial
condition and resources permit, the Company may pursue strategically located
companies with technology, equipment or inventory that complement or expand the
Company's existing operations. In particular, the Company may seek to acquire
companies that will enable it to expand its international operations or
horizontally increase its product offerings within the aviation repair and
maintenance industry. External growth is a long-term element of the Company's
growth strategy, and no acquisitions are currently being sought or contemplated.
-10-
Competition
Numerous companies compete with Hawker Pacific in the aviation services
industry. The Company primarily competes with various repair and overhaul
organizations, which include the service arms of OEMs, the maintenance
departments or divisions of large air carriers (some of which also offer
maintenance services to third parties) and independent organizations such as the
Aerospace Division of B.F. Goodrich Company, the Landing Gear Division of AAR
Corporation ("AAR"), Revima, a company organized and operating under the laws of
France, and Messier Services. The Company's major competitors in its
hydromechanical components business include AAR and OEMs such as Sunstrand,
Aeroquip Vickers, Inc., Parker-Hannifin Corporation, Messier Services and Lucas.
Government Regulation
The Company is highly regulated worldwide by the FAA, the JAA (a consortium
of European regulatory authorities), and various other foreign regulatory
authorities, including the Dutch Air Agency, which regulates the Company's
Netherlands' operations, and the Civil Aviation Authority, which regulates the
Company's United Kingdom operations. These regulatory authorities require all
aircraft to be maintained under continuous condition monitoring programs and
periodically to undergo thorough inspection. In addition, all parts must be
certified by the FAA and equivalent regulatory agencies in foreign countries and
conformed to regulatory standards before installation on an aircraft.
The Company is a certified FAA and JAA approved repair station, and has
been granted Parts Manufacturer Approvals by the FAA Manufacturing Inspectors
District Office. In addition, the Company's operations are regularly audited and
accredited by the Coordinating Agency for Supplier Evaluation, formed by
commercial airlines to approve FAA approved repair stations and aviation parts
suppliers.
Environmental Matters and Proceedings
The Company's operations are subject to extensive and frequently changing
federal, state and local environmental laws and substantial related regulation
by government agencies, including the United States Environmental Protection
Agency (the "EPA"), the California Environmental Protection Agency, and the
United States Occupational Safety and Health Administration. Among other
matters, these regulatory authorities impose requirements that regulate the
operation, handling, transportation and disposal of hazardous materials
generated by the Company during the normal course of its operations, govern the
health and safety of the Company's employees and require the Company to obtain
and maintain permits in connection with its operations.
Employees and Employee Training
As of February 29, 2000, the Company had 467 full-time employees, of whom
278 are employed at the Company's Sun Valley headquarters and repair facility,
178 are employed with the Company's United Kingdom subsidiary, and 11 are
employed at the Company's repair facility in the Netherlands. In the United
Kingdom, 95 employees, representing 53% of the Company's work force, are covered
by a collective bargaining agreement.
Each of the Company's technical employees receives specific training in the
individual repair and overhaul functions that he or she performs, in addition to
comprehensive general training in total quality management procedures,
statistical process control and material resource planning. The Company also
regularly conducts in-house training programs, which the Company's management
designs using standard industry practice manuals. In-house training is provided
for the Company's technical and engineering employees on a number of subjects,
including materials handling, corrosion prevention and control, surface temper
etch inspection and shot peening.
Stock Price Volatility
In recent years, the stock market has experienced significant price and
volume fluctuations. These fluctuations, which are often unrelated to the
operating performances of specific companies, have had a substantial effect on
the market price of stocks, particularly for many small capitalization
companies. The Company's common stock is also thinly traded, which frequently
causes relatively small trades to have a disproportionate effect on the
Company's market price.
During the fourth quarter of 1999 the Company retained an investment banker
to advise the Board of Directors on alternatives for enhancing shareholder
value. The Company can provide no assurance that such an
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engagement will provide a lasting increase in shareholder value, or that the
termination of such engagement will not have an adverse impact on shareholder
value.
Forward Looking Statements
This Annual 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, products, 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, competitive, legal, governmental and technological factors.
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.
ITEM 2. PROPERTIES
The Company's principal executive offices and production facilities are
located in Sun Valley, California, near the Burbank Airport in Los Angeles. The
Company occupies the premises, comprising approximately 193,000 square feet and
eight buildings, pursuant to various long-term leases that expire on dates
ranging between 2004 and 2010.
Hawker Pacific Aerospace Ltd. operates the Company's second major repair
facility. This operation is located in a new 140,000 square foot facility in
Hayes, about four miles from Heathrow Airport. The lease on this facility
expires in 2024.
The Company's Holland operation is located in a 11,700 square foot facility
near Schiphol Airport in Amsterdam. The lease for the facility expires in 2008.
ITEM 3. LEGAL PROCEEDINGS
The Company is sued from time to time in the ordinary course of business.
At the present time, there are no material legal proceedings against the
Company, its subsidiary, or any officer, director, affiliate or five percent
shareholder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is quoted on the NASDAQ National Market(R) under
the symbol "HPAC". The following table sets forth the high and low sale prices
as reported by NASDAQ from January 29, 1998, the date public trading of the
Company's common stock commenced. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
Sale Price
-------------------
Low High
------ ------
1998
From January 29, 1998 $ 8.00 $11.25
2nd Quarter 10.00 14.12
3rd Quarter 1.88 13.50
4th Quarter 2.56 4.88
1999
1st Quarter 2.50 5.25
2nd Quarter 1.88 3.44
3rd Quarter 1.97 4.88
4th Quarter 4.00 8.00
2000
1st Quarter 5.50 8.00
As of March 23, 2000, the Company's common stock was held by 34
shareholders of record, and owned beneficially by an estimated 745 shareholders.
The Company has not paid cash dividends on its common stock since inception
and has no plans to pay dividends on its common stock in the foreseeable future.
The Company's current bank credit facility prohibits the payment of dividends.
The Company intends to reinvest future earnings, if any, in the development and
expansion of its business.
On December 10, 1999, the Company closed a $3 million equity financing.
This transaction was exempt from registration under Regulation D of the
Securities Act of 1933. The Company hereby incorporates by reference the
description of that private placement set forth in Hawker Pacific's Amendment
No. 4 to Registration Statement on Form S-3, filed on March 11, 2000, and
discussed under "Description of Our Capital Stock -Series C" and "Selling
Shareholders - Deephaven Financing." Excerpts of those portions of the S-3 are
filed as an exhibit to this Form 10-K.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain financial data which should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included in this Annual Report. For
the years ended December 31, 1995, and the ten months ended October 31, 1996,
the Company was a wholly owned subsidiary of BTR Dunlop Holdings, Inc., and
financial data related to those periods is presented under columns marked
"Predecessor". Effective November 1, 1996, the Company was acquired by the
shareholders of Unique Investment Corporation and the Company's then current
executive officers. All financial data subsequent to October 31, 1996, is
presented below under columns marked "Successor".
The balance sheet data as of December 31, 1996, 1997, 1998 and 1999 and the
statement of operations data for the fiscal year ended the ten months ended
October 31, 1996, the two months ended December 31, 1996, and the years ended
December 31, 1997, 1998 and 1999, are derived from the financial statements of
the Company which have been audited by Ernst & Young LLP, independent
accountants.
The pro forma statement of operations data for the year ended December 31,
1996, is derived from unaudited pro forma adjustments which were made to
estimate the results of operations for fiscal year 1996 as if the purchase had
occurred on January 1, 1996. The unaudited financial statements have been
prepared by the Company on a basis consistent with the Company's audited
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the Company's results of operations for theperiod.
Successor Predecessor
---------------------------------------------------------------- ----------------------------
Two Ten Year ended
Year Ended December 31, Months Months December 31,
---------------------------------------------------- Ended Ended ------------
(pro forma) December 31, October 31,
(in thousands except per share data) 1999 1998 1997 1996 1996 1996 1995
- ------------------------------------ ---- ----- ---- ---- ---- ---- ----
Revenue $ 82,318 $65,151 $41,042 $39,004 $ 6,705 $32,299 $35,012
Income (loss) before extraordinary item (2,260) (1,598) 788 (1,523) 469 (1,606) 265
Income (loss) before extraordinary item
per share (0.44) (0.28) 0.25 (0.48) 0.15 -- --
Net income (loss) (2,260) (2,198) 788 (1,523) 469 (1,606) 265
Net income (loss) per share (0.44) (0.39) 0.25 (0.48) 0.15 -- --
Total assets 103,163 87,237 40,898 35,178 -- -- 35,455
Total long-term debt and redeemable
preferred stock 9,909 2,500 17,700 19,150 -- -- 27,310
On February 4, 1998, the Company acquired the British Airways repair and
overhaul operation in the United Kingdom. See "Organization and Basis of
Presentation" in Note 1 to the Consolidated Financial Statements.
Income tax expenses for the two months ended December 31, 1996, and the
year ended December 31, 1997, include provisions of $382,000 and $467,000,
respectively, primarily due to changes in deferred tax assets. No tax was
actually payable for such provisions. See Note 4 to the Consolidated Financial
Statements.
The Company operated as a subsidiary of BTR Dunlop Holdings, Inc., a
Delaware Corporation, from December 21, 1994 to October 31, 1996. BTR Dunlop
Holdings, Inc. was a subsidiary of BTR plc, a United Kingdom company
(collectively, the "Parent"). Pursuant to an Agreement of Purchase and Sale of
Stock, AqHawk, Inc. purchased all of the Company's outstanding stock from BTR
plc effective as of November 1, 1996 (the "Acquisition"). AqHawk, Inc. was
formed as a holding company for the sole purpose of acquiring the stock of the
Company and was subsequently merged into the Company. The acquisition has been
accounted for under the purchase accounting method. The aggregate purchase
price was approximately $29,800,000, which includes the cost of the acquisition.
The aggregate purchase price was allocated to the assets of the Company, based
upon estimates of their respective fair market values. The excess of purchase
price over the fair values of the net assets acquired was $1,019,000 and was
recorded as goodwill. Goodwill has been subsequently reduced for the reduction
of certain allowances on deferred taxes and amortization.
-14-
The financial statements for the ten months ended October 31, 1996, are
presented under the historical cost basis of the Company, as a wholly owned
subsidiary of BTR Dunlop Holdings, Inc., the predecessor Company (the
"Predecessor"). The financial statements as of December 31, 1997 and 1998, and
for the two months ended December 31, 1996, and the years ended December 31,
1997 and 1998, are presented under the new basis of the successor company (the
Successor") established in the Acquisition.
The following unaudited pro forma information combines the results of
operations of the Successor and the Predecessor as if the Acquisition had
occurred on January 1, 1996, and includes certain pro forma adjustments to the
historical operating results for amortization of goodwill, depreciation and
amortization of fixed assets and interest expense. The pro forma information is
presented for illustrative purposes only, and is not necessarily indicative of
what the actual results of operations would have been during such period, nor is
it intended to be representative of future operations.
Twelve Months Ended
December 31, 1996
(Unaudited)
-------------------
Revenue $39,004,000
Net loss (1,523,000)
Net loss per share (0.48)
Restructuring charges of $1,196,000 are included during the ten months
ended October 31, 1996, and the pro forma year ended December 31, 1996, related
to costs incurred to shut down discontinued operations of Dunlop Miami.
Included in selling, general and administrative expenses for the ten months
ended October 31, 1996, and the pro forma year ended December 31, 1996, are
expenditures related to an EPA Claim of approximately $947,000. No such costs
were incurred during the two months ended December 31, 1996, or the year ended
December 31, 1997.
Fiscal year 1995 includes a non-recurring charge to cost of revenues of
$927,000 for disposal of inventory related to the Dunlop Merger which had
operations in Chatsworth, CA and Miami, FL. Fiscal year 1995 also includes a net
gain of approximately $300,000 included in selling, general and administrative
expenses, which represents an operating expense of $700,000 offset by an
insurance reimbursement of $1,000,000 related to the EPA Claim for which the
Company has been fully indemnified by BTR.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
Hawker Pacific finished fiscal year 1999 with record quarterly revenue of
$25,256,000, a 43% increase from the fourth quarter of 1998. Net income for the
quarter improved by over 100% to $164,000. Net income (loss) to common
shareholders was ($109,000), or ($0.02) per share after a $273,000 reduction in
net income related to accretion of a discount and redemption premium on
preferred stock issued in December 1999 (all basic and diluted per share amounts
are equal for the periods presented in this discussion). For additional detail
on the preferred stock accretion, please refer to Amendment Changes on page 2.
For the year, the Company recorded a net loss in 1999 of $2,260,000
primarily as a result of the relocation of the Company's United Kingdom
subsidiary. The net loss to common shareholders was $2,533,000, or $0.44 per
share, after the reduction for preferred stock accretion. From May through July
1999 the Company relocated its UK operation from its prior location in a British
Airways maintenance facility to a new 140,000 square foot state-of-the-art
facility in Hayes. Although large portions of the move were completed in July,
it took several additional months for the operation to settle in and complete
necessary leasehold improvements. In addition, several functional areas could
not be moved until November and December. Most importantly, the UK operation
could not relocate British Airway's aging plating shop, and it was necessary to
construct a new plating facility at the Hayes location. The new plating shop,
costing approximately $3,300,000, was not completed until January 2000.
As a result of this relocation, from May 1999 through January 2000 the UK
subsidiary operated in a constant period of transition, losing substantial
amounts from under-utilized labor and under-absorbed overhead. Excess overhead
costs during 1999 amounted to $1,299,000, not counting many other costs that are
not quantifiable from the impact of the lengthy relocation on operating
efficiencies. From June 1999 through January 2000 UK technicians were required
to shuttle work product back and forth between the old and new facilities at
least several times for each overhauled gear. 1999 also had an excessive amount
of low or negative margin outside processing, as many jobs were given to other
competitive landing gear operations, or shipped via air to the Company's Sun
Valley facility. The impairment on operating efficiencies, and the very high
costs of outside processing and transportation, had a substantial and
unquantifiable adverse impact on UK financial results during 1999, over and
above the $1,299,000 of excess overhead costs. The UK plating shop is now
complete, along with every other phase of the transition and integration of the
UK operation.
The second primary factor adversely affecting profitability for 1999 was
the amount of extra costs related to the Company's violation of certain
covenants on its senior credit facility. These violations were cured in October
1999 when the loan agreement was restructured. As a result of the violations,
the Company's senior lender has increased the interest rate on all borrowings by
almost 3.25%, and charged numerous fees and additional costs. In total, these
violation costs in 1999 amounted to $1,371,000 over and above the amount of loan
costs the Company would have incurred if it had not been in violation. These
costs include $949,000 in additional interest, and $422,000 in additional costs
(penalties, legal and consulting fees, and other related costs).
Other unusual charges in 1999 included $826,000 for an inventory
adjustment, $198,000 for Year 2000 costs, $140,000 to settle a lawsuit, and
$126,000 for non-operational advisory fees. The sum of these unusual charges,
$1,290,000, plus relocation expenses and the Heller violation costs, amounts to
$3,960,000 of lost income during 1999. Once again, this amount does not include
the substantial negative impact on UK results from relocation-related
impairments to operating efficiencies, and increased outside processing and
transportation costs. After tax, these charges resulted in a $2,689,000 net loss
($0.46) for the year, and $464,000 ($0.08) for the quarter.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue for the year ended December 31, 1999, increased by
$17,167,000 from $65,151,000 to $82,318,000. Revenue growth was almost evenly
split between the US and UK operations, although the UK unit was only active for
eleven months during 1998. The Company's Sun Valley division landed several new
contract awards during 1999, and the UK subsidiary expanded its revenue base
with many new customers.
Most of the revenue gains during 1999 were recorded in the Company's
landing gear product lines, which increased by 30% to $53,938,000. Fixed wing
and helicopter repair and overhaul increased by 21% to $17,304,000. Wheels,
brakes and braking system components repair and overhaul declined by 8% to
$4,733,000.
-16-
Cost of Revenue and Gross Margin. Cost of revenue during 1999 was
abnormally high in the UK because of the relocation, and also high on a
consolidated basis as a result of the $826,000 inventory adjustment.
Nevertheless, cost of revenue as a percentage of sales in 1999 decreased
slightly to 84.1% from 84.5% in 1998. Both 1998 and 1999 fiscal years were
strongly affected by the UK acquisition, integration and relocation, and such
results are not considered indicative of the results of operations which the
Company expects in the future.
Selling, General and Administrative Expense. Selling expense for 1999
decreased by 9% to $3,296,000, while general and administrative expense
increased by 15% to $7,076,000. General and administrative expense in 1999
increased as a result of higher payroll costs, and unusual charges of $422,000
in loan violation costs, $198,000 for Year 2000 costs, and $140,000 for a
litigation settlement.
Interest Expense. Interest expense increased from $3,402,000 in 1998 to
$6,001,000 in 1999 as a result of increased borrowings on the Company's senior
credit facility, a 0.75% rise in the prime rate, and increased interest charges
as a result of the loan violation. Increased interest charged as a result of the
loan violation amounted to $949,000 in 1999. Interest on the revolving line of
credit started at a market rate of 7.0% in December 1998, but the Company is
currently paying a default rate of 11.5%. The Company is actively seeking to
replace its senior lender in order to return its debt service to a normal level,
and hopes to have alternative senior financing in place within the next few
months. In such an event, the Company expects that annual interest costs will be
reduced by in excess of $1,000,000.
Extraordinary Item. In December 1998 the Company incurred $954,000 of costs
in deferred loan fees and prepayment charges to retire the Company's previous
credit facility. These charges were recorded as an extraordinary item, and
presented net of tax of $354,000.
Net Loss. The net loss for fiscal year 1999 was $2,260,000, as compared
with a net loss in 1998 of $2,198,000. The net loss to common shareholders for
1999 was $2,533,000, or $0.44 per share, after the reduction for preferred stock
accretion. The net loss before extraordinary items in 1999
increased by 41% to $2,260,000 from $1,598,000 in 1998. As previously discussed,
the principal factors which have negatively affected UK operating results during
the last two years are no longer present after January 2000.
Quarter Ended December 31, 1999, Compared to Quarter Ended December 31, 1998
Revenue. Revenue for the fourth quarter of 1999 increased to $25,256,000
from $17,618,000 in the prior comparable period. While revenue has increased in
every quarter of 1999, the Company does not project that this trend will
predictably continue. The Company's revenue is predicated to a large extent on
the scheduling of landing gear overhaul events, which frequently aggregate more
in one quarter than another. Asset sales in the fourth quarter also included a
$4,200,000 sale. While the Company expects continual revenue growth on an annual
basis in accordance with industry and historical trends, it does not expect that
the sharp revenue surges in the third and fourth quarters of 1999 will continue
at the same rate.
Cost of Revenue and Gross Margin. While fourth quarter 1999 revenue
increased by 43% from the fourth quarter of 1998, the comparable cost of revenue
only increased by 15%. Gross margin accordingly increased from $335,000 in the
fourth quarter of 1998 to $5,463,000 in the fourth quarter of 1999. Fourth
quarter 1998 gross margin was adversely affected by restructuring expenses in
the UK operation, and a $750,000 writedown of slow-moving inventory.
Selling, General and Administrative Expense. 1999 fourth quarter selling,
general and administrative expense decreased to $3,159,000 from $3,806,000 in
the comparable period of 1998. 1999 quarterly expenses included $242,000 of
loan violation costs, and $57,000 related to the settlement of a litigation,
while 1998 quarterly expenses were $667,000 higher than normal because of
several unusual charges. Without the effect of unusual charges, selling, general
and administrative expenses in the fourth quarter of 1999 were 9% lower than the
fourth quarter of 1998.
Interest. Interest in the fourth quarter of 1999 increased by $659,000,
$384,000 of which was attributable to the higher default rate.
Net Loss. The Company posted net income in the fourth quarter of 1999 of
$164,000, as compared with a net loss of $3,622,000 ($3,022,000 before
extraordinary items) in the comparable period of 1998. Net income (loss) to
common shareholders was ($109,000) or ($0.02) per share, after the reduction for
preferred stock accretion. During the fourth quarter of 1999 the
-17-
Company incurred unusual charges of $626,000 for loan violation costs, and
$57,000 for settlement costs, which amounts reduced earnings per share by
$0.08.
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenue. Revenue for the year ended December 31, 1998, increased by
$24,109,000, or 59%, from the year ended December 31, 1997. Revenue comparisons
were favorably affected by the Company's acquisition of the British Airways
landing gear repair and overhaul operation in February 1998. Without the effect
of the British Airways acquisition, the Company's other operations recorded
revenue growth of 25% as compared with 1997.
Landing gear repair and overhaul revenue increased $22,380,000 (118%) to
$41,400,000. The increase in landing gear repair and overhaul revenue was
primarily attributable to increased business from the Company's UK operation
($16,562,000). Fixed wing and helicopter repair and overhaul increased to
$14,245,000 from $13,195,000 in 1997 or 8%. Wheels, brakes and braking system
components repair and overhaul declined 5% to $5,135,000 from $5,393,000 in
1997.
Cost of Revenue and Gross Margin. Cost of revenue as a percentage of sales
in 1998 increased to 84.5%, as compared with 76.6% in 1997. Cost of revenue was
higher proportionally during 1998 primarily because the Company's UK subsidiary
was restructuring its operations, implementing new procedures and controls, and
hiring and training personnel throughout 1998. The UK operation therefore
required increased labor, material and overhead costs as compared with the
Company's long-established Sun Valley facility. As the prior comparable period
included only Sun Valley results, the gross margin percentage decreased
accordingly during 1998. Also adversely affecting gross margin was a $750,000
writedown of certain slow-moving inventory.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1998, increased
significantly from the prior comparable period as a direct result of the added
facility in the United Kingdom. Additional expense was also incurred from the
cancellation of a convertible debt offering ($241,000), foreign currency
adjustments ($326,000), and an increase to a reserve for doubtful accounts
($100,000). Although the dollar amount increased primarily because of the new
facility and the significant charges above, selling, general and administrative
expense as a percent of revenue increased only slightly for the year.
Interest Expense. Interest expense increased by $971,000 during 1998 as a
result of increased borrowings on the Company's senior credit facility.
Income Taxes. During 1998 the Company recorded an income tax benefit of
$1,402,000, as compared to income tax expense of $467,000 in 1997. A valuation
allowance of $225,000 was recorded against the related deferred tax assets for
state net operating loss carryforwards that expire in the near term.
Extraordinary Item. In December 1998 the Company obtained a new senior
credit facility which provided an additional $20,800,000 of availability. The
Company incurred $954,000 of costs in deferred loan fees and prepayment charges
to retire the Company's previous credit facility. These charges were recorded as
an extraordinary item, and presented net of tax of $354,000.
Net Loss. The net loss for fiscal year 1998 was $2,198,000, or $0.39
($1,598,000, or $0.28 cents before extraordinary items), as compared with net
income of $788,000, or $0.25, for fiscal year 1997.
Quarter Ended December 31, 1998, Compared to Quarter Ended December 31, 1997
Revenue. Revenue for the fourth quarter of 1998 increased by 60% to
$17,618,000 from $10,982,000 for the comparable period of 1997.
Cost of Revenue and Gross Margin. Cost of revenue as a percentage of sales
increased significantly during the fourth quarter of 1998 because of the
addition of the new operation in the United Kingdom. The UK subsidiary was still
establishing its operations, implementing new procedures and controls, and
working to cope with massive personnel turnover issues. The UK operation
therefore required increased labor, material and overhead costs, which
management estimates exceeded $1 million in additional costs, as compared with
the Company's long-established Sun Valley facility. As the prior comparable
period included only Sun Valley results, the gross margin percentage decreased
accordingly during the fourth quarter of 1998.
-18-
Extraordinary, Unusual or Infrequently Occurring Items. Fourth quarter
charges totaled $3,421,000, or $0.59. This amount includes an extraordinary
expense of $954,000, and unusual or infrequently occurring charges of
$2,467,000. The extraordinary expense of $954,000 consisted of costs related to
retiring the Company's previous senior credit facility. Unusual or infrequently
occurring charges included: (i) $241,000 for the cancellation of a convertible
debt offering; (ii) $825,000 for restructuring expenses in the UK operation,
including costs related to replacing management and restructuring operations;
(iii) $750,000 to writedown slow-moving inventory; (iv) $326,000 of foreign
exchange adjustments; (v) $225,000 to establish a valuation allowance against
California net operating loss carryforwards which imminently expire; and (vi)
$100,000 to increase the allowance for bad debt.
Net Loss. The Company posted a fourth quarter loss of $3,622,000, or $0.62
($3,022,000, or $0.51 cents, before extraordinary items), as compared with net
income of $123,000, or $0.02 in the comparable period of 1997.
Liquidity And Capital Resources
Statement of Financial Position. Accounts receivable increased during 1999
from $12.3 million to $18.2 million. This increase is partially a result of the
increased sales volume, but is primarily attributable to one $4.2 million
transaction in late December. Total current assets increased from $35.2 million
to $46.0, as inventory also increased to support the higher sales volume. Along
with a $4.3 million increase in fixed assets, total assets increased from $87.2
million to $103.2 million at December 31, 1999.
During 1999, borrowings on the Company's line of credit increased from
$37.2 million to $52.6 million as funds were drawn to support the UK relocation,
leasehold improvements for the new facility, and construction of the plating
shop. During 1999 the Company reduced the principal amount due on its two term
notes with its senior lender by $5.1 million.
Current liabilities of $75.7 million at December 31, 1999, include $52.6
million for the line of credit. Barring any significant changes in the Company's
collateral base, line of credit amounts are generally not payable until the end
of 2003. Excluding the line of credit amount, the current liabilities the
Company actually expects to pay during the next twelve months yields an
effective current ratio of 2.0.
Other comprehensive income (loss) adjustments to retained earnings include
$1.6 million of unrealized foreign currency translation loss resulting from the
decreased value of the British pound. As the dollar has strengthened against the
pound, the value of the Company's intercompany loan and investment in its UK
subsidiary has decreased accordingly.
Statement of Cash Flows. The $4.2 million sale in December increased
accounts receivable to an unusually high level right at the end of the year.
This unfavorable effect on cash was the principal contributing factor to the
Company's use of $1.9 million in operating activities. $9.8 million of cash used
in investing activities principally reflects cash expended on the new UK
facility.
These uses of cash were funded by $15.4 million of borrowings on the
Company's line of credit, along with a net $2.8 million raised in a private
equity placement in December 1999.
Liquidity. On December 22, 1998, the Company secured a $66.3 million senior
credit facility from Heller Financial, Inc., and NMB-Heller Limited
(collectively, "Heller"). The Loan and Security Agreement, as amended (the
"Heller Agreement") originally provided a $55 million revolving line of credit,
a Term Loan A in the amount of $4.3 million, and a Term Loan B in the amount of
$7.0 million. The revolver and both term loans expire in five years. At December
31, 1999, all three instruments carried interest at a rate of 11.0%. Since March
22, 2000, when the prime rate increased, the rate on all three instruments has
been 11.5%.
Availability for the $55 million revolving line of credit may be limited by
borrowing base criteria related to levels of accounts receivable, inventory and
exchange assets. At December 31, 1999, the Company's borrowing base was $55.0
million, of which $52.6 million had been advanced, leaving remaining
availability of $2.4 million. At March 31, 2000, the Company's borrowing base
was $55.0 million, of which $53.8 million had been advanced, leaving remaining
availability of $1.2 million.
-19-
During 2000 the Company has been providing cash from operations, and it is
expected that the Company will continue to generate surplus cash flow throughout
2000 and beyond. The Company remains, however, cash tight currently because the
UK subsidiary is still paying off large capital expenditures incurred during
1999. The monthly surplus cash flow from operations is expected to reduce this
tightness gradually during the next few months.
On April 5, 2000, the Company and Heller executed an amendment to the
Heller Agreement. This amendment extends certain covenant provisions of the
Heller Agreement until August 31, 2000, and provides for an escalation of
certain fees to Heller. The Company is actively working to secure a new senior
credit facility, and upon doing so, these additional fees to Heller will cease
accruing. The Company believes the additional fees to Heller will be
approximately $0.4 million, but they may amount to as much as $1.6 million by
August 31, 2000.
The Company believes that cash provided from operations, along with savings
from deferring discretionary capital expenditures, will continue to provide
sufficient liquidity to meet the Company's cash requirements for the year ending
December 31, 2000.
Foreign Exchange
The Company has operating units located in the United Kingdom and the
Netherlands, and also conducts business in many other countries worldwide.
Foreign currency exchange rates could cause the Company's products to become
relatively more expensive in particular countries, leading to a reduction in
revenues in that country. However, to date, the Company's business has not been
significantly affected by currency fluctuations.
The Company makes substantial inventory purchases in French francs from
such suppliers as Messier Services and Eurocopter France. In the last few years,
the US dollar has strengthened against the French franc, creating a favorable
exchange rate variance for the Company. Transactions related to the Company's
Netherlands facility are primarily denominated in US dollars for inventory
purchases, while revenue and operating expenses are partially denominated in
Dutch guilders. The Company anticipates that approximately one-third of its 2000
consolidated revenue may be received by the Company's UK subsidiary in British
pounds sterling.
During the fourth quarter of 1999 and the first quarter of 2000 the US
dollar strengthened against the British pound. If this short term trend
continues, UK sales 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 receivable from the UK operation will become less
valuable. To date, the UK subsidiary has not made any payments on the
intercompany loan, and no payments are expected in the foreseeable future.
The Company's payment of the purchase price for the BA Acquisition was
denominated in pounds. To hedge against the fluctuation of pounds to dollars,
the Company entered into a transaction which permitted it to purchase
approximately $17 million of pounds at a rate of 1.6373 dollars per pound. The
balance of the purchase price was not hedged, although the spot rate when the BA
Acquisition was completed was similar to the forward hedge rate. The Company
will continue to evaluate hedging options in the future. The Company's business
will require it to continue engaging in foreign currency denominated sales, and
to incur material amounts of expense in foreign currencies. These activities may
generate gains and losses as a result of currency fluctuations.
Quarterly Revenue Fluctuations
The Company's operating results are affected by a number of factors,
including the timing of orders for repair and overhaul work, the timing of
expenditures to manufacture parts and purchase inventory in anticipation of
future services and sales, parts shortages that delay work in progress, general
economic conditions and other factors. As a result, the Company may experience
significant fluctuations in operating results from quarter to quarter.
Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, the Company does not believe that inflation has had, or is
likely to have in the foreseeable future, a material effect on its results of
operations or financial condition.
-20-
Other Matters
In October 1999 the Company retained an investment banking firm to advise
the Company's Board of Directors on alternatives for maximizing shareholder
value. The Company is still investigating possible transactions.
Forward Looking Statements
This Annual 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, products, 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, competitive, legal, governmental and technological factors.
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.
ITEM 7A. 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 United Kingdom
and the Netherlands. The currencies of these two countries have been relatively
stable as compared with the U.S. dollar. The Company manages foreign currency
risk, in part, 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. The Company has not to date seen the
need for currency hedging transactions in the ordinary course of business. For
additional discussion on foreign currency exchange risk as it relates to the
Company's operations, please refer to: (i) Item 7--Foreign Exchange; and (ii)
Note 1 to the Consolidated Financial Statements--Foreign Currency Translation.
Interest Rate Risk. The Company's senior credit facility is comprised of
two notes payable and a revolving line of credit, each of which carries an
interest rate which varies in accordance with a Base Rate equal to the higher of
the Federal Reserve prime rate, or the Federal Funds Effective Rate. The Company
is subject to potentially material fluctuations in its debt service as the Base
Rate changes. The extent of this risk is not quantifiable or predictable. For
additional information, please refer to Note 1 to the Consolidated Financial
Statements--Fair Value of Financial Instruments.
In February 1998, to reduce the impact of changes in interest rates on the
Company's debt facility, the Company entered into an interest rate Swap
Agreement. The Swap Agreement reduced interest rate exposure to a fixed amount.
This agreement was terminated in 1999. For additional information, please refer
to Note 5 to the Consolidated Financial Statements--Lines of Credit and Notes
Payable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Form 10-K for the
information required by Item 8.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-21-
PART III
ITEMS 10-13. The information required by Items 10-13 of Part III is omitted and
incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
Page
----
Report of Independent Auditors................................................................ 26
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................. 27
Consolidated Statements of Operations for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997....................................................... 29
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, December 31, 1998 and December 31, 1997............................... 30
Consolidated Statements of Cash Flows the years ended December 31, 1997,
December 31, 1998 and December 31, 1999.................................................. 31
Notes to Consolidated Financial Statements.................................................... 33
Note 1 - Summary of Significant Accounting Policies....................................... 33
Note 2 - Inventories...................................................................... 36
Note 3 - Equipment and Leasehold Improvements............................................. 37
Note 4 - Income Taxes..................................................................... 37
Note 5 - Lines of Credit and Notes Payable................................................ 38
Note 6 - Commitments and Contingencies.................................................... 40
Note 7 - Related Party Transactions....................................................... 41
Note 8 - Stock Option Plan................................................................ 41
Note 9 - Employee Benefit Plans........................................................... 43
Note 10 - Redeemable Preferred Stock...................................................... 45
Note 11 - Shareholders Equity............................................................. 45
Note 12 - Non-Monetary Transactions....................................................... 46
Note 13 - Segment Information............................................................. 46
Schedule II. Valuation and qualifying accounts.................................................... 46
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1999.
-22-
(c) Exhibits
2.1 Agreement relating to the Sale and Purchase of part of the
Business of British Airways plc dated December 20, 1997 by and
among the Company, Hawker Pacific Aerospace Limited and British
Airways plc, and related Landing Gear Overhaul Services Agreement
(1)+
3.1 Amended and Restated Articles of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (1)
3.3 Certificate of Amendment to the Amended and Restated Articles of
Incorporation of the Company (1)
3.4 Certificate of Determination for 8% Series C Convertible
Preferred Stock, as filed with the California Secretary of State
on December 9, 1999 (10)
4.1 Specimen Common Stock Certificate (1)
4.2 Rights Agreement, Form 8-A12G, dated as of March 10, 1999,
between the Company and U.S. Stock Transfer Corporation (6)
4.3 Amendment to Rights Agreement, Form 8-A12G/A, dated as of March
10, 1999, between the Company and U.S. Stock Transfer Corporation
(7)
4.4 Copy of Warrant to purchase 50,000 shares issued to Brighton
Capital, Ltd., dated December 10, 1999 (10)
4.5 Copy of Warrant to purchase 125,000 shares issued to Deephaven
Private Placement Trading Ltd., dated December 10, 1999 (10)
10.1 1997 Stock Option Plan and forms of Stock Option Agreements (1)
10.1A Amendment No. 1 to 1997 Stock Option Plan (1)
10.2 Employment Agreement dated November 1, 1996 between the Company
and David L. Lokken (1)
10.2A First Amendment to Employment Agreement for David L. Lokken (1)
10.3 Employment Agreement dated November 1, 1996 between the Company
and Brian S. Aune (1)
10.3A First Amendment to Employment Agreement for Brian S. Aune (1)
10.4 Employment Agreement dated November 1, 1996 between the Company
and Brian S. Carr (1)
10.4A First Amendment to Employment Agreement for Brian S. Carr (1)
10.5 Employment Agreement dated November 1, 1996 between the Company
and Michael A. Riley (1)
10.5A First Amendment to Employment Agreement for Michael A. Riley (1)
10.6 Form of Indemnity Agreement for directors and executive officers
of the Company (1)
10.7 Business Loan Agreement dated November 27, 1996 between the
Company and Bank of America National Trust and Savings
Association (1)
10.7A Amendment No. 1 to Business Loan Agreement between the Company
and Bank of America National Trust and Savings Association (1)
10.8 Agreement of Purchase and Sale of Stock effective as of November
1, 1996 by and among BTR Dunlop, Inc., BTR, Inc., the Company and
AqHawk, Inc (1)
10.9 Repair, Overhaul, Exchange, Warranty and Distribution Agreement
dated November 1, 1996 between the Company and Dunlop Limited,
Aviation Division (1)+
10.10 Distribution Agreement dated November 1, 1996 between the Company
and Dunlop Limited, Precision Rubber (1)
10.11 Repair, Overhaul, Exchange, Warranty and Distribution Agreement
dated November 1, 1996 between the Company and Dunlop Equipment
Division (1)+
10.12 Repair Services Agreement dated September 9, 1997 between the
Company and American Airlines, Inc (1)+
10.13 Award/Contract dated September 20, 1995 issued by USCG Aircraft
Repair and Supply Center to the Company (1)+
10.14 Maintenance Services Agreement dated August 19, 1994 between the
Company and Federal Express Corporation (1)+
10.15 Lease Agreement dated March 31, 1997 by and between the Company
and Industrial Centers Corp (1)
-23-
10.15A First Amendment to Lease Agreement dated March 31, 1997 by and
between the Company and Industrial Centers Corp. (2)
10.16 Management Services Agreement dated November 14, 1997 between the
Company and Unique Investment Corp. (1)
10.17 Mergers and Acquisitions Agreement dated September 2, 1997 between
the Company and Unique Investment Corp. (1)
10.17A Form of First Amendment to Mergers and Acquisitions Agreement
between the Company and Unique Investment Corp. (1)
10.17B First Amendment to Mergers and Acquisitions Agreement, dated as of
January 23, 1998, by and between the Company and Unique Investment
Corp. (3)
10.18 Subordinated Note for $6,500,000 in favor of Unique Investment
Corp. (1)
10.19 Amended and Restated Subordinated Promissory Note dated February 3,
1998 in favor of Unique Investment Corp. (2)
10.20 Certified Translation of Rental Agreement between Mr. C. G.
Kortenoever and Flight Accessory Services (1)
10.21 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.21A First Amendment to Lease Agreement dated July 28, 1994 by and
between the Company and Industrial Bowling Corp. (2)
10.22 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.23 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.24 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp. (1)
10.25 Lease Agreement dated June 24, 1997 by and between the Company and
AllState Insurance Company (1)
10.25A First Amendment to Lease Agreement between the Company and
AllState Insurance Company (2)
10.26 Lease Agreement dated November 21, 1994 by and between the Company
and Gordon N. Wagner and Peggy M. Wagner, and Joseph W. Basinger
and Viola Marie Basinger (1)
10.27 Amended and Restated Business Loan Agreement dated January 23, 1998
between the Company and Bank of America National Trust and Savings
Association (2)
10.28 Security Agreement dated January 23, 1998 by the Company in favor
of Bank of America National Trust and Savings Association (2)
10.29 Pledge Agreement dated January 23, 1998 by the Company in favor of
Bank of America National Trust and Savings Association (2)
10.30 Subordination Agreement dated January 23, 1998 by and among the
Company, Hawker Pacific Aerospace Limited, Bank of America National
Trust and Savings Association, Melanie L. Bastian and Unique
Investment Corp. (2)
10.31 Underlease, dated February 4, 1998, by and among British Airways
plc, Hawker Pacific Limited and the Company (3) +
10.32 Bailment and Services Agreement, dated as of September 1, 1997, by
and between Federal Express Corporation and the Company (3) +
10.33 Tenancy Agreement relating to Bennebroekerweg, Rijsinboat
(Netherlands), dated March 15, 1998, between Hawker Pacific
Holland, a division of the Company, and Mateor II C.V. (4)
10.34 Statement of Terms and Conditions of Employment, dated May 12,
1998, by and between Hawker Pacific Aerospace, Ltd., and Richard
Adey (4)
10.35 Statement of Terms and Conditions of Employment, dated October 1,
1998, by and between Hawker Pacific Aerospace and Philip Panzera
(5)
10.36 Statement of Terms and Conditions of Employment, dated October 12,
1998, by and between Hawker Pacific Aerospace and Dennis Biety (5)
10.37 Loan and Security Agreement, dated December 22, 1998, between
Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as
borrowers, and Heller Financial, Inc., and NMB-Heller Limited (8)
10.38 Lease relating to Unit 3 Dawley Park, Hayes, Middlesex, dated April
7, 1998, between Sun Life Assurance plc and Hawker Pacific
Aerospace Limited and Hawker Pacific Aerospace (8)
-24-
10.39 Sublease related to Building 9, Sun Valley, dated January 14, 1998,
between Hawker Pacific Aerospace and Abex Display Systems, Inc. (8)
10.40 Forbearance Agreement between Hawker Pacific Aerospace and Hawker
Pacific Aerospace Limited, as borrowers, and Heller Financial,
Inc., and NMB-Heller Limited, dated March 10, 1999 (8)
10.41 Second Forbearance Agreement between Hawker Pacific Aerospace and
Hawker Pacific Aerospace Limited, as borrowers, and Heller
Financial, Inc., and NMB-Heller Limited, dated April 13, 1999 (8)
10.42 Waiver and Amendment No. 1 to Loan and Security Agreement, between
Hawker Pacific Aerospace and Hawker Pacific Aerospace Limited, as
borrowers, and Heller Financial, Inc., and NMB-Heller Limited,
dated October 21, 1999 (9)
10.42A Waiver and Amendment No. 2 to Loan and Security Agreement, dated
December 10, 1999 (10)
10.42B Waiver and Amendment No. 3 to Loan and Security Agreement, dated
February 16, 2000
10.42C Waiver and Amendment No. 4 to Loan and Security Agreement, dated
March 27, 2000
10.43 Convertible Preferred Stock Purchase Agreement, dated December 10,
1999, between the Company and Deephaven Private Placement Trading
Ltd. (10)
10.44 Registration Rights Agreement, dated December 10, 1999, between the
Company and Deephaven Private Placement Trading Ltd. (10)
10.45 Description of $3 million Private Placement in response to Item 5
of Form 10-K, as excerpted from the Company's Form S-3 under
"Description of Our Capital Stock - Series C" and "Selling
Shareholders - Deephaven Financing"
11 Statement re Computation of Per Share Earnings
21.1 Subsidiaries of Registrant
27.1 Financial Data Schedule
_______________________________
+ Portions of exhibits deleted and filed separately with the Securities
and Exchange Commission pursuant to
a request for confidentiality
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1, as amended (Registration No. 333-40295), and incorporated
herein by reference
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, and incorporated herein by
reference
(3) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, and incorporated herein
by reference
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, and incorporated herein
by reference
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, and incorporated
herein by reference
(6) Previously filed with the Securities and Exchange Commission on March
23, 1999, and incorporated herein by reference
(7) Previously filed with the Securities and Exchange Commission on April
7, 1999, and incorporated herein by reference
(8) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, and incorporated herein by
reference
(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, and incorporated
herein by reference
(10) Previously filed as an exhibit to the Company's Registration Statement
on Form S-3 (Registration No. 333-93391), and incorporated herein by
reference
(d) Financial Statement Schedules
Schedule II -- Valuation And Qualifying Accounts, has been included
herein under Item 14(a) above.
-25-
Report of Independent Auditors
The Board of Directors
Hawker Pacific Aerospace
We have audited the accompanying consolidated balance sheets of Hawker Pacific
Aerospace as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hawker Pacific
Aerospace at December 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
Woodland Hills, California
February 11, 2000, except for paragraph 5
of Note 5, for which the date is April 5, 2000
-26-
CONSOLIDATED BALANCE SHEETS
Assets
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------
Current assets
Cash $ 2,227,000 $ 560,000
Accounts receivable, less allowance for
doubtful accounts of $324,000 and $301,000
at December 31, 1999 and 1998, respectively 18,246,000 12,303,000
Other receivables 260,000 114,000
Inventories 24,680,000 21,645,000
Prepaid expenses and other current assets 550,000 617,000
------------ -----------
Total current assets 45,963,000 35,239,000
Equipment and leasehold improvements, net 13,822,000 9,298,000
Landing gear exchange, less accumulated
amortization of $3,846,000 and $1,844,000
at December 31, 1999 and 1998, respectively 37,613,000 37,877,000
------------ -----------
Total fixed assets 51,435,000 47,175,000
Deferred taxes 2,412,000 1,916,000
Deferred financing costs 607,000 798,000
Other assets 2,746,000 2,109,000
------------ -----------
Total assets $103,163,000 $87,237,000
====================================================================================================
See Accompanying Notes to Consolidated Financial Statements
-27-
Consolidated Balance Sheets
(continued)
Liabilities and Shareholders' Equity
December 31, 1999 1998
- -------------------------------------------------------------------------------------------
Current liabilities
Line of credit $ 52,617,000 $ 37,185,000
Accounts payable 13,402,000 12,171,000
Deferred revenue 3,397,000 1,023,000
Accrued payroll and employee benefits 1,495,000 1,433,000
Accrued expenses and other liabilities 4,186,000 1,242,000
Current portion of notes payable 623,000 11,280,000
------------ -----------
Total current liabilities 75,720,000 64,334,000
Notes payable
Bank note 5,617,000 --
Related party 2,500,000 2,500,000
------------ -----------
8,117,000 2,500,000
Commitments and contingencies
Redeemable convertible preferred stock:
5,000,000 shares authorized;
issued and outstanding: 300 and zero shares
at December 31, 1999 and 1998, respectively;
$3,750,000 redemption amount 1,792,000 --
Shareholders' equity
Common stock: 20,000,000 shares authorized;
issued and outstanding: 5,822,222 shares 22,384,000 21,108,000
Retained earnings (deficit) (3,474,000) (941,000)
Accumulated other comprehensive income (1,376,000) 236,000
------------ -----------
Total shareholders' equity 17,534,000 20,403,000
------------ -----------
Total liabilities and shareholders' equity $ 103,163,000 $ 87,237,000
See Accompanying Notes to Consolidated Financial Statements
-28-
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Revenue $ 82,318,000 $ 65,151,000 $41,042,000
Cost of revenue 69,197,000 55,059,000 31,430,000
------------- ------------- -----------
Gross margin 13,121,000 10,092,000 9,612,000
Operating expenses
Selling expense 3,296,000 3,621,000 3,191,000
General and administrative expense 7,076,000 6,143,000 2,706,000
------------- ------------- -----------
Total operating expenses 10,372,000 9,764,000 5,897,000
------------- ------------- -----------
Income from operations 2,749,000 328,000 3,715,000
Other income (expense)
Interest expense (6,001,000) (3,402,000) (2,431,000)
Miscellaneous income (expense), net (76,000) 74,000 (29,000)
------------- ------------- -----------
Total other income (expense) (6,077,000) (3,328,000) (2,460,000)
------------- ------------- -----------
Income (loss) before income
tax provision (benefit) and
extraordinary item (3,328,000) (3,000,000) 1,255,000
Income tax provision (benefit) (1,068,000) (1,402,000) 467,000
------------- ------------- -----------
Income (loss) before extraordinary
item (2,260,000) (1,598,000) 788,000
Extraordinary loss on early
extinguishment of debt (net of
tax benefit of $354,000) -- (600,000) --
------------- ------------- -----------
Net income (loss) (2,260,000) (2,198,000) 788,000
Accretion of discount and redemption
premium on preferred stock (273,000) -- --
Net income (loss) to common
shareholders ($ 2,533,000) ($ 2,198,000) $ 788,000
============= ============= ===========
Earnings (loss) per common share
before extraordinary item: basic
and diluted ($0.44) ($0.28) $ 0.25
============= ============= ===========
Weighted average common
and common equivalent
shares outstanding 5,822,222 5,622,770 3,145,079
============= ============= ===========
See Accompanying Notes to Consolidated Financial Statements
-29-
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Stock Common Stock Retained Other
------------------ -------------------- Earning Comprehensive
Shares Amount Shares Amount (Deficit) Income Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 400 $ 2,000,000 2,870,603 $ 40,000 $ 469,000 $ -- $ 2,509,000
Net income and comprehensive
income for the year -- -- -- -- 788,000 -- 788,000
Issuance of common stock -- -- 101,619 1,000,000 -- -- 1,000,000
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 400 2,000,000 2,972,222 1,040,000 1,257,000 -- 4,297,000
Net loss for the year -- -- -- -- (2,198,000) -- (2,198,000)
Foreign currency translation -- -- -- -- -- 236,000 236,000
----------
Comprehensive loss -- -- -- -- -- -- (1,962,000)
Conversion of preferred stock (400) (2,000,000) 250,000 2,000,000 -- -- --
Issuance of common stock -- -- 2,600,000 18,068,000 -- -- 18,068,000
---------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- -- 5,822,222 21,108,000 (941,000) 236,000 20,403,000
Net loss for the year -- -- -- -- (2,260,000) -- (2,260,000)
Foreign currency translation -- -- -- -- -- (1,612,000) (1,612,000)
----------
Comprehensive loss -- -- -- -- (3,872,000)
Beneficial conversion feature of
redeemable convertible
preferred stock -- -- -- 750,000 -- -- (3,872,000)
Issuance of warrant to preferred
stock shareholders -- -- -- 286,000 -- -- (3,872,000)
Issuance of warrant as cost
related to preferred stock -- -- -- 240,000 -- -- (3,872,000)
Accretion of discount and redemption
premium on preferred stock -- -- -- (273,000) -- -- --
Balance at December 31, 1999 -- -- 5,822,222 $22,384,000 ($3,474,000) ($1,376,000) $17,534,000
See Accompanying Notes to Consolidated Financial Statements
-30-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) (2,260,000) ($2,198,000) $ 788,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Extraordinary loss -- 954,000 --
Deferred income taxes (533,000) (1,771,000) 466,000
Depreciation 1,803,000 1,464,000 741,000
Amortization 2,254,000 1,743,000 463,000
Non-cash items -- -- --
(Gain) on the sale of machinery,
equipment and landing gear (1,648,000) -- (78,000)
Proceeds from sale of landing gear 4,734,000 -- 250,000
Changes in operating assets and liabilities:
Accounts and other receivables (6,311,000) (4,986,000) (1,036,000)
Inventory (3,242,000) (4,870,000) (185,000)
Prepaid expenses and other
current assets 63,000 (377,000) 104,000
Accounts payable 1,049,000 5,225,000 622,000
Deferred revenue 2,365,000 175,000 (745,000)
Accrued liabilities 2,913,000 1,546,000 (818,000)
---------- ----------- -----------
Cash provided by (used in) operating
activities 1,187,000 (3,095,000) 572,000
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment, leasehold
improvements and landing gear (12,216,000) (7,427,000) (2,890,000)
Purchase of equipment and landing gear
from British Airways -- (26,585,000) --
Purchase of inventory from British Airways -- (1,961,000) --
Other assets (680,000) (1,162,000) (824,000)
---------- ----------- -----------
Cash used in investing activities (12,896,000) (37,135,000) (3,714,000)
- ---------------------------------------------------------------------------------------------------------
(continued)
-31-
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowing under bank note $15,431,000 $ 38,766,000 $ --
Principal payments on bank note (5,041,000) (40,136,000) (850,000)
Principal payments on related party note -- (4,000,000) --
Borrowing under related party note -- -- --
Borrowings/payments on line of credit, net -- 28,656,000 3,200,000
Proceeds from equity offering -- 20,800,000 --
Deferred offering costs -- (1,966,000) (766,000)
Deferred financing cost 191,000 (1,490,000) (337,000)
Issuance of preferred stock 2,795,000 -- --
Contributions to capital -- -- 1,000,000
----------- ------------ ----------
Cash provided by financing activities 13,376,000 40,630,000 2,247,000
--------------------------------------------------------------------------------------------
Increase (decrease) in cash 1,667,000 400,000 (895,000)
Cash, beginning of period 560,000 160,000 1,055,000
----------- ------------ ----------
Cash, end of period $ 2,227,000 $ 560,000 $ 160,000
============================================================================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 5,492,000 $3,291,000 $ 2,261,000
Income taxes 9,000 81,000 3,000
See Accompanying Notes to Consolidated Financial Statements
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Hawker Pacific Aerospace, formerly known as Hawker Pacific, Inc. (the
"Company") is a California corporation with headquarters in Sun Valley,
California, and satellite facilities in the Netherlands and, through May 31,
1996, Miami, Florida. In addition, the Company has a wholly owned subsidiary
known as Hawker Pacific Aerospace, Ltd. which operates an overhaul facility in
the United Kingdom ("UK"). The Company repairs and overhauls aircraft and
helicopter landing gear, hydromechanical components, and wheels, brakes and
braking system components for a diverse international customer base, including
commercial airlines, air cargo operators, domestic government agencies, aircraft
leasing companies, aircraft parts distributors, and original equipment
manufacturers. In addition, the Company distributes, manufactures and sells new
and overhauled spare parts and components for both fixed wing and helicopters.
Organization and Basis of Presentation
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. As a result of the significant
amounts of cash and operating costs related to the new plant construction and
moving of the Company's operations in the United Kingdom from Heathrow to it's
new location in Hayes, the Company incurred losses and negative cash flows from
operating activities in 1999, and has a working capital and an accumulated
deficit at December 31,1999. Management's plans with respect to these conditions
include carefully managing cash flow, increasing liquidity and availability on
the credit line where possible, considering the viability of additional external
financing, and improving the operations in the United Kingdom.
On February 3, 1998, the Company completed an initial public offering (the
"Offering") of 2,766,667 shares of the Company's common stock. Of the 2,766,667
shares of common stock sold in the Offering, 2,600,000 shares were sold by the
Company and 166,667 shares were sold by a principal shareholder of the Company.
The principal shareholder sold 415,000 additional shares of common stock
pursuant to the exercise of an over allotment option granted to the underwriters
by the principal shareholder. The Company received net proceeds of approximately
$18.1 million, net of expenses of approximately $2.7 million. The Company used
approximately $9.2 million of the net proceeds to fund a portion of the purchase
price for certain assets of British Airways as discussed below, and
approximately $7.6 million to repay a portion of the revolving and term debt
previously outstanding under the Company's credit facility.
On February 4, 1998 (the "Acquisition Date"), the Company completed its
acquisition of certain assets of British Airways ("BA Assets"). The BA Assets
represent the assets of British Airways Engineering used to service landing gear
primarily on British Airways' aircraft. The purchase price for the BA Assets was
approximately $19.5 million, including acquisition related expenses, and
excluding a 747-400 landing gear rotable asset that was acquired during the
second quarter of 1998 for approximately $2.9 million. Transaction expenses of
$1.1 million were capitalized as part of the rotable asset value.
As part of the BA Acquisition, the Company and British Airways entered into
a seven-year exclusive service agreement on February 4, 1998, for the Company to
provide landing gear and related repair and overhaul services to substantially
all of the aircraft currently operated by British Airways.
As required by the BA purchase agreement, BA employees covered by a
collective bargaining contract continue to be covered by the contract until
three years after the date the Company completed the purchase. As of December
31, 1999, there were 95 employees in the Company's UK subsidiary that are
covered by the BA collective bargaining agreement.
Principles of Consolidation
The consolidated financial statements include the accounts of Hawker
Pacific Aerospace and its wholly owned subsidiary, Hawker Pacific Aerospace,
Ltd. All significant intercompany transactions and balances have been
eliminated.
-33-
Landing Gear Exchange
Landing gear and other rotable assets are accounted for as fixed assets at
cost and are depreciated over their estimated useful lives to their respective
salvage values. These assets include various airplane, wing, body and nose
landing gear shipsets. Landing gear and other rotable assets are held for the
purpose of exchanging the asset with a customer to allow the customer's aircraft
to get back in service in the shortest possible time. Certain of the Company's
contracts could not have been obtained without sufficient rotable inventory to
meet the customer's requirements.
As the landing gear is exchanged and the customer is billed for the cost of
the repair, the landing gear or other parts are typically repaired and
overhauled and maintained as property of the Company for future exchanges. The
estimated useful lives 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. Amortization expense is recorded as a cost of revenue using the
straight-line amortization method.
Recognition of Revenue
The Company generates revenue primarily from repair and overhaul services.
In some cases repair and overhaul services include exchange fees for the
exchange of the Company's landing gear or other parts needing repair or overhaul
services. The Company also generates revenue from the sale and distribution of
spare parts. Spare parts sales and exchange fee revenues are each individually
less than 10% of total revenues.
Revenue for repair and overhaul services not involving an exchange
transaction is recognized when the job is complete and shipped to the customer.
Deferred revenue is principally comprised of customer prepayments and progress
billings related to the overhaul and repair of landing gear and other services,
which are in process. Revenue from spare parts sales is recognized at the time
of shipment. Landing gear exchange fees are recognized on shipment of the
exchanged gear to the customer. Revenue for repair and overhaul service
involving an exchange is recognized when the cost of repairing the part received
from the customer is known and billable.
Concentrations of Risk
Major Customers. The Company performs credit evaluations and analysis of
amounts due from its customers; however, the Company generally does not require
collateral. Credit losses have been within management's expectations and an
estimate of uncollectible accounts has been provided for in the financial
statements.
During 1999, three customers accounted for 19%, 14%, and 10% of the
Company's revenue, and represented 16%, 6%, and 10%, respectively, of the
accounts receivable balance at December 31, 1999. During 1998, three customers
accounted for 22%, 18% and 10% of the Company's revenue, and represented 25%,
19% and 5%, respectively, of the accounts receivable balance at December 31,
1998. During 1997, one customer accounted for 19% of the Company's revenue, and
represented 18.9% of the accounts receivable balance at December 31, 1997.
Major Vendors. During 1999, two vendors accounted for $8,898,000 and
$4,940,000, or 22% and 12%, respectively, of total purchases for the year.
During 1998, three vendors accounted for 12,905,000, 5,439,000 and 3,977,000, or
43%, 18% and 13%, respectively, of total purchases for the year. During 1997,
two vendors accounted for $3,761,000 and $3,580,000, or 20% and 19%,
respectively, of total purchases for the year.
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 revenue
forecasts.
-34-
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation
expense is being provided using the straight-line method based on the
following estimated useful lives.
Leasehold improvements Lesser of life of lease or asset
Machinery and equipment 8 years
Tooling 5 years
Furniture and fixtures 5 years
Vehicles 3 years
Computer equipment 3 years
Expenditures for repairs are expensed as incurred, and additions and
betterments are capitalized.
Goodwill
In connection with the purchase of the Company goodwill was recorded which
represented the excess of the purchase price over the estimated fair value of
the net assets acquired. The Company was amortizing goodwill using the straight-
line method over a period of fifteen years. The Company assesses the
recoverability of its goodwill whenever adverse events or changes in
circumstances or business climate indicate that expected future cash flows for
the business may not be sufficient to support recorded goodwill.
At December 31, 1997 and 1998, goodwill was reduced by $466,000 and
$145,000 respectively, due to the realization of certain deferred tax assets and
the corresponding reduction of the valuation allowance established in the
allocation of the purchase price of the Acquisition. As a result of the
reduction there is no remaining amount of goodwill at December 31, 1998 or 1999.
Foreign Currency Translation
The Company considers the local currency of its foreign operations to be
the functional currency. Accordingly, the Company translates the assets and
liabilities of its foreign operations at the rate of exchange in effect at the
period end. Revenues and expenses are translated using an average of exchange
rates in effect during the period. Translation adjustments are recorded as a
separate component of other comprehensive income (loss) and are included in
shareholders' equity. Transaction gains and losses other than on inter-company
accounts deemed to be of a long-term nature are included in net income in the
period they occur.
Realized and unrealized foreign exchange gains recognized in earnings
amounted to $298,000, $425,000 and $71,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
Earnings (Loss) per Share
Basic and diluted earnings (loss) per common share is computed based upon
the weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per common share reflects the potential dilution that could
occur if certain securities were exercised or converted into common stock. Basic
earnings (loss) per share is the same as diluted earnings (loss) per share for
all periods presented. The number of shares used in the calculation of basic and
diluted earnings per share is 3,145,079, 5,622,770 and 5,822,222 for the years
ended December 31, 1997, 1998 and 1999, respectively. Net income (loss) used in
the calculation of basic and diluted earnings (loss) per share has been adjusted
for the accretion of the discount and redemption premium on the preferred stock
in order to derive net income (loss) available for common shareholders.
Options to purchase 613,107 shares of common stock at exercise prices
between $3.50 and $9.88 were outstanding during 1998, and an additional 30,000
shares at exercise prices between $2.85 and $3.875 were issued and outstanding
during 1999. None of these were included in the computation of diluted earnings
loss per share because the exercise price was greater than the average market
price of the common shares and/or the Company incurred a loss for the period,
therefore, the effect would be antidilutive.
Fair Value of Financial Instruments
The Company's financial instruments principally consist of accounts
receivable, accounts payable, line of credit, note payable to a bank, and notes
payable to a related party as defined by Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments. The
carrying value of accounts receivable and accounts payable approximate their
fair value because of the short-term nature of these instruments. The carrying
value of the line of credit and note payable to a bank approximate their fair
market
-35-
value since these financial instruments carry a floating interest rate.
The fair market value of the note payable to a related party approximates its
carrying value based on current market rates for such debt.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Significant estimates and assumptions include the accounts
receivable allowance for doubtful accounts, a provision for potentially excess
or slow-moving inventory, the warranty accrual, and the cost accruals for repair
and overhaul services. Actual results may differ from those estimates.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). Pursuant to SFAS No. 123, a company may elect to continue expense
recognition under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") or to recognize compensation expense
for grants of stock options, and other equity instruments to employees based on
the fair value methodology outlined in SFAS No. 123. SFAS No. 123 further
specifies that companies electing to continue expense recognition under APB No.
25 are required to disclose pro forma net income and pro forma earning per share
as if fair value based accounting prescribed by SFAS No. 123 has been applied.
The Company has elected to continue expense recognition pursuant to APB No. 25.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
(loss) and its components. The components of other comprehensive income (loss)
consist entirely of foreign currency translation adjustments related to the
Company's operations in the United Kingdom and Holland.
2. INVENTORIES
Inventories are comprised of the following:
December 31,
-------------------------
1999 1998
----------- -----------
Purchased parts and assemblies $20,246,000 $19,251,000
Work-in-process 4,434,000 2,394,000
----------- -----------
$24,680,000 $21,645,000
=========== ===========
-36-
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements, at cost, consist of the following:
December 31,
--------------------------
1999 1998
----------- ------------
Leasehold improvements $ 7,034,000 $ 1,770,000
Machinery and equipment 8,525,000 7,631,000
Tooling 580,000 533,000
Furniture and fixtures 278,000 265,000
Vehicles 38,000 38,000
Computer equipment 1,591,000 1,518,000
----------- -----------
18,046,000 11,755,000
Less: accumulated depreciation 4,224,000 2,457,000
----------- -----------
$13,822,000 $ 9,298,000
=========== ===========
4. 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. Significant components of
the Company's deferred tax assets and liabilities are as follows:
December 31,
--------------------------
1999 1998
----------- ------------
Deferred tax assets
Net operating loss carryforwards $ 9,322,000 $4,308,000
Inventory valuation accruals 575,000 709,000
Accounts receivable valuation accruals 154,000 121,000
Employee benefits and compensation 197,000 305,000
Product and service warranties 76,000 --
State tax credits 94,000 178,000
Other items, net 29,000 --
----------- ----------
Total deferred tax assets 10,447,000 5,621,000
Less valuation allowance -- (225,000)
----------- ----------
Net deferred tax asset 10,447,000 5,396,000
=========== ==========
December 31,
--------------------------
1999 1998
----------- ----------
Deferred tax liabilities:
Depreciation and amortization methods
Difference in fixed assets basis due to
accelerated depreciation and tax
deferred exchanges 7,441,000 3,302,000
Translation gain 586,000 --
Other items, net 8,000 178,000
----------- ----------
Total deferred tax liabilities 8,035,000 3,480,000
----------- ----------
Net deferred tax asset after allowance $ 2,412,060 $1,916,000
=========== ==========
-37-
Significant components of the provision (benefit) for taxes based on income
(loss) are as follows:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------
Current:
Federal $ 19,000 $ -- $ --
State 1,000 1,000 1,000
------------- ------------- --------
20,000 1,000 1,000
Deferred:
Federal (1,364,000) (1,114,000) 466,000
State 276,000 (289,000) --
------------- ------------- --------
(1,088,000) (1,403,000) 466,000
------------- ------------- --------
Provision (benefit) for taxes ($ 1,068,000) ( $1,402,000) $467,000
============= ============= ========
For the years ended December 31, 1997, 1998, and 1999, reductions were made
in the valuation reserve of approximately $466,000, $434,000, and $225,000,
respectively, of which $466,000 for 1997 and $170,000 for 1998 were credited
against goodwill. For the year ended December 31, 1997, deferred tax assets of
$302,000 were determined not to be realizable and were charged directly against
the valuation allowance. At December 31, 1999, there is no valuation allowance
on the net deferred tax asset because management considers the realization of
the net deferred tax asset more likely than not.
A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of income before tax, is as follows:
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Statutory federal income tax rate (34%) (34%) 34%
Nondeductible expenses 1 7 3
State income taxes, net of
federal benefit 5 (10) --
Decrease in valuation reserve (7) (10) --
Other 3 -- --
---- ---- ----
Effective tax rate (32%) (47%) 37%
The Company has net operating loss carryforwards for federal tax purposes
of $25,784,000 which expire in the years 2000 to 2019. The Company also has
state net operating loss carryforwards of $7,579,000 which expire in the years
2001 to 2004. Utilization of approximately $421,000 of federal net operating
loss carryforwards are subject to limitation as a result of changes in
ownership. Such limitations are not anticipated to have a material impact on the
Company's ability to utilize such net operating loss carryforwards.
5. LINES OF CREDIT AND NOTES PAYABLE
On December 22, 1998, the Company secured a $66.3 million senior credit
facility from Heller Financial, Inc., and NMB-Heller Limited
(collectively,"Heller"). The Loan and Security Agreement, as amended (the"Heller
Agreement") originally provided a $55 million revolving line of credit, a Term
Loan A in the amount of $4.3 million, and a Term Loan B in the amount of $7.0
million. The revolver and both term loans expire in five years.
As a result of obtaining the Heller facility the Company incurred $954,000
of expenses related to early extinguishment of its loan agreement with Bank of
America. This expense is presented in the Consolidated Statements of Operations
for the year ended as of December 31, 1998, as an extraordinary item net of
related tax benefit of $354,000.
-38-
At December 31, 1999, all three instruments carried interest at a rate of
11.0%. Since March 22, 2000, when the prime rate increased, the rate on all
three instruments has been 11.5%. During 1999 the Company made principal
payments of $0.6 million and $4.5 million on Term Loans A and B, respectively.
Availability for the $55 million revolving line of credit may be limited by
borrowing base criteria related to levels of accounts receivable, inventory and
exchange assets. At December 31, 1999, the Company's borrowing base was $55.0
million, of which $52.6 million had been advanced, leaving remaining
availability of $2.4 million.
On April 5, 2000, the Company and Heller executed an amendment to the
Heller Agreement. This amendment extends certain covenant provisions of the
Heller Agreement until August 31, 2000, and provides for an escalation of
certain fees to Heller. The Company is actively working to secure a new senior
credit facility, and upon doing so, these additional fees to Heller will cease
accruing. These additional fees may range from approximately $0.4 million to
$1.6 million.
The Company believes that cash provided from operations, along with savings
from deferring discretionary capital expenditures, will continue to provide
sufficient liquidity to meet the Company's cash requirements for the year ending
December 31, 2000.
The Company's note payable balance consists of the following:
December 31,
--------------------------------
1999 1998
-------------- ------------
Note payable to a financial institution, payable in 19
quarterly installments of $153,000, and a final payment
of $1,375,000 plus interest at prime rate, secured by the
fixed assets of the Company, maturing December 31, 2003.
The interest rate in effect at December 31, 1998 and 1999,
was 7.75% and 11.0 %, respectively. $ 3,669,000 $ 4,280,000
Note payable to a financial institution, payable in
quarterly installments of $350,000, plus interest at
prime rate maturing December 31, 2003. The
interest rate in effect at December 31, 1998 and 1999,
was 7.75% and 11.0 %, respectively. 2,500,000 7,000,000
Note payable to related party, interest accrues
monthly at the greater of prime plus 4% or 11.8% per
annum, interest payments due monthly, subordinated
to the line of credit and term loans, maturing on the earlier
of the date such balance can be repaid per the loan
agreement or June 30, 2005. 2,500,000 2,500,000
Note payable to a financial institution, payable in quarterly
installments of $4,700 per quarter, including interest,
maturing in 2004. 71,000 --
----------- -------------
8,740,000 13,780,000
Less current 623,000 11,280,000
------------ -------------
$ 8,117,000 $ 2,500,000
============ =============
-39-
Maturity of notes payable as of December 31, 1999, is summarized as follows:
2000 $ 623,000
2001 623,000
2002 623,000
2003 4,347,000
2004 24,000
2005 2,500,000
----------
$8,740,000
==========
In February, 1998, the Company entered into an interest rate swap agreement
(the "Swap Agreement") to reduce the impact of changes in interest rates in its
floating-rate long-term debt. The Swap Agreement has an initial notional amount
of $14,700,000 reducing to $8,550,000 through the expiration date of March 28,
2002. The Company is required to pay interest on the notional amount at the rate
of 6.39% and receives from the bank a percentage of the notional amount based on
a floating interest rate. The Swap Agreement effectively reduces its interest
rate exposure to a fixed rate of 6.39% of the notional amount. The floating
interest rate in effect under the Swap Agreement is 5.625%. The Swap Agreement
had a negative fair market value of $458,000 at December 31, 1998. The Swap
Agreement was collateralized by a $1 million Treasury Bill, which was included
in Other Assets at that time, and approximated the fair value. This Swap
Agreement was terminated in 1999.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities, certain office equipment and a vehicle
under operating lease agreements, which expire through June 2023, and which
contain certain escalation clauses based on various inflation indexes. Future
minimum rental payments as of December 31, 1998, are summarized as follows:
2000 $ 3,870,000
2001 3,826,000
2002 3,748,000
2003 3,710,000
2004 3,576,000
2005 and thereafter 44,804,000
-----------
$63,534,000
===========
In July 1997 the Company entered into a 13-year operating lease for
additional office space and warehouse facilities in Sun Valley. In addition,
significant leasehold improvement costs were incurred during the year ended
December 31, 1997.
In April 1999, the Company entered into a 25-year operating lease for a
140,000 square foot facility in Hayes, outside of London, UK.
The Company incurred rent expense of approximately $795,000, $2,898,000
and $3,204,000, for the years ended December 31, 1997, 1998 and 1999,
respectively.
Employment Agreements
The Company is obligated under certain management employment contracts
through October 31, 2001. Future minimum salary expense related to these
contracts are summarized as follows:
2000 $863,000
2001 527,000
2002 214,000
2003 161,000
-----------
$ 1,765,000
===========
-40-
Environmental Remediation
There are various environmental remediation actions that have involved
the area surrounding the Company's Sun Valley facility. The Company has
been fully indemnified by BTR plc for certain asserted claims against the
Company.
Litigation
The Company is involved in various lawsuits, claims and inquiries, which
the Company believes are routine to the nature of the business. In the opinion
of management, the resolution of these matters will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
7. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company pays sales commissions to a
company, which is also a shareholder of the Company. For the year ended December
31, 1997 and 1998, the Company paid $556,000, $408,000, and $439,000,
respectively of commissions and reimbursed expenses to this related party.
As more fully described in Note 5, the Company is subject to a $5,000,000
note payable to Unique, an entity controlled by shareholders of the Company. In
December 1998 the Company made a $2,500,000 principal payment on this note to
Unique. This debt is included in long-term notes payable on the 1998 and 1999
balance sheets. Interest expense on this note payable for the years ended
December 31, 1997, 1998, and 1999, amounted to $74,000, $601,000, and $295,000,
respectively.
Management Fee
The Company had an agreement (the "Old Management Agreement") with Unique
to pay a management fee of $25,000 per month. Certain shareholders of the
Company are related parties to Unique. The Company paid Unique and included in
general and administrative expense $300,000 during 1997.
In September 1997, the Company and Unique entered into a new management
services agreement (the "New Management Services Agreement") pursuant to which,
upon the consummation of the Offering, the Old Management Agreement was
terminated, and Unique became entitled to receive $150,000 per year payable
monthly commencing in January 1999 for certain management services rendered to
the Company. No management fees were paid to Unique during 1998. During 1999,
$150,000 was paid or accrued to Unique for management services rendered. The New
Management Services Agreement will terminate upon the Company completing an
underwritten public offering in which selling shareholders offer 25% or more of
the common stock sold in such offering.
In September 1997, the Company also entered into a mergers and acquisitions
agreement with Unique pursuant to which Unique received $300,000 upon the
closing of the BA Acquisition for services provided in connection with the
acquisition. Such amount was recorded as part of the cost of the BA assets.
8. STOCK OPTION PLAN
In November 1997, the Board of Directors adopted the Company's 1997 Stock
Option Plan (the "1997 Plan"). The 1997 Plan, provides for the grant of options
to directors, officers, other employees and consultants of the Company to
purchase up to an aggregate of 634,514 shares of common stock. The purpose of
the 1997 Plan is to provide participants with incentives that will encourage
them to acquire a proprietary interest in, and continue to provide services to,
the Company.
The exercise price of any incentive stock options granted may not be less
than 100% of the fair market value of the Company's common stock as of the date
of grant (110% of the fair market value if the grant is to an employee who owns
more than 10% of the total combined voting power of all classes of capital stock
of the Company). Nonqualified options may be granted under the 1997 Plan at an
exercise price of not less than 85% of the fair market value of the Common Stock
on the date of grant. Options may not be exercised more than ten years after the
date of grant (five years after the date of grant if the grant is an incentive
stock option to an employee who owns more than 10% of the total combined voting
power of all classes of capital stock of the Company). The number of options
outstanding and the exercise price thereof are subject to adjustments in the
case of certain transactions such as mergers, recapitalizations, stock splits or
stock dividends.
-41-
In November 1997, the Board of Directors of the Company granted six-year
options to purchase 259,572 shares of common stock under the 1997 Plan. The
options generally are subject to vesting and become exercisable at a rate of 5%
per quarter from the date of grant, subject to the optionee's continuing
employment with the Company. Certain options become fully vested and exercisable
upon a change in control.
In addition, in November 1997, the Board of Directors granted five-year
management stock options to purchase an aggregate of 115,365 shares of common
stock. All of these options are vested and are exercisable at the initial public
offering price per share.
The Company has adopted the disclosure-only requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("FAS 123"). Therefore, the following information is presented in accordance
with the provisions of that Statement.
Had the Company elected to recognize compensation cost based on the fair
value of options granted as prescribed by FAS 123, net income and earnings per
share would have been reported as the pro forma amounts indicated below for the
years ended December 31, 1999 and 1998:
1999 1998
------------- ------------
Reported net loss ($2,260,000) ($2,198,000)
Pro forma net loss (2,806,000) (2,695,000)
Reported diluted loss per share (0. 39) (0.39)
Pro forma diluted loss per share (0.48) (0.48)
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Risk free interest rate 5.2%
Dividend yield 0%
Expected stock price volatility 75.0%
Expected option lives:
Incentive 5.0 years
Non-qualified 5.0 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have characteristics significantly different from those of traded
options such as vesting restrictions and extremely limited transferability. In
addition, the assumptions used in option valuation models (see above) are highly
uncertain, particularly the expected stock price volatility of the underlying
stock. Because changes in these uncertain input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized over the option vesting periods. The pro forma effect on
net income for 1999 is not representative of the pro forma effect on net income
in future years because it does not take into consideration pro forma
compensation expense for a full year as certain options were granted at
different times during the year and it does not consider future grants. Pro
forma information in future years will reflect the amortization of a larger
number of stock options granted in several succeeding years.
-42-
A summary of the Company's stock option plans and changes in outstanding
options for the years ended December 31, 1998 and 1999, is presented below.
Shares Weighted
Under Average
Option Exercise Price
----------------- ---------------
1998
----
Options granted in connection with IPO 374,937 $ 8.00
Options granted 406,892 4.48
Options cancelled (168,722) 8.00
Options exercised -- --
---------
Options outstanding at end of year 613,107 5.66
=========
Options exercisable at end of year 165,836
Weighted average fair value
of options granted during the year $ 2.61
==========
1999
----
Options outstanding at beginning of year 613,107 $ 5.66
Options granted 30,000 3.06
Options cancelled (60,167) (6.00)
Options exercised -- --
---------
Options outstanding at end of year 582,940 5.49
=========
Options exercisable at end of year 251,451 5.19
Weighted average fair value
of options granted during the year
$ 3.06
=========
The following table summarizes stock options outstanding information at
December 31, 1999.
Options Outstanding Options Exercisable
--------------------------------------------------------------------- ------------------------------------
Weighted-Average Weighted
Range of Remaining Weighted Average Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ------------------
$2.25-2.99 15,000 9.6 $ 2.25 1,500 $2.25
$7.00-7.99 43,261 8.8 $ 7.00 8,652 $7.00
$3.00-6.99 307,048 8.9 $ 3.57 157,219 $3.56
$9.00-9.88 14,861 8.3 $ 9.88 4,954 $9.88
$8.00-8.99 202,770 8.0 $ 8.00 79,126 $8.00
------- --------
582,940 8.6 $ 5.49 251,451 $5.19
======= ========
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, the Company adopted a defined benefit pension
plan (the "1997 Plan") to provide retirement benefits to its employees. This
non-contributory plan covers substantially all employees of the Company as of
the effective date of the plan. Pursuant to plan provisions, normal monthly
retirement benefits are equal to the participant's credited benefit service (up
to a maximum of 35 years), times the sum of 0.75% of the participant's final
average monthly compensation, plus 0.65% of such compensation in excess of the
participant's covered average monthly wage. The plan also provides for early
retirement and certain death and disability benefits. The Company's funding
policy for the plan is to contribute amounts sufficient to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974,
plus any additional amounts which the Company may determine to be appropriate.
-43-
The net pension cost for the Company-sponsored defined benefit pension plan
for the years ended December 31, 1998 and 1999 includes the following
components:
Pension Benefits
-----------------
1999 1998
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $1,329,000 $1,040,000
Service cost 181,000 137,000
Interest cost 93,000 73,000
Actuarial losses 139,000 87,000
Prior service costs -- --
Benefits paid (3,000) (8,000)
---------- ----------
Benefit obligation at end of year $1,739,000 $1,329,000
---------- ----------
Change in plan assets
Fair value of plan assets at beginning of year 383,000 --
Actual return on plan assets 100,000 51,000
Company contributions 289,000 340,000
Benefits paid (3,000) (8,000)
---------- ----------
Fair value of plan assets at end of year 769,000 383,000
---------- ----------
Funded status of the plan (underfunded) (970,000) (946,000)
Unrecognized net actuarial losses 214,000 149,000
Unamortized prior service cost 677,000 711,000
---------- ----------
Prepaid (accrued) benefit cost ($79,000) ($86,000)
========== ==========
The Company made contributions of $340,000 and $289,000 to the Plan during
1998 and 1999, respectively. No contributions were made to the Plan
The assumptions used in the determination of the net pension cost for the
defined benefit pension plan for the years ended December 31, 1998 and 1999,
were as follows:
1999 1998
---- ----
Discount rate 7.0% 7.0%
Rate of increase in compensation levels 3.0% 3.0%
Expected long-term rate of return on assets 7.0% 7.0%
Effective January 1, 1997, the Company also adopted a defined contribution
401(k) retirement savings plan which covers substantially all employees of the
Company. Plan participants are allowed to contribute up to 15% of their base
annual compensation and are entitled to receive a Company match equal to 50% of
the participant's contribution up to a maximum of 6% of the participant's annual
base compensation. Participant contributions to the plan are immediately fully
vested while the Company matching contributions are subject to a five-year
vesting period. All contributions to the plan are held in a separate trust
account. During the years ended December 31, 1997, and December 31, 1998, the
Company's matching contribution amounted to $137,000 and $168,000, respectively.
This amount was expensed during the period and is included in the Statement of
Operations.
Employees associated with the BA Acquisition continued to participate in
the BA pension plan through January 31, 1999. The Company incurred $436,000 and
$286,000 of expense related to contributions to this plan for the years ended
December 31, 1998 and 1999, respectively. As of January 1, 1999, the Company
instituted its own pension plan for UK employees which covers the former BA
employees. The Company has no further obligation to the BA Plan as of January
31, 1999. The Company also contributed $37,000 to the new pension plan
established in 1999.
-44-
10. REDEEMABLE PREFERRED STOCK
In December 1999, the Company issued 300 shares of 8% Series C
Convertible Preferred Stock ("Series C") for $3,000,000. In connection with the
issuance of preferred stock, the Company issued a warrant to the broker to
purchase 50,000 shares of common stock at $2.85 per share. The warrant was
valued at $240,000 and is included in the costs associated with the issuance.
The Company incurred an additional $205,000 in costs associated with the
issuance of preferred stock.
In connection with the issuance of preferred stock, the Company issued a
warrant to the preferred stock holder to purchase 125,000 shares of common stock
at $7.37 per share. The warrant was valued at $286,000.
Upon the request of the Series C stockholder, the Company must redeem the
Series C, and any underlying shares of common stock issued, within 45 days of
the occurrence of any of the following events: (a) the U.S. Securities and
Exchange Commission ("SEC") fails to declare effective the registration
statement registering the shares of common stock underlying the Series C within
180 days of the issuance of the Series C; (b) the SEC suspends the effectiveness
of the registration statement for more than 10 days; (c) the common stock of the
Company ceases to be listed on the Nasdaq stock exchange; or (d) the Company
experiences a change in control or agrees to sell over 50% of its assets. The
redemption feature calls for the preferred stock to be redeemed, under certain
circumstances, for 125% of the stated value ($3,750,000) and as such the
preferred stock is being accreted to $3,750,000 over a 180 day period which
extends from December 1999 until June 2000. This accretion is charged to
retained earnings, similar to a preferred dividend, as a reduction of earnings
(loss) to common shares.
Series C provides for a multiple-step beneficial conversion feature, which
has been valued for financial statement purposes at $750,000. The resulting
discount on the Series C will be amortized over a 180 day period which extends
from December 1999 until June 2000, and charged to retained earnings, similar to
a preferred dividend, as a reduction of earnings (loss) to common shares.
The amount of accretion related to the redemption premium, conversion
discount, associated warrants, and costs of issuance which are included in the
calculation of the loss per share for the year ended December 31, 1999 was
$273,000.
11. SHAREHOLDERS' EQUITY
In 1997 the Company received $1,000,000 for the issuance of 101,619 shares
of the Company's common stock. The capital infusion was made pursuant to an
agreement under which the majority shareholder had agreed to provide to the
Company up to $1,000,000 in return for common stock. The Series A Preferred
Stock was converted into 250,000 shares of common stock in connection with the
Company's initial public offering.
In connection with the initial public offering, the Company effected a
579.48618 for one stock split of the Company's common stock in November 1997 and
a one for .9907406 reverse stock split in January 1998. All references in the
accompanying financial statements to the number of shares of common stock, per
common share amounts have been retroactively adjusted to reflect the stock
splits. All of the Company's Series A Preferred Stock were converted into an
aggregate of 250,000 shares of common stock. In addition, the Company's capital
structure was changed to reflect 20,000,000 shares of common stock. The Board of
Directors has authority to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any future vote
or action by the shareholders. As part of the Company's initial public offering,
warrants to purchase 222,716 shares were issued to the underwriters. These
warrants allow them to purchase a share of stock for each warrant at $8.00 per
share.
The following table is presented to summarize the Common Stock authorized
at December 31, 1999:
Common Shares
Issued
Description of Instrument or Reserved
------------------------- -------------
Common Stock outstanding 5,822,222
Series C Convertible Preferred Stock 659,341
Series C Convertible Preferred Stock Dividends 115,200
Management Options 115,365
Employee Incentive Stock Option Plan 634,514
Common Stock Warrants 397,716
-----------
Total Common Stock Issued or Reserved 7,744,358
-----------
Total Common Stock Available 12,255,642
===========
-45-
12. NON-MONETARY EXCHANGE TRANSACTION
During the year ended December 31, 1997, the Company sold certain landing
gear with a book value of $1,240,000 for a different landing gear valued at
$1,800,000 and cash of $250,000. In connection with the exchange transaction the
Company recognized profit of $78,000 during the year ended December 31, 1997,
representing the pro rata portion of the gain associated with the cash received.
The landing gear received in the exchange was recorded in the amount of
$1,068,000.
13. SEGMENT INFORMATION
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their business segments and their 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 December 31, 1999
-----------------------
Total assets $50,113,000 $53,050,000 $103,163,000
Total long-lived assets (net of
depreciation and amortization) 19,669,000 31,766,000 51,435,000
For the year ended December 31, 1999
------------------------------------
Revenue by location of operations 54,977,000 27,341,000 82,318,000
Profit/(loss) before income tax benefit
and extraordinary item 1,553,000 (4,881,000) (3,328,000)
The Company generated revenue from customers located outside of the United
States of $11,856,000, $26,660,000 and $ 37,329,000, of which $9,901,000,
$10,802,000 and $9,988,000 were revenues generated from the Company's United
States location for the years ended December 31, 1997, 1998 and 1999,
respectively.
- --------------------------------------------------------------------------------
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable Allowance for Doubtful Accounts
Balance at Charged to Charged to Balance at
Beginning Costs and Other the End of
Description of Period Expenses Accounts Deductions (a) Period
------------ ---------- ---------- -------- -------------- ----------
Year Ended December 31, 1997 $ 67,000 $167,000 $ -- ($87,000) $147,000
Year Ended December 31, 1998 147,000 158,000 28,000 (32,000) 301,000
Year Ended December 31, 1999 301,000 50,000 -- (27,000) 324,000
(a) Represents amounts written-off against the allowance for doubtful
accounts.
-46-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HAWKER PACIFIC AEROSPACE
By /s/ Philip M. Panzera
----------------------------
Philip M. Panzera
Executive Vice President
Date: May 11, 2000
-47-